So rich, so comprehensive...
Long lingering concerns on the economy relate to the falling rate of investment; rising stock of public debt and consequent debt servicing which increasingly eats up the revenues, leaving less for investment; the ever growing proportion of NPA to total loans in the banking sector is another drag in the economy.
The Economic Survey acknowledged that demonetisation led to a temporary slowdown in GDP as cash-intensive sectors such as agriculture, real estate and jewelry were affected more than others. Further, because of the rising uncertainty, firms and households postponed investment decisions, aside from cutting consumption, which is 60 per cent of GDP. The Survey revised downwards the official growth rate for 2016-17 to 7.1 per cent.
For 2017-18 also the growth rate is revised downwards: it will be in the range of 6.75 per cent to 7.5 per cent. The IMF forecast is 7.2 per cent.
The Survey asserts that countercyclical measures (fiscal deficits during recession and fiscal surplus in good times) adopted by advanced nations are not applicable to India and the focus should be on containing debt. It is not clear whether because of RBI’s advice against bigger fiscal deficit in the wake of rising oil price and high inflationary potential, the Survey shifted gears from deficit to public debt.
The non-performing loans or assets (NPA) of banks are 12 per cent of gross advances. The Survey urges to solve the problem since “the consequent squeeze of banks has led them to slow credit growth to crucial sectors-especially to industry and medium and small scale enterprises.”
The Survey suggests a centralized Public Sector Asset Rehabilitation Agency (PARA) to look at the “largest, most difficult cases, and make politically tough decisions to reduce debt.”
The Survey points out that state or regional dispersion continues to be striking unlike China. Although India as whole performed well during 2004-14, some states have lagged. Thus there has been a lack of convergence. There are two sets of economic indicators: income and consumption, and health/demographic indicators. Convergence means that a state that starts off at low performance levels on an outcome of importance, say the level of income or consumption, should grow relatively faster over time, improving its performance, so that it catches up with states which had better starting points.
Referring to convergence in real per capita GDP during 2004-14, the Survey says that while incomes converged for provinces in China, incomes diverged for states in India. The same trend of divergence is observed in the case of convergence in real per capita consumption for states in India. Thus, despite rapid growth on average “there is a sign of growing regional inequality among the Indian states.” This needs to be addressed early.
The Survey observes inflation is likely to be well below the Reserve Bank of India’s target of 5 per cent in the current fiscal thanks to demonetization. Since credit growth has been poor, the Survey indicates room for an easy money policy. In the same breath, the Survey notes the low oil price environment of last few years would not be repeated in 2017.
On wholesale-price front, a reversal trend was observed from a trough of negative 5.1 per cent in August 2015 to 3.4 per cent at the end of December 2016 due to rising crude prices. There is possibility of “sharp rise in prices in 2017-18 that may narrow the scope for monetary easing .”
Acche Din Ayenge
In the wake of “the most destructive tsunami of monetization,” the Survey offers some solace to the poor by way of a Universal Basic Income (UBI). However, it points out to a “number of implementation challenges: it should not become an add on to the current anti-poverty and social programs.”
For long IE has been cautioning on the unrestrained increase in public debt from 1980. This eats increasing amounts of revenue through debt servicing - interest payments and repayment of a portion of debt.
Public debt has ballooned from a few thousand crores of rupees in 1980 to close to Rs 69 lakh crore today. The Budget estimates borrowing of Rs 5.35 lakh crore to bridge the gap
between expenditure and receipts. This means higher cost
of debt servicing. India, well - poised to become the FIFTH LARGEST ECONOMY next year should address this weak aspect of its fiscal picture.