UPSC 2018 Study Notes: Economic Survey of India

Eco Survey every year is presented by the Chief Economic Advisor and this time too Arvind Subramaniam has done it.

Eco Survey is comprised of two volumes where Volume 1 and Volume 2. Volume 1 contains the analytical overview and more research-cum-analytical material. Volume 2 provides the more descriptive review of the current fiscal year, encompassing all the major sectors of the economy. A large part of Volume 1 focused on what are perhaps more long-term challenges.

The pink color of this year’s survey cover was chosen as a symbol of support for the growing movement to end violence against women, which spans continents.

Volume 1 has been divided into 9 chapters.

Chapter 1 State of the Economy: An Analytical Overview and Outlook for Policy

This chapter discusses recent happenings in the Indian economy and prioritizes events for short and medium term. It laid plans to achieve 8 percent growth and also discusses the deviation of Indian economy from the World Economy in performance.

Short term:

After the implementation of both Demonetization and GST India lagged the world for the first half of the year due to additional reasons of consequences of Twin Balance Sheet Problem(TBS), rising real interest rates and fall in food prices resulting in lessening of Agricultural Income. In the second half, revival was seen, and two major events happened. India moved ahead in rankings of ease of doing business by 30 points and a rating Upgrade by Moody’s after 14 years.

In this period FDI inflow increased by 20 percent.

 

Tackling TBS:

To tackle the problem of TBS government proposed two things

1.  A new Indian Bankruptcy Code (IBC) helping Corporates to clean up their balance sheets

2. A recapitalization of banks of 2.2 lakh crores to revive investments in the economy with higher capital to disburse in their hands.

These are 2 R’s Resolution and Recapitalization out of the total 4 R’s to tackle TBS- Recognition, Resolution, Recapitalization and Reforms.

Medium term:

Issues to be addressed in the medium term include common agricultural market, integrate electricity markets, inter-state water disputes, implement direct benefit transfers (DBT), provide access to social benefits across states, and reduce air pollution.

Macro Economy to be taken care of by addressing Current and Fiscal Deficits in the situations of rise in the oil prices.

To increase Tax-GDP ratio where there is a high economic growth. This is possible with GST.

Reviving Manufacture structure with twin aims of make in India and increase competitiveness of Indian manufacturing. Policy changes have been witnessed to result in improvement of exports and GST council has to take a comprehensive approach on policy to reduce export taxes.

Outlook for 2017-18

· High frequency indicators like overall GVA, manufacturing GVA, the IIP, gross capital formation and exports indicating that robust growth is about to take place. Manufacturing exports and imports in the second and third quarters of this fiscal year has started to improve. Export growth of 13.6 percent in the third quarter of FY2018 and reduction of import growth to 13.1 percent also suggest the same.

· Headline inflation for the first time crossed the RBI’s 4 percent target in November, posting a rate of 5.2 percent in December 2017.

· The current account deficit has also widened but is well below the target of 3 percent.

· foreign exchange reserves have reached a record level of about $432 billion.

· The fiscal deficit for the first 8 months of 2017-18 reached 112 % of the total for the year, above the 89 % i.e average of last 5 years, because of reduction in non-tax revenue i.e reduced dividends from government Undertakings.

·  Personal income tax collections increased from 2 percent to 2.3 percent.

Chapter 2. A New, Exciting Bird’s Eye View of the Indian Economy Through the GST

· The GST has increased the number of unique indirect taxpayers by more than 50 percent from 6.4 million to 9.8 million.

· On the question of whether the tax base shifted from manufacturing states to consuming state the answer from the initial data shows ‘no’.

· Firms are placed in five categories based on their annual turnover. less than Rs. 20 lakhs;,Rs. 20-100 lakhs small and micro enterprises (SMEs), Rs. 1-5 crore; medium, Rs. 5-100 crore; and large firms above Rs. 100 crore.

·  State-wise distribution of international exports of goods and services data was first time found due to GST Data.

· Five states—Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Telangana—respectively account for 70% of India’s exports. A state’s GSDP per capita is highly correlated with its export share in GSDP for the major 20 states

·  Internal trade is about 60 percent of GDP.

· Formality in terms of the GST, indicates a formal sector employment as 53 percent, of the non-agricultural work force.

