Economic Survey Highlights with full details

Invest in welfare, undertake reforms, says Economic Survey

Economic survey projects real GDP growth for the current financial year and 2016-17 to be in the range of 7-7.75%.

• According to CSO, growth this year will be 7.6%, lower than 8.1-8.5% growth projected in the last survey.

Important recommendations made by the survey in this regard:

• Improved investments in health and education, where India fares the worst, and adequate attention to agriculture could help India achieve higher growth rates. Four seasons of weak rainfall have demanded immediate attention from policy makers.
• The survey has advised the government to take up the unfinished agenda including 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, the survey noted.
• It also recommends 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.
• It also recommends raising resources for recapitalising public sector banks by carefully leveraging the assets of the Reserve Bank of India and other regulatory institutions.

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.

The survey has also indicated that the government would keep the fiscal deficit within the target of 3.9% of GDP in the current year.

Highest FDI

According to the survey, Delhi is the largest recipient of FDI in the country. It is closely followed by Maharashtra and Karnataka.

Rich feed off subsidies worth over Rs. 1 lakh crore: Economic Survey

The survey notes that India’s rich feed off subsidies worth over Rs. 1lakh crore a year that are meant for the poor. While noting this, the survey has considered subsidies only on six commodities including Railways, electricity and PPF.

• It also says that various government interventions in the country have been helping the relatively better-off in society, which in turn is taking the form of explicit subsidization, and is substantial in magnitude.

Implications of such policies: Any tax incentives that are given, for example, for savings, benefit not the middle class, not the upper middle class but the super-rich who represent the top 1-2%.

Where we are losing?

• Most commodities primarily consumed by the rich have a very low tax rate, in effect subsidising them at the cost of the poor. For example, the rich consume 98% of the gold in the country, and yet gold is taxed at only 1-1.6% (the Centre and the States combined).
• The rich avail of an 88% subsidy on kerosene, amounting to Rs. 5,501 crore and 86% subsidy on LPG, amounting to Rs. 40,151 crore.
• Some commodities are subsidised more for the poor than the rich, such as railway tickets (since there are different categories of tickets), but even here, the rich avail of a subsidy of 34%.
• Similarly, the tax structure has resulted in aviation fuel being cheaper per litre than petrol and diesel. Aviation fuel is taxed at about 20% (average of tax rates for all states), while diesel and petrol are taxed at about 55% and 61%. The real consumers of ATF are those who travel by air, who essentially are the well-off.

How this was calculated?

To arrive at the quantum of subsidies availed of by the rich, the Economic Survey assumed the average tax on normal commodities at 19%, the Revenue Neutral Rate for the GST as recommended by the Subramanian panel, and a 50% tax on energy-related commodities that serves as an “appropriate carbon tax.”

• The effective subsidy availed by the rich, as calculated by the Survey, is the difference between this tax rate (19% or 30%) and the actual subsidy, measured as a negative number, or the (positive) tax rate on that commodity or service.

Private finance vital for India to reach climate goals: Survey

The Economic Survey finds that India will find it hard to meet its variety of obligations to tackle climate change without substantial help from the private sector.

Successful implementation of the Paris Agreement, the Sustainable Development Goals (SDGs) and the ambitious targets set out in the Intended Nationally Determined Contributions (INDCs) will require huge financial resources which cannot be met through budgetary sources alone. Hence, according to the survey, leveraging private finance along with public finance, both international and national, will be critical.

• The SDGs set by the United Nations last September lay the onus on countries to make significant progress on a wide range of goals including ending poverty and hunger and combating climate change.
• The INDCs are plans by governments communicated to the United Nations climate change council regarding the steps they will take to address climate change domestically.

Only 5.5% who earn are tax payers: Economic Survey

According to the survey, only about 5.5% of the people who earn pay tax in India and only 15.5% of the net national income is reported to the tax authorities.

• The tax to GDP ratio at 16.6%, as a result, is well below that of the emerging market economies of 21% and OECD average of 34%.
• On the expenditure side, India’s spending on human capital, education and health, to the GDP ratio is the lowest among BRICS and lower than the OECD and emerging market economies averages. They are in fact, lower than those of comparable per-capita GDP economies such as Vietnam, Bolivia and Uzbekistan.

