Economic Survey 2016
Economic Survey 2016: Highlights
India expects its
economy to grow 7-7.5% in the fiscal year to March 2017, the Economic
Survey said on Friday, ahead of the presentation of the annual budget by
finance minister Arun Jaitley on Monday.
The Economic Survey, the basis for Jaitley's Budget for the fiscal year starting April 1, projected India to grow 8% in the next couple of years.
The survey was prepared by the finance ministry's chief economic adviser Arvind Subramanian.
Following are the highlights of the report:
FISCAL DEFICIT
* 2015/16 fiscal deficit seen at 3.9 percent of GDP seems achievable
* 2016/17 expected to be challenging from fiscal point of view
* Credibility and optimality argue for adhering to 3.5% of GDP fiscal deficit target
* Time is right for a review of medium-term fiscal framework
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
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
* Favours 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
Macro Economic Survey 2016: 3.5% deficit target achievable; rural eco to see growth: Experts
The Macro Economic Survey for 2016 not only talks about realistic growth
of about 7-7.5 percent in FY17, but also recognizes challenges in
meeting the fiscal deficit target for the year, on back of slowing
global economy and higher expenditure due to OROP and the Seventh pay
Commission.
Chief Economic Advisor, Arvind Subramanian, in his speech, clearly states that an ambitious growth of 8 percent will have to wait for another two years.
Experts on CNBC-TV18 have clearly given a nod to the government’s realistic growth targets and the suggested review for the medium-term growth rate.
Onno Ruhl, India Director at the World Bank says that the growth targets put forth are realistic considering the challenging global environment.
Despite the headwinds, probability of been on lower-end of growth target is not very high, says Sonal Verma, India Economist at Nomura. Rural economy, which restricted growth in the last year, will see some normalization in the year and OROP and pay commission will help in improving consumption, she adds.
The Survey also discusses the “critical twin balance sheet problem - the impaired financial positions of the public sector banks and some corporate houses.”
Rana Kapoor, MD & CEO of Yes Bank says that this is”a very lucid explanation for state of the private and banking sector.”
The four Rs’ mentioned - recognition, recapitalisation, resolution and reform - is not a sequential process, but a constant one, he adds.
Arun Maira, former Planning Commission member says that too much stress has been given on the fiscal deficit.
Maira says that one reason that held back growth in FY16 was the rural economy. In FY17, he expects some improvement in the situation. He says: “saw a lot in economic survey on what reforms are required to drive and sustain high growth.”
Maira says that a private investment is likely to remain weak.
Verma says the talks of 3.5 percent fiscal deficit will lead to more creditability and a fiscal consolidation at the moment may not be beneficial. “A 3 percent target will be postponed to FY19 at least,” she adds.
Eyes will be on medium-term fiscal consolidation roadmap, she says adding that expenditure control is likely to be difficult this year. “India needs measures to expand tax base, cut down on leakages,” she says adding, “India needs to reorient spending towards productive capex.”
Kapoor further says capital formation and investment cycle needs to restart. Reforms, which are already underway, will help in crowding investments, he adds.
‘Massive growth impulses’ are needed in the infrastructure, Kapoor says adding that soft sectors like education, health and tourism must be on the priority list.
Ruhl, however, says the main highlight of the survey is “importance of India realizing second half of its demographic dividend.” The survey highlights the need to invest in people, especially women and children to ensure long-term growth.
Below is the transcript of the panel discussion.
Q: Let me start by getting a comment from you Onno as far as the growth rate is concerned, 7-7.5 percent, downside risks to even that target and 8 percent or 8 percent plus looks like a bit of stretch at this point in time is what the survey very clearly articulates. In fact if I read out, it says the current global environment there needs to be a recalibration of growth expectations and consequently of the standards of assessment. What do you make of the growth targets that have been articulated by the economic survey?
Ruhl: I think they are realistic growth targets. They also correspond to what we have roughly said in our projections. It is absolutely true that global environment is challenging. It is also true that India remains a bright spot in that environment but it is obviously the case that there are downside risks in the global environment and therefore it is important for India to manage them well. I think the survey hits all the right notes in terms of how to do that and sets out a realistic set of expectations. If they are met I think everybody will agree it is a very good result.
Q: Let me ask you what is the chance at this point in time given the global context as well as the domestic situation that we could perhaps be at the low end of that band that has been articulated by the Chief Economic Advisor?
