Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Inclusive growth and issues arising from it.
Till now, the second part of economic survey was given before budget. But as the budget was advanced by a month, the first part was given in February and the second part was given in August. This part talks about mid-term review of performance of economy in country.
This economic survey has projected the economic growth wherein in comparison to that given in first part- 6.75%-7.5% of GDP, the second part has moderated that it may not reach or achieve the upper limit of the range given in first part.
In the last 6 months, the economy and policy has moved in direction where as compared to the earlier stance of 7.5% GDP looking more achievable, the chances are that GDP growth rate would end up to lower range, which is 6.75%.
Some reasons are:
Farm loan waivers
Lack of interest rate cut in economy
Twin balance sheet problem due to NPAs
Expenditures increase due to pay commission recommendation
Lack of growth in real economy
Impact of new policy reforms
Though introduction of GST and demonetisation has created some hiccups in the initial stages of implementation, their impact would bring positives which would be apparent from next financial year. So the projection is in a balanced manner with growth projection below 7%. But if the government maintains policy stance and comes out with reforms, then year afters will be better.
Critical of RBI’s stand
This economic survey is directly hitting at RBI. Even the fiscal deficit projection and the target. The survey says that the fiscal deficit would be around 3.5% and inflation at 3%. The survey says this is achievable as the tax revenue is buoyant and there is good amount of foreign exchange reserve. So on the lower side of fiscal deficit, good balance of account situation.
The government objective is to push growth but RBI has different objective for growth. Its priority is to maintain inflation at the committed level +/-2% to +/-6%. The inflations is expected to be below 4% level in next year. If the RBI thinks that inflation might come under pressure which is 4%, then it will maintain the higher interest rates.
There is no guarantee that even if RBI cuts 50 or 75 basis points, the economic activity will pick up immediately. Hence to spur growth in the economy, there has to be one eye on global appetite for demand and another on the domestic demand, global and domestic investment in India.
There is substantive growth in FDI in India as it is raised to $43.4 billion in 2016-17. FDI in services, telecom and banking sector is more. Majority of FDI came from Singapore, Mauritius and Japan. Thus, India has historic level of FDI in country. There has been investment opportunities from world and it is because of the demand expected which is more than domestic investment.
There are indication that foreign companies and countries are interested in India and growth projection around 7% is a big factor. But until and unless domestic demand, domestic investment picks up and there is optimal capacity utilisation in the economy and the government tackles persisting challenges, it will be difficult to take the economy to 7.5 to 8% level.
How to spur growth?
Interest rate cuts depend on how RBI sees inflation projection
Reform areas- the government has established the fact that it can undertake big measures. So now, labour reforms should be taken up at the earliest.
Bankruptcy code- the government has given RBI the powers so that NPA are tackled.
Air India privatisation- if such big privatisation policies are taken, it will be good in long term for fiscal policy.
FDI liberalisation- more areas if possible
Land acquisition bill changes revival
Current situation suggests that if these incremental reforms are taken and done then in next 2-3 years, investment will start taking up.
Agriculture in economy
Agriculture has 16% contribution in GDP but the population dependence is more than 50%. Due to this factor, farm loan waiver has become a political fashion. This is not going to help as it will be a recurring problem. The states have come in competition to woo farmers for their political gain.
Agriculture needs special attention. There has been liberalization in food retail. But in agriculture, the basics have to be changed the way food production is tackled, the way the government buys food and the way government provides subsidies to the farmers. Once FDI enters in multi-brand, with new capital new technology will come. India is suffering from highest wastage of food grains. With FDI, the agriculture will get mechanized in India.
In last 30-40 years, production of wheat and rice is taken by FCI. The requirement is to shift rice production from Haryana and Punjab to eastern India and bring more cash crops over there with high technology and less water consumption.
The farmers get subsidies in fertilizers, electricity, seed, irrigation etc. The government will have to identify a scheme where there is composite subsidy. Farmers who need subsidy can be given per hectare subsidy in form of cash. There has to be one market for agriculture and bring in private companies in food retailing to conserve food. Thus, there is a need for gradual and incremental reforms.
Growth Outlook summary
Balance of risks to growth has shifted to the downside
Structural decline in inflation and inflation outlook create scope for lower rates
Neutral nominal rates based on RBI studies of neutral real rates between 5.25 and 5.75%. if growth below potential and there is economic slack, actual rate must be below neutral
For fiscal outlook, Downside risks include GST receipts, growth outlook, spectrum receipts, 7th Pay Commission but the upside is compliance benefits from the GST and Demonetization
For agriculture, there should be remunerative MSPs backed by effective procurement. Also, time is ripe to consider whether direct support (as opposed to indirect support) can be more effective
Connecting the dots:
Highlight the critical points of Volume 2 of Economic Survey.