What needs to be done?

• To widen the tax net and raise revenue for spending on India’s human capital development, the survey called for bringing rich farmers into the tax net, raising property tax rates and phasing out tax exemptions.
• Besides, there should be reasonable taxation of the better-off, regardless of the source of their incomes, whether it is from industry, services, real estate, or agriculture.

Inequality in India

The survey also seeks to analyse the levels of inequality in India.

• According to the survey fast growing years in the 2000s were in fact associated with rising inequality at the very top end of the Indian income distribution.
• As in many countries, there has been a growing concentration of income at the top: in 2013-14.
• The top 1%, 0.5% and 0.1% of people in the overall income distribution (the three highest income groups) accounted for 12.4%, 9.4% and 5% of the entire income of the Indian economy.
• At these levels, inequality in India is comparable to that in the U.K. and lesser than in the United States.

RBI must redeploy its capital in state-owned banks

The survey has asked the Reserve Bank of India (RBI) to deploy some of its capital in the public sector banks (PSBs).

• The survey highlighted the ratio of shareholder equity to assets (total equity as a percentage of balance sheet) for RBI is very high among various central banks, at 32%, only after Norway and well above that of the U.S. Federal Reserve and the Bank of England whose ratios are less than 2%.
• Stress, which is emanating from both banks and corporate sector, is a major impediment to private investment and a full-fledged economic recovery.
• The survey notes that if the RBI were to move even to the median of the sample (16%), this would free up a substantial amount of capital to be deployed for recapitalizing the PSBs.

However, any such move would need to be initiated jointly and cooperatively between the government and the RBI. And it will also be critical to ensure that any redeployment of capital would preserve the RBI’s independence, integrity and financial soundness.

On the other hand, banking industry experts said the idea may not go well with the RBI which insists that its regulation is ownership neutral.

State of PSBs:

Public sector banks are in need of capital as bad loans have surged in the last few years and also to meet Basel-III norms. The finance ministry estimates public sector banks will need Rs.1.8 lakh crore capital infusion for four years ending March 2018-19 while the government plans to infuse only Rs.70,000 crore during the period.

Gas prices must be linked to market

Market-determined pricing for gas in India is the best policy going forward in order to ensure greater investment, competitiveness and transparency in the sector, according to the Economic Survey.

• The survey also recommends capping the LPG subsidy to 10 cylinders per household per year from the current 12.
• Market-determined arm’s length pricing for domestic gas, with an effective regulator, to provide adequate incentive for investment and also ensure competitiveness and transparency remains the first-best solution that merits consideration. It would reflect the appropriate gas price in relation to alternative fuels.

The current gas pricing formula, in place since October 2014, mandates that the price of natural gas be revised every six months on the basis of a weighted average of rates in gas-surplus economies such as the US, Mexico, Canada, and Russia.

India has 3rd largest base of start-up firms

Within a year, the number of technology start ups in the country has grown by 40 per cent to over 4,200, making India the third largest base of technology start-ups in the world, according to the Economic Survey 2015-16.

• This has further helped create about 80,000-85,000 jobs during 2015.
• Also, Indian start-ups raised USD 3.5 billion in funding in the first half of 2015, and the number of active investors in India increased from 220 in 2014 to 490 in 2015.
• As of December 2015, eight Indian start-ups belonged to the ‘Unicorn’ club i.e had valuations greater than USD one billion.

Slow labour reforms hurt ‘good’ jobs

The economic survey has criticised the slow pace of reforms in labour laws, arguing that firms negotiate regulatory hurdles imposed to protect employees who get poor quality jobs as a consequence and suggested easier retrenchment norms and lower statutory deductions from salaries to create ‘good’ jobs.

• India’s most pressing labour market challenge going forward will be to generate a large number of good jobs. These jobs tend to be formal sector jobs.
• Two obstacles to formal sector job creation are regulation-induced taxes on formal workers and spatial mismatch between workers and jobs.