Chapter 3. Investment and Saving Slowdowns and Recoveries: Cross-Country Insights for India

· The government has taken various steps for boosting growth, controlling inflation and curbing corruption as part of structural reforms intended to achieve 8-10 percent growth.

· The ratio of gross fixed capital formation to GDP increased from 26.5 percent in 2003, reached a peak of 35.6 percent in 2007, and then slid back to4 percent in 2017.

· The ratio of domestic saving to GDP has registered a similar evolution, rising from 29.2 percent in 2003 to a peak of 38.3 percent in 2007, 29 percent in 2016.

· Private investment and household or government savings are the to sectors responsible for the decline in investment or savings.

· There has been a shift from currency and bank deposits towards market instruments

· Savings do not necessarily see sustained growth improvements. but countries that see growth transitions see sustained higher rates of saving.

· While studying investment it has been noted that, a one percentage point fall in investment rate is expected to dent growth by 0.4-0.7 percentage points.

Chapter 4. Reconciling Fiscal Federalism and Accountability: Is there a Low Equilibrium Trap?

“The state’s role is to create the conditions for prosperity for all by providing essential services and protecting the less well-off via redistribution. The citizen’s part of the contract is to hold the state accountable when it fails to honor that contract.”

· Direct taxes are more felt by the people and they leave people with less disposable income. Direct taxes are collected at various levels.

· Central level: India has the lowest share of direct tax collection in overall taxes.

·  State level: Taxes are collected by the centre on behalf of the states and devaluated on basis of Finance commission.

· Local level: Rural local govts collect round 6 percent of direct taxes of their total taxes and panchayats around 4 percent. Countries like Brazil and Germany collect for these levels at around 20 to 40 percent.

· Urban local governments have been in excess of revenue share while compared to world countries and direct tax collection is also in line with them.

·  The central and state governments spend on an average 15-20 times more per capita than do RLGs. ULGs spend about 3 times more. More importantly, this gap has persisted over time despite percapita spending by RLGs increasing almost four-fold since 2010-11.

· Even though most states have constituted State Finance Commission SFCs, very few seem to have accepted their recommendations.

Chapter 5. Is there a “Late Convergence Stall” in Economic Development? Can India Escape it?

Poorer countries are growing faster than richer countries leading to “economic convergence”.
There is a fear that there can be a slowdown in this process of convergence for countries like India.

Reasons:

1. backlash against globalization,

2. difficulties of transferring resources from low productivity to higher productivity sectors,

3. challenge of upgrading human capital to the demands of a technology-intensive workplace,

4. coping with climate change-induced agricultural stress.

In 1960, India was a low-income country. In 2008 we attained lower middle-income status and if per-capita income grows at 6.5% per year, we would reach upper-middle income status by 2020.

Reasons for middle income trap:

· Country would be squeezed out of manufacturing and other dynamic sectors by poorer, lower-cost competitors.

· Lack the institutional, human, and technological capital to carve out niches higher up the value-added chain.

The risk of a Late Convergence Stall needs to be taken seriously because of four headwinds:

1. Hyper (rapid) Globalization Repudiation

2. The Difficulties of Structural Transformation

3. Human Capital Regression

4. Climate Change-induced Agricultural Stress

There is no Late Converger Stall, as yet, but it would be wise to act to head it off.

Chapter 6. Climate, Climate Change, and Agriculture

This chapter discusses a long-term trend of rising temperatures, declining average precipitation, and increase in extreme precipitation.

Pradhan Mantri FasalBima Yojana should be read in detail here.

Farm revenues declining for several crops despite increase in production and fall in market prices below the Minimum Support Price. Productivity has to be increased while price and income volatility has to be reduced.

1. Shortages of water and land, deterioration in soil quality, and climate change-induced temperature increases and rainfall variability, are going to impact agriculture.

2. In the period after the global agricultural commodity surge, growth increased to 3.6%.

3. The volatility of agricultural growth in India has declined substantially over time and production of cereals has become more sustainable to drought.

Climate change effect on crop and farm income

4. Crops grown in rain-fed area pulses in both kharif and rabi are vulnerable to weather shocks while

5. The cereals both rice and wheat are relatively more immune.

6. 1°C increase in temperature reduces wheat production by 4 to 5%.

