Highlights of Economic Survey 2016 − 17 YouTube Lecture Handouts

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Watch video lecture on YouTube: Economic Survey 2016-17 Volume 2: Analysis with Key Terminologies Economic Survey 2016-17 Volume 2: Analysis with Key Terminologies
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About Economic Survey

  • Presented by Department of Economic Affairs, Finance Ministry of India

  • Presented in the parliament every year, just before the Union Budget.

  • For 2017 – since there was lack of financial statistics, the volume 2 was released recently

Highlights of the Economic Survey 2016-17 Volume-2

  • The fiscal outcome in 2016-17 marked by strong growth in tax revenue, sustenance of pace of capital spending and consolidation of non-salary and pension revenue expenditure- containing fiscal deficit to of GDP in 2016-17.

  • Union Budget for 2017-18 opted for gradual fiscal consolidation path: the fiscal deficit is expected to decline to of GDP in 2017-2018. Target fiscal deficit is of GDP under the FRBM framework projected for 2018-19.

  • Reforms under budget for 2017-18:

    • Merger of Railway & Union Budget

    • Advance Union Budget to February 1

    • Remove classification of expenditure into ‘plan’ and ‘non-plan

    • Restructure Medium Term Expenditure Framework Statement with projected expenditures (revenue and capital) for each demand for the next two financial years

  • Introduction of GST from the 1st July 2017 – to include several central and state indirect taxes

Monetary Management and Financial Intermediation

  • RBI cut the policy rate by 50 basis points during 2016-17. However, it shifted its monetary policy stance from accommodative to neutral in February 2017

  • August 2017: Repo rate & reverse repo rate

  • Monetary aggregates decelerated after withdrawal of legal tender status of specified bank notes.

  • As of 31st March 2017, currency in circulation contracted by whereas reserve money contracted by

  • Credit off-take from banks continued to decelerate. During 2016-17, gross bank credit outstanding grew at around on an average. The average gross bank credit to industry contracted by .

  • Sluggish growth and increasing indebtedness in some sectors

  • Gross non-performing advances (GNPAs) ratio of SCBs rose from 9.2% in September 2016 to in March 2017.

  • Financial inclusion is proceeding apace under the Pradhan Mantri Jan Dhan Yojana. Zero balance accounts decreased from in March 2015 to in Dec. 2016.

Prices and Inflation

  • Significant moderation in CPI headline inflation during the last three years- fell to a series low of in June 2017.

  • Headline inflation - measure of total inflation within an economy, including food and energy prices (e.g., oil and gas) that are much more volatile and prone to inflationary spikes.

  • Broad decline in all commodity groups during 2016-17, the most significant being decline in food.

  • Food inflation declined significantly during the year because of improvements in supply of pulses and vegetables on the back of a normal monsoon. Core inflation declined in the last few months.

  • Convergence between CPI and WPI inflation in the last few months.

  • Most States saw sharp decline in CPI inflation in 2016-17.

  • Both rural and urban inflation declined in 2016-17 & the gap decreased

Climate Change, Sustainable Development and Energy

  • India ratified the Paris Agreement in 2016 & actions post-2020 period based on its Nationally Determined Contribution (NDC).

  • India’s NDC targets:

    • Lower emissions intensity by 33 – 35% of GDP by 2030 from 2005 levels

    • Increase share of non-fossil based power generation capacity to 40% of installed electric power capacity (cumulative) by 2030

    • Create an additional carbon sink of 2.5-3 Gt CO2e through forest and tree cover by 2030.

  • International community writing “Paris rule book” - to implement Paris Agreement

  • Implementation Committee and six Sub-Committees for respective NDC goals and identifying specific policies and actions aimed at achieving them.

  • Aim for world’s largest renewable energy expansion program.

  • 5-fold increase in the overall renewable energy capacity to 175 GW by 2022- 100 GW of solar, 60 GW of wind, 10 GW of biomass, and 5 GW of small hydropower capacity.

