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IASbaba’s Daily Current Affairs – 27th February, 2016

  • February 27, 2016
  • 13
IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs Feb 2016, UPSC
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IASbaba’s Daily Current Affairs – 27th February, 2016

 

 

ECONOMICS

 

TOPIC:  General Studies 3

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
  • Government Budgeting.

 

NOTE: This article is compilation of information from 5 different National Newspapers’

 

Economic Survey 2015-16: A snapshot

Background:

  • Painting an optimistic picture of the economy despite the grim prospects for global growth, this year’s Economic Survey sees India getting on to the 8-10 per cent GDP growth trajectory over the next few years.
  • To realise this potential Centre needs to address, three critical issuesthe transition from socialism to “marketism”, which the Indian economy struggles with; expand investment in people (health and education); and sharpen the focus on agriculture.
  • India recording GDP growth in excess of 7 per cent for the third straight year in a row in 2016-17.India grew 7.2 per cent in 2014-15 and 7.6 per cent (advance estimate) in 2015-16.
  • There is still the promise of India due to accelerated structural reforms, competitive federalism (among) States and good economics becoming good politics all over India

STATE OF THE ECONOMY

  • FY17 GDP expected to be in the range of 7-7.75%. Current year’s at 7.6%
  • Stick to fiscal consolidation path But need to revisit medium-term fiscal policy framework
  • Farm prices and trade policies need to account that India is a big market for the world
  • Twin balance sheet problem – banking stress and that of the corporate sector hampering economy

 

FISCAL DEFICIT

  • 2016-17 expected to be challenging from fiscal point of view; time is right for a review of medium-term fiscal framework
  • 2015-16 fiscal deficit, seen at 3.9 per cent of GDP, seems achievable
  • Credibility and optimality argue for adhering to 3.5 per cent of GDP fiscal deficit target

PUBLIC FINANCE

  • Remove tax incentives for small savings, as mostly the rich benefit from them
  • Impose tax on gold since it is hoarded by the rich
  • Rs 1-lakh-crore subsidy going to the rich from the government
  • Fast-growth years for GDP have led to larger inequality in India; need for measures like wider property tax in the context of smart cities
  • Only four per cent of Indians pay income tax; this has to rise to about 23 per cent

 

PRICES & MONETARY MANAGEMENT

  • Benefits of low global oil prices transient
  • El Niño effect on agriculture to continue for some more time
  • Crop-wise yields in India compared to the world are low for rice, wheat and pulses
  • Need to shift to demand-driven agri-extension services
  • Food not the only reason for low transmission of rate cuts by RBI

INFLATION

  • CPI inflation seen around 4.5 to 5% in 2016/17
  • Low inflation has taken hold, confidence in price stability has improved
  • Expect RBI to meet 5 percent inflation target by March 2017
  • Prospect of lower oil prices over medium term likely to dampen inflationary expectations
  • Low inflation has taken hold, confidence in price stability has improved
  • Slack in the private sector labor market and capacity underutilization in industry mean that higher public sector wages would not be transmitted across the rest of the economy
  • Continuing moderation in oil prices, a return to normal monsoons, and persistent below-potential output also led to the Survey’s conclusion that consumer price inflation would be between 4.5 and five per cent in 2016-17, well within the RBI’s target.

 

CURRENT ACCOUNT DEFICIT

  • 2016/17 current account deficit seen around 1-1.5% of GDP

CURRENCY

  • Rupee’s value must be fair, avoiding strengthening; fair value can be achieved through monetary relaxation
  • India needs to prepare itself for a major currency readjustment in Asia in wake of a similar adjustment in China
  • Gradual depreciation in rupee can be allowed if capital inflows are weak

TAXES

  • Proposes widening tax net from 5.5% of earning individuals to more than 20%
  • Tax revenue expected to be higher than budgeted levels in FY15/16
  • Easiest way to widen the tax base would be not to raise exemption thresholds
  • Favors review and phasing out of tax exemptions