7. Extreme temperature shocks reduce farmer incomes by 4.3% and 4.1% whereas extreme rainfall

8. shocks reduce incomes by 13.7% and 5.5% during kharif and rabi respectively.

9. when rainfall levels were 100 mm less than average, farmer incomes would fall by 15% during kharif and by 7% during the rabi season.

10. A study by the IMF, finds that for emerging market economies a 1°C increase in temperature would reduce agricultural growth by 1.7%, and a 100 mm reduction in rain would reduce growth by 0.35%.

11.Farmer income losses from climate change could be between 15 % and 18 % on average, rising to anywhere between 20 % and 25 % in un-irrigated areas.

12. “More crop for every drop” campaign hold the key future to Indian agriculture.

Chapter 7. Gender and Son Meta-Preference: Is Development Itself an Antidote?

Over the last 10-15 years, India’s performance improved on 14 out of 17 indicators of women’s
agency, attitudes, and outcomes. On seven of them, the improvement has been such that India’s
situation is comparable to that of a cohort of countries after accounting for levels of development.

On several other indicators, notably employment, use of reversible contraception, and son
preference, India has some distance to traverse because development has not proved to be an antidote.

While there is considerable variation within the Indian states and across dimensions, the broad pattern is one of the North-Eastern states doing substantially better than the hinterland states even in development time; hinterland states are lagging, some associated with their level of development and some even beyond that; surprisingly, some southern states such as Andhra Pradesh and Tamil Nadu fare worse than expected given their level of development.

There is another phenomenon of son meta-preference which involves parents adopting fertility “stopping rules” – having children until the desired number of sons are born. This meta-preference leads naturally to the notional category of “unwanted” girls which is estimated at over 21 million.

In some sense, once born, the lives of women are improving but society still appears to want fewer of them to be born.

Most North-Eastern states (with the exception of Tripura and Arunachal Pradesh) and Goa are the best performer. Kerala comes next.

The lagging performers are Bihar, Rajasthan, Madhya Pradesh, Uttar Pradesh, Jharkhand and, surprisingly, Andhra Pradesh.

The worst Indian score is 57.6 (Bihar) and the best is 81 (Sikkim)

Increased incomes of men allow Indian women to withdraw from the labor force, higher education levels of women also allow them to pursue leisure.

Son Preference: Skewed Sex Ratio at Birth (SRB)

Most striking is the performance of Punjab and Haryana where the sex ratio (0-6 years) is approaching 1200 males per 1000 females, even though they are amongst the richest states.

Son “Meta” Preference: Sex Ratio of Last Child (SRLC) and “Unwanted” Girls

While active sex selection via fetal abortions is widely prevalent, son preference can also manifest itself in a subtler form. Parents may choose to keep having children until they get the desired number of sons. This is called son “meta” preference. A son “meta” preference – even though it does not lead to sex-selective abortion – may nevertheless be detrimental to female children because it may lead to fewer resources devoted to them.

the sex ratio of the last child for first-borns is 1.82, heavily skewed in favor of boys compared with the ideal sex ratio of 1.05.

gender outcomes exhibit a convergence pattern, improving with wealth to a greater extent in India than in similar countries so that even where it is lagging it can expect to catch up over time.

The state and all stakeholders have an important role to play in increasing opportunities available for women in education and employment. Understanding the importance of its role, the government has launched the BetiBachaoBetiPadhao and Sukanya Samridhi Yojana schemes.

Chapter 8. Transforming Science and Technology in India

Innovations in science and technology are integral to the long-term growth and dynamism of any nation. The pursuit of science also creates a spirit of enquiry and discourse which are critical to modern, open, democratic societies.

A doubling of R&D spending is necessary and much of the increase should come from the private sector and universities.

To recapture the spirit of innovation that can propel it to a global science and
technology leader_from net consumer to net producer of knowledge__India should invest in
educating its youth in science and mathematics, reform the way R&D is conducted, engage
the private sector and the Indian diaspora, and take a more mission-driven approach in areas
such as dark matter, genomics, energy storage, agriculture, and mathematics and cyber physical
systems

Status of S&T in India:

· Investments in Indian science, measured in terms of Gross Expenditure on R&D (GERD), have shown a consistently increasing trend over the years. GERD has tripled in the last decade in nominal terms and double in real terms. However, as a fraction of GDP, public expenditures on research have been stagnant – between 0.6-0.7 percent of GDP – over the past two decades.