Varma: There is always a probability attached to that but at this stage I would say that the probabilities are actually not that high. One of the factors and one of the reasons why we haven’t seen so much growth in FY16 is really the rural economy which should see some normalisation next year. The pay hikes that will be given by the central government and then the state governments and the pension hikes that are coming up under the One Rank One Pension (OROP) essentially imply that there is a significant consumption stimulus in the pipeline. So, I think private investments have been weak, likely to remain weak, external demand has been weak, likely to remain weak. However incrementally I think on the consumption side there can be some acceleration. So, I think the chances of lower band at this stage look remote unless globally things really turn hostile.
Q: I want to move to the other issue that the survey has spent a fair amount of time on and that is India's fiscal position as well as the fiscal headwinds that we could be faced with in FY17 on account of largely the 7th pay commission. However what we are given to understand from our sources is that the government is likely to calibrate or reduce the out go on account of the 7th pay commission in order to meet the fiscal deficit target of 3.5 percent. In fact the survey makes the case for credibility and optimality arguing that the government should adhere to the 3.5 percent fiscal deficit target. A good move you think?
Maira: Whether it should be 3.5 or 3.8 percent or less, what I found very consoling in the economic survey was the indication that the payment on account of pay commission was actually going to help the economy at this stage. It is going to provide some consumption and fillip to growth at this stage. It looked at the effects of previous pay commission implementations and said that this time in fact the impact in terms of actual outgoes would be less than previously. So, that I think we shouldn't be so worried about having read the economic survey.
Regarding whether the deficit should be 3.5 percent or not, I got the sense reading this survey that Arvind Subramanian thinks it doesn't really matter. There are so many other pros and cons here to be so hung up about 3.5 percent. He is suggesting we shouldn't be spending too much time talking about that actually.
Q: The Chief Economic Advisor also says that there is a need for the review of the medium term fiscal framework. Sonal how would you interpret the commentary as far as reviewing the medium term fiscal framework and putting it into context of the commentary that you just heard there from Arun Maira?
Varma: Reading through the economic survey my understanding is that the discussion in the economic survey is between arguments against aggressive fiscal consolidation which would be 3.5 percent next year and 3 percent the year after that vis-a-vis the arguments for more moderate level of fiscal consolidation which would actually be 20-30 basis point consolidation every year.
So, while the document talks about how 3.5 percent would lead to more credibility and help in debt dynamics, the ultimate case that actually it makes is that at this stage the growth risk if you do a significant and a very aggressive fiscal consolidation can actually outweigh the benefits.
So, looking at this survey I think a number around 3.7 percent looks more likely.
Second like you said they are also talking about reviewing the medium term framework as well. So, it is not like they are going to go all the way from let's say 3.7 percent for next year to 3 percent. So, it looks like even the 3 percent target is going to be postponed by at least another 1-2 years. So, we are talking about FY19 potentially when they would be targeting 3 percent as well.
(Interview transcribed by Swapnil Deshpande)
Chief Economic Advisor, Arvind Subramanian, in his speech, clearly states that an ambitious growth of 8 percent will have to wait for another two years.
Experts on CNBC-TV18 have clearly given a nod to the government’s realistic growth targets and the suggested review for the medium-term growth rate.
Onno Ruhl, India Director at the World Bank says that the growth targets put forth are realistic considering the challenging global environment.
Despite the headwinds, probability of been on lower-end of growth target is not very high, says Sonal Verma, India Economist at Nomura. Rural economy, which restricted growth in the last year, will see some normalization in the year and OROP and pay commission will help in improving consumption, she adds.
The Survey also discusses the “critical twin balance sheet problem - the impaired financial positions of the public sector banks and some corporate houses.”
Rana Kapoor, MD & CEO of Yes Bank says that this is”a very lucid explanation for state of the private and banking sector.”
The four Rs’ mentioned - recognition, recapitalisation, resolution and reform - is not a sequential process, but a constant one, he adds.
Arun Maira, former Planning Commission member says that too much stress has been given on the fiscal deficit.
Maira says that one reason that held back growth in FY16 was the rural economy. In FY17, he expects some improvement in the situation. He says: “saw a lot in economic survey on what reforms are required to drive and sustain high growth.”
Maira says that a private investment is likely to remain weak.
Verma says the talks of 3.5 percent fiscal deficit will lead to more creditability and a fiscal consolidation at the moment may not be beneficial. “A 3 percent target will be postponed to FY19 at least,” she adds.
Eyes will be on medium-term fiscal consolidation roadmap, she says adding that expenditure control is likely to be difficult this year. “India needs measures to expand tax base, cut down on leakages,” she says adding, “India needs to reorient spending towards productive capex.”