BANKING & CORPORATE SECTOR

  • Estimated capital requirement for banks likely around Rs 1.8 trillion by 2018/19
  • Corporate, bank balance sheets remain stretched, affecting prospects for reviving private investments
  • Underlying stressed assets in corporate sector must be sold or rehabilitated
  • Govt could sell off certain non financial companies to infuse capital in state-run banks
  • Govt proposes to make available 700 bln rupees via budgetary allocations during current, succeeding years in banks
  • Banks’ gross non-performing advances (GNPA) as a proportion of gross advances increased to 5.1 per cent between March and September 2015, from 4.6 per cent.
  • Restructured standard advances as a proportion of gross advances declined to 6.2 per cent from 6.4 per cent in the period, while the stressed advances to total gross advances ratio increased to 11.3 from 11.1.
  • PSBs had the highest level of stressed assets (gross plus restructured) at 14 per cent of the total, followed by private sector banks (PVBs) at 4.6 per cent and foreign banks (FBs) at 3.4 per cent at end-September 2015.
  • Net non-performing advances (NNPA) as a proportion of total net advances for all scheduled commercial banks increased to 2.8 per cent from March to September 2015, from 2.5 per cent.
  • The contribution of five sub-sectors — mining, iron and steel, textiles, infrastructure and aviation — to the total of stressed advances was 53 per cent.
  • Stressed advances in the aviation sector increased to 61 per cent in June 2015 from 58.9 per cent in March. That of the infrastructure sector increased to 24 per cent, from 22.9 per cent.
  • The performance of these sectors and their impact on the asset quality of banks continue to be a cause for concern.

 

Trade:

  • The Survey also had particularly pointed recommendations about the direction of India’s trade policy, saying “introspection is overdue” on issues including its continued support to farmers that are controversial at the World Trade Organization.
  • The Survey concludes India should “resist calls to seek recourse in protectionist measures, especially in relation to items that could undermine the competitiveness of downstream firms”.
  • The Centre has recently imposed price controls on the import of steel, which auto firms have protested.

Reforms inclined towards rich: Bounties for the Well-off

  • The survey makes a case for unpopular reforms, such as bringing agricultural incomes in the tax net, rationalisation of fertiliser subsidies estimated at Rs. 75,000 crore (excluding arrears) and the withdrawal of tax benefits which benefit mainly the rich.
  • Restricting the cooking gas subsidy to 10 cylinders from 12 at present, raising the levels of property tax and desisting from raising the income tax threshold. This needs to be done while taxes and duties on domestic and commercial LPG users are aligned
  • Venturing into the politically sensitive issue of fertilizer subsidy, whose beneficiaries are ostensibly poor farmers, survey points to three forms of leakages and lacunae: black marketeering, inability of small farmers to derive full benefits, and inefficiency of fertilizer manufacture.
  • The report identified seven areas — small savings schemes, kerosene, railways, electricity, LPG, gold and aviation turbine fuel –– where the benefits of subsidies accrue largely to the ‘well-off’, defined as the top 70 per cent of the population based on expenditure distribution as per National Sample Survey data.
  • Reducing subsidies in these areas would do good not only from a fiscal and welfare perspective, but also from a political economy welfare perspective, and lend credibility to other market-oriented reforms
  • “Strengthening the state by improving fiscal relations between the rich and the poor is one of the two main messages of the Budget,”

 

 Challenges ahead:

  • Raising pay for government employees as per 7th pay commission
  • Bail out banks without increasing borrowing.
  • Challenge of creating good jobs is proving difficult
  • Too many regulations have harmed job creation – worker-centric rule needed
  • Competitive federalism is needed to reduce bottlenecks in clearances
  • Transparency and simplicity needed in power rates
  • Easier power supply to encourage ‘Make in India’

Disappointments:

  • Failure to pass a goods and services tax, underperformance on disinvestment and privatization,
  • Incomplete rationalization of subsidies
  • Stressed balance sheets of banks and private companies.

Need of the hour:

  • Improved investments in education and health, where India fares the worst among BRICS nations and adequate attention to agriculture could realise the potential.
  • In the wake of four seasons of weak rainfall and consequent adversity, agriculture has served a wake-up call, demanding attention from policy makers.
  • In the unfinished agenda, the Goods and Services Tax, strategic disinvestment, de-stressing of the balance sheet of both banks and private companies, and the rationalisation of subsidies.
  • Stretched corporate and bank balance sheets are affecting prospects for reviving private investments, and so the underlying stressed assets must be sold or rehabilitated.
  • Aggressive disinvestment and subsidy reforms would have released resources for much-needed public capital expenditures to counter weak external demand and crowd-in private investments.