  • Access of the poor to efficient energy by Ujjwala Yojana, PAHAL scheme, Deen Dayal Upadhyaya Gram Jyoti Yojana.

  • India requires fast growth rate to lift BPL. SDG 7 ensures access to affordable, reliable, sustainable, and modern energy for all.

  • Social cost analysis of coal and renewables based power indicates higher social costs (total cost to society includes private and external costs) for renewables. Storage costs and abandoning of assets based on coal-based power are major costs associated with the renewable power.

  • Main goal is 100% energy access through all possible energy sources.

  • Initiatives in Indian financial sector for renewable energy segment include:

    • Bank loans of up to Rs. 15 crore for solar-based power generators

    • Biomass-based power generators, windmills, micro-hydel plants, etc. considered part of Priority Sector Lending.

    • Liberalize External Commercial Borrowing (ECB) norms for green projects.

    • Green bonds by SEBI

External Sector

  • India’s BoP improved in 2016-17 due to low and falling trade and current account deficits, rising capital inflows leading to accretion of foreign exchange reserves.

  • India’s exports - positive at 12.3% in 2016-17 after an interregnum of two years. Decline in imports by 1% narrowed the trade deficit to US$ 112.4 billion (5% of GDP) in 2016-17 as compared to US$ 130.1 billion (6.2% of GDP) in 2015-16.

  • Current Account Deficit (CAD) narrowed to 0.7% of GDP in 2016-17 from 1.1% of GDP in 2015-16 led by sharp contraction in trade deficit which more than outweighed a decline in net invisibles earnings.

  • Net capital inflows was US$ 36.8 billion (1.6% of GDP) in 2016-17 as compared to US$ 40.1 billion (1.9% of GDP) in the previous year due to fall in NRI deposits.

  • Gross FDI inflows increased significantly to US$ 60.2 billion in 2016-17 from US$ 55.6 billion in 2015-16.

  • In 2017-18 (April-June) - double digit export growth at 10.6%.

  • India has second largest foreign exchange reserves after Brazil.

  • Average monthly exchange rate of the rupee against the US dollar appreciated continuously from February to June 2017 with rupee performing better than other EME-currencies in 2016-17.

  • During 2016-17 - Indian rupee depreciated by 2.4% against US dollar.

  • Most external debt indicators of India improved at March 2017 compared to March 2016. India’s aggregate external debt stood at US$ 471.9 billion registering a decline of US$ 13.1 billion (2.7%).

  • World trade growth projected at 3.8% and 3.9% in 2017 and 2018.

Agriculture and Food Management

  • Small and declining average farm size.

  • Progress in agriculture evaluated in terms of outcomes such as global yields of various crops.

  • Credit improves productivity.

  • Challenges to horticulture sector include post-harvest losses, availability of quality planting material and lack of market access for produce.

Industry

  • Industrial performance - 8.8% in 2015-16 to 5.6% in 2016-17.

  • Industrial growth per Index of Industrial Production (IIP) grew at 5% in 2016-17 as compared to 3.4% last year.

  • Index of Eight Core Industries (coal, oil, gas, refinery products, fertilizers, steel, cement, electricity) growth during 2016-17 was 4.8% compared to 3.0% in 2015-16.

  • Government in 2016 introduced Minimum Import Price (MIP) to counter dumping of steel. Imports of steel by India have declined by 36.2% while exports have risen by 102% in 2016-17.

  • Apparel sector - highly employment intensive industry especially for women- Post Rs.6,000 crore special package for textile & apparel sector exports of clothing have improved

  • FDI equity inflow of US$ 43.4 billion in 2016-17- highest ever FDI Equity inflows.

Infrastructure

  • India far ahead of emerging economies in providing qualitative transportation related infrastructure.

  • During 2016-17, Indian Railways registered freight earnings at Rs.104339 crore (P), registered a negative growth of 4.5% over 2015-16 due to carrying larger volume of low fare freight in the year

  • Domestic airlines have low share in international traffic due to factors like foreign airlines utilizing the 6th freedom of the air (right to carry passengers or cargo from 2nd to 3rd country by stopping in one's own country for non-technical reasons), expansion of capacity entitlements under bilateral air service agreements with foreign countries, lower utilization of India’s own capacity entitlements, the 0/20 rule (0 years of operation but 20 aircraft fleet for international routes) and fleet constraints.

  • UDAY scheme for financial turnaround of power distribution companies to refinance total outstanding debt of Rs. 3.82 lakh Cr

    • National average of AT&C (sum of technical and commercial) loss has come down to 20.2% in FY 2017 from 21.1% in FY 2016

    • Billing efficiency increased by 2%

    • 15 states - tariff-revisions for FY 2017-18.

  • Under Smart Cities Mission, 57 projects worth Rs.941 crore have completed. 462 projects worth Rs.15307 crore are likely to be completed through 2018.

Services Sector

  • Key driver of India’s economic growth, contributing almost 62% of its GVA growth in 2016-17.

  • Growth moderated to 7.7% in 2016-17

  • Higher than the other two sectors and at the top among the 15 major economies.

  • Services growth moderation mainly due to deceleration in growth in two services categories:

    • Trade, hotels, transport, communication, and services related to broadcasting

    • Financial, real estate & professional services

  • FDI equity inflows to the services sector in 2016-17 (top 15 services) declined.

  • India’s and world’s services export trend growth was almost flat in the pre-crisis period, while in the post-crisis period, the deceleration in trend growth of India’s services was sharper than world.

  • In 2016-17, services exports recorded a growth of especially in transportation, business services and financial services and travel. Software services exports, accounting for around of total services

  • What increased? Telecom with increase in telecom connections reflecting Jio effect, aviation particularly domestic travel, tourism related services mainly in terms of foreign exchange earnings, and even information technology-business process management (IT-BPM) despite fall in growth in computer software.

  • Foreign Tourist Arrivals (FTAs) during 2016 grew by 9.7% and Foreign Exchange Earnings (FEEs) through Tourism, grew by 8.8%. Promote tourism by e-Visa for 161 countries citizens, promote India as a 365 days destination, launch of Multilingual Tourist Info line, and Swachh Paryatan Mobile App.

  • In 2016-17 India’s total revenue of the IT-BPM sector including and excluding hardware expected to touch US$154 billion and US $140 billion, with growths of 7.8% and 8.1% respectively.

  • Real estate sector accounted for share in India’s overall GVA in 2015-16. The growth of this sector decelerated in the last three years from in 2013-14 to in 2015-16.

  • Satellite mapping and launching services earned India more than Rs 100 crores in last 5 years. Foreign exchange earnings from export of satellite launch services increased noticeably in 2015-16 and 2016-17.

Social Infrastructure, Employment and Human Development

  • Deterioration in quality learning in primary education sector and achievement of targeted enrolment level in the middle education poses challenge

  • Employment a great challenge - structure dominated by informal, unorganized, and seasonal workers and characterized by under employment, skill shortages, with labour markets impacted by rigid labour laws, and contract labour.

  • Health sector challenges – decrease in public delivery of health services, high Out of Pocket (OoP) expenses on health and issues of accessibility and affordability of health services.

  • Progress of Swatch Bharat Mission. Cleanliness and ODF drive - decline open defecation at less than 35 crores.

Highlights of Reforms

Agriculture and Food Management

Manage and reduce risks in agriculture activities- Make sector resilient, increase profitability and ensure stable income flows to the farmers. Reforms include:

  • Address the price risks with strong marketing infrastructure and value chain.

  • Address production risks by expanding irrigated area through water saving irrigation systems like micro irrigation systems.

  • Increase productivity