Kapoor further says capital formation and investment cycle needs to restart. Reforms, which are already underway, will help in crowding investments, he adds.
‘Massive growth impulses’ are needed in the infrastructure, Kapoor says adding that soft sectors like education, health and tourism must be on the priority list.
Ruhl, however, says the main highlight of the survey is “importance of India realizing second half of its demographic dividend.” The survey highlights the need to invest in people, especially women and children to ensure long-term growth.
Below is the transcript of the panel discussion.
Q: Let me start by getting a comment from you Onno as far as the growth rate is concerned, 7-7.5 percent, downside risks to even that target and 8 percent or 8 percent plus looks like a bit of stretch at this point in time is what the survey very clearly articulates. In fact if I read out, it says the current global environment there needs to be a recalibration of growth expectations and consequently of the standards of assessment. What do you make of the growth targets that have been articulated by the economic survey?
Ruhl: I think they are realistic growth targets. They also correspond to what we have roughly said in our projections. It is absolutely true that global environment is challenging. It is also true that India remains a bright spot in that environment but it is obviously the case that there are downside risks in the global environment and therefore it is important for India to manage them well. I think the survey hits all the right notes in terms of how to do that and sets out a realistic set of expectations. If they are met I think everybody will agree it is a very good result.
Q: Let me ask you what is the chance at this point in time given the global context as well as the domestic situation that we could perhaps be at the low end of that band that has been articulated by the Chief Economic Advisor?
Varma: There is always a probability attached to that but at this stage I would say that the probabilities are actually not that high. One of the factors and one of the reasons why we haven’t seen so much growth in FY16 is really the rural economy which should see some normalisation next year. The pay hikes that will be given by the central government and then the state governments and the pension hikes that are coming up under the One Rank One Pension (OROP) essentially imply that there is a significant consumption stimulus in the pipeline. So, I think private investments have been weak, likely to remain weak, external demand has been weak, likely to remain weak. However incrementally I think on the consumption side there can be some acceleration. So, I think the chances of lower band at this stage look remote unless globally things really turn hostile.
Q: I want to move to the other issue that the survey has spent a fair amount of time on and that is India's fiscal position as well as the fiscal headwinds that we could be faced with in FY17 on account of largely the 7th pay commission. However what we are given to understand from our sources is that the government is likely to calibrate or reduce the out go on account of the 7th pay commission in order to meet the fiscal deficit target of 3.5 percent. In fact the survey makes the case for credibility and optimality arguing that the government should adhere to the 3.5 percent fiscal deficit target. A good move you think?
Maira: Whether it should be 3.5 or 3.8 percent or less, what I found very consoling in the economic survey was the indication that the payment on account of pay commission was actually going to help the economy at this stage. It is going to provide some consumption and fillip to growth at this stage. It looked at the effects of previous pay commission implementations and said that this time in fact the impact in terms of actual outgoes would be less than previously. So, that I think we shouldn't be so worried about having read the economic survey.
Regarding whether the deficit should be 3.5 percent or not, I got the sense reading this survey that Arvind Subramanian thinks it doesn't really matter. There are so many other pros and cons here to be so hung up about 3.5 percent. He is suggesting we shouldn't be spending too much time talking about that actually.
Q: The Chief Economic Advisor also says that there is a need for the review of the medium term fiscal framework. Sonal how would you interpret the commentary as far as reviewing the medium term fiscal framework and putting it into context of the commentary that you just heard there from Arun Maira?
Varma: Reading through the economic survey my understanding is that the discussion in the economic survey is between arguments against aggressive fiscal consolidation which would be 3.5 percent next year and 3 percent the year after that vis-a-vis the arguments for more moderate level of fiscal consolidation which would actually be 20-30 basis point consolidation every year.
So, while the document talks about how 3.5 percent would lead to more credibility and help in debt dynamics, the ultimate case that actually it makes is that at this stage the growth risk if you do a significant and a very aggressive fiscal consolidation can actually outweigh the benefits.
So, looking at this survey I think a number around 3.7 percent looks more likely.
Second like you said they are also talking about reviewing the medium term framework as well. So, it is not like they are going to go all the way from let's say 3.7 percent for next year to 3 percent. So, it looks like even the 3 percent target is going to be postponed by at least another 1-2 years. So, we are talking about FY19 potentially when they would be targeting 3 percent as well.
(Interview transcribed by Swapnil Deshpande)
Economic Survey 2016
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