 

The Survey examines the problem of “exit” – Chakravyuh Challenge of Economy:

  • The Survey has likened the Indian economy in the 21st century to the ‘Chakravyuh’ legend of Mahabharata – the ability to enter but not exit – cautioning the country is facing adverse consequences due to the lack of a way out for failed ventures
  • Just as a market economy requires unrestricted entry of new firms, new ideas and new technologies, it also requires an exit route so that resources are forced or enticed away from inefficient and unsustainable uses
  • Stressed corporate and bank balance sheets were partly because it was difficult for capital to exit enterprises or investments that had turned unprofitable.
  • As a consequence, India was littered with firms that were too small and unproductive, taking up scarce resources more efficiently allocated elsewhere.
  • In addition to the proposed bankruptcy law, the Survey argues for independent sector regulators and ending resistance to privatization by sharing the resources freed up with affected employees.
  • The underlying stressed assets in the corporate sector must be sold or rehabilitated. Future incentives for the private sector must be set right, to avoid a repetition.

Decanalising urea imports:

  • According to the Survey, this would increase the number of importers, allow greater freedom in import decision and allow supply to respond ‘flexibly and quickly’ to changes in demand.
  • The Survey also recommends bringing urea under the nutrient-based subsidy programme, which would allow domestic producers to continue receiving fixed subsidies based on the nutritional content of their fertilizer.

Spreading the JAM

  • The Survey also recommends expanding the coverage for JAM (Jan Dhan – Aadhaar – Mobile) as in the case of the Direct Benefit Transfer scheme for LPG, since the Centre controls the fertilizer supply chain.
  • However, the Survey points out that targeting the poor are difficult at the best of times. It therefore suggested a cap on the number of subsidized bags that each household could purchase, with biometric authentication at the point of sale.

What is the difference between 2014-15 and 2016-17 economic survey?

  • The 2014-15 Economic Survey had introduced the “JAM” acronym – standing for Jan-Dhan, Aadhaar and mobiles – to better target welfare spending. this year’s Survey has given importance towards ‘Spreading JAM Across the Economy’
  • This year’s Survey takes the idea further, saying that direct benefit transfers (DBT) in household liquid petroleum gas (LPG) cylinders had worked in reducing leakage – and arguing that because of close central control on spending the fertiliser subsidy should be the next target for such transfers, and that the fertilizer sector was overdue for reform.
  • The 2015-16 survey, by contrast, emphasizes the need for “a recalibration of expectations” and making “conditional” assessments of the economy’s performance over the coming year. The main reason for this is “an unusually challenging and weak external environment”.
  • But external factors apart, there is also an admission of internal political failure to push reforms: “Approval for the game-changing GST bills has proved elusive so far; the disinvestment programme fell short of targets, including that of achieving strategic sales; and the next stage of subsidy rationalization is a work-in-progress”.

 

Way ahead

  • A clear strategy on disinvestment extending to sale of majority government equity and Commitment to credible fiscal consolidation is what investors will primarily look for.
  • But beyond the budget, the government’s efforts to get at least two important legislation — those relating to the GST and a comprehensive bankruptcy code (enabling businesses to shut as easily as to start) — through Parliament would also matter. And that requires creating the right political environment, for which the responsibility lies more with the party in power.
  • India’s macro economy is robust and it is likely to be the fastest growing major economy in the world in 2016. For an economy where exports have declined due to weak global demand and private investment remains weak, India’s economy is performing remarkably well
  • The Survey said that the government’s initiatives including the new bankruptcy law, rehabilitation of stalled projects, proposed changes to the Prevention of Corruption Act as well as the expansion of the direct benefit scheme holds the promise of providing a significant boost to long-run efficiency and growth.
  • The Survey reckons that the 3.9 per cent fiscal deficit target for 2015-16 is achievable. It notes that the time is ripe for a review of the medium-term fiscal framework.
  • The Survey stops short of recommending whether or not the government should deviate from its set fiscal goals. It says there are very good arguments for a strategy of “aggressive fiscal consolidation” as well as a strategy of “moderate consolidation”.

 

Fiscal consolidation:

  • While making arguments both for and against the current path of fiscal consolidation, the Survey seemed to argue overall for a less stringent fiscal consolidation path
  • The Survey concludes that even a gradual recovery of nominal growth – which, thanks to deflationary pressure has been lower than expected, driving the debt-to-GDP ratio upward – would be sufficient in any case to deal with the debt problem it had cited as the main reason for sticking to the current fiscal consolidation path.
  • In one of its more specific recommendations, the Survey suggested higher property taxes, which it said would “put sand in the wheels of property speculation.” Smart cities require smart public finance, the Survey noted, and sound property taxation is vital to India’s urban future.

 

Connecting the dots :

  • Strengthening the state by improving fiscal relations between the rich and the poor is one of the two main messages of the Budget,” Comment.

 

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