· India’s spending on R&D (about 0.6 percent of GDP) is well below that in major nations such as the US (2.8), China (2.1), Israel (4.3) and Korea (4.2).

· Government expenditure on R&D is undertaken almost entirely by the central government. There is a need for greater State Government spending, especially application oriented R&D aimed at problems specific to their economies and populations.

· Private investments in research have severely lagged public investments in India.

· In India universities play a relatively small role in the research activities of the country.

·  East Asian countries like China, Japan, and Korea, have seen dramatic increases in R&D as a percentage of GDP as they have become richer.

· Indian Ph.D. students obtain their degrees either within India or abroad, especially in the US.

·  According to the WIPO, India is the 7th largest Patent Filing Office in the World. However, India produces fewer patents per capita. Unless there is a greater focus on R&D, rising income alone will not allow India to catch up in the near future.

·  Indian science and research institutes need to inculcate less hierarchical governance systems, that are less beholden to science administrators and encourage risk-taking and curiosity in the pursuit of excellence. Hence it is imperative that there be greater representation of younger scientists in decision making bodies in their areas of expertise.

Here the Schemes like UcchatarAvishkar Yojana, INSPIRE, Visiting Advanced Joint Research Faculty Scheme, Ramanujan Fellowship Scheme, Ramalingaswami Re-entry Fellowship need to be given a look.

Chapter 9. Ease of Doing Business’ Next Frontier: Timely Justice

The government’s efforts to make business and commerce easy have been widely acknowledged. Along with that next frontier to be gained on the ease of doing business is addressing pendency, delays and backlogs in the appellate and judicial arenas. These are hampering dispute resolution and contract enforcement, discouraging investment, stalling projects, hampering tax collections but also stressing tax payers, and escalating legal costs. This chapter recommends how to handle the issue of pendency of cases.

India jumped thirty places to break into the top 100 for the first time in the World Bank’s Ease of Doing Business Report (EODB), 2018. The rankings reflect the government’s reform measures on a wide range of indicators.

This striking progress notwithstanding, India continues to lag on the indicator on enforcing contracts, marginally improving its position from 172 to 164 in the latest report, behind Pakistan, Congo and Sudan.

Measures taken up by the Government to improve enforcement regime:

· Passed The Commercial Courts, Commercial Division And Commercial Appellate Division Of High Courts Act, 2015

· Expanded the Lok Adalat Programme to reduce the burden on the judiciary.

·  Amended The Arbitration And Conciliation Act, 2015

· The judiciary has simultaneously expanded the seminal National Judicial Data Grid (NJDG) and is close to ensuring that every High Court of the country is digitized, an endeavor recognized in EODB, 2018.

The average pendency of tax cases is particularly acute at nearly 6 years per case.

Reasons:

·  One reason for the rising pendency of economic cases at the High Courts could simply be the generalized overload of cases.

· Some High Courts of the country retain a unique original jurisdiction, under which the High Court, and not the relevant lower court, transforms into the Court of first instance for some civil cases.

·  The Supreme Court, like the High Courts, has less capacity to deal with mounting economic cases because of rising overall pendency.

· Rising pendency also results from the injunction of cases by Courts.

Steps needed to improve the situation:

·  Expanding judicial capacity in the lower courts and reducing the existing burden on the High Courts and Supreme Court

· Substantially increasing state expenditure on the judiciary, particularly on their modernization. The Government may consider incentivizing expenditure on court modernization and digitization.

· Building on the success of the Supreme Court in disposing tax cases, creating more subject-matter and stage-specific benches that allow the Court to build internal specializations and efficiencies in combating pendency and delay.

· Improving the Courts Case Management and Court Automation Systems.

Clear lines of demarcation and separation of powers between the two to preserve independence and legitimacy. Even while respecting these lines, it should be possible and desirable for these branches to come together to ensure speedier justice to help overall economic activity.