However, the slow pace of labour reform has encouraged firms to resort to other strategies to negotiate regulatory cholesterol. One popular strategy is to hire contract workers,” the survey said highlighting how “managing” inspectors to the contract labour firm has become a normal exercise for factories.

Role of Industrial Disputes Act:

Medium-sized formal sector manufacturing firms have reported labour regulations as a significant barrier to growth, specifically the dismissal norms under the Industrial Disputes Act.

• The Industrial Disputes Act 1947 requires firms with more than 100 workers to seek government’s approval before retrenching workers. The law has encouraged factories to employ contract workers to stay out of the rule books even though entrepreneurs feel ‘contract labour is not the ideal solution’ for them.

Only 35% of the 10.5 million new manufacturing jobs created between 1989 and 2010 were in the formal sector. Though the informal sector kept unemployment levels low, these jobs were much worse than the formal sector ones.

DBT “jammed” by last-mile challenge

According to the survey, the government’s big push for scaling up Direct Benefit Transfer subsidies using the JAM trinity (Jan Dhan Yojana, Aadhaar and Mobile number) is unlikely to work in rural India in the short to medium-term.

• It notes that the JAM agenda is currently jammed by the last-mile challenge of getting money from banks into beneficiaries’ hands, especially in rural India.
• The survey adds there is still some way to go before bank-beneficiary linkages are strong enough to pursue Direct Benefit Tranfer (DBT) without committing exclusion errors despite the huge improvements seen in financial inclusion due to Jan Dhan Yojna.

What needs to be done?

• The government must invest in last-mile financial inclusion by further improving banking correspondent (BCs) networks and promoting the spread of mobile money.
• Regulations governing the remuneration of BCs may need to be reviewed to ensure that commission rates are sufficient to encourage BCs to remain active.
• The Survey also suggests incentivising states by sharing fiscal saving from DBT to help fully implement JAM.

Survey outlines steps to boost Make in India

The survey has proposed a slew of steps, such as eliminating exemptions on countervailing duties on imports, monetisation of land owned by public sector companies and allowing industries to buy electricity directly from the markets to enable Make in India Initiative a success.

Challenges:

• The duty exemptions are favouring foreign producers over domestically made goods thus defeating the initiative.
• The efficiency of electrical energy usage has fallen with an increase in power generation capacity not being able to be capitalised by distribution companies due their financial inability to purchase electricity.
• On the issue of countervailing duty exemptions, the Economic Survey last year had also pointed out that the duties were not imposed on several items of imports. The survey had said the effective rate of excise on domestically-produced non-oil goods was about 9%. Though the effective collection rate of CVDs should theoretically be the same, in real terms it was only around 6%. This difference represents the fiscal cost to the government to the tune of around Rs.40,000 crore.
• Another factor that could have an adverse effect on the Make in India Initiative will be India’s decision to join the US-led mega regional free trade pact called the Trans-Pacific Partnership (TPP) at a future date.

Other proposed measures:

• Parts of land belonging to the state-owned companies can be converted into land banks and used to promote Smart City initiatives. If the land is in dense urban areas, it could be used to develop eco-systems to nurture start-ups, and if located in smaller towns and cities, it could be used to develop sites for industrial clusters.
• Industries with a high demand for power should be allowed to absorb the excess generation capacity through open access (OA). Consumers with electricity load above one MW are permitted by the OA policy (under the Electricity Act 2003) to procure power directly from electricity markets.
• Eliminating policies — currently providing negative protection for Indian manufacturing and favouring foreign manufacturing — could be achieved by quickly implementing the Goods and Services Tax (GST. However, if delays are envisaged in rolling out the GST, a similar result could be achieved by eliminating the duty exemptions.
• Membership of the TPP would prevent the Indian government from using state-owned enterprises and government procurement as vehicles for achieving social and economic objectives, including employment generation, thereby have to compromise on the Make in India Initiative policy.

The Make in India Initiative aims to transform India into a global manufacturing hub and increase the share of manufacturing in India’s GDP from a stagnant 15-16 per cent since 1980 to 25 per cent by 2022 and create an additional 100 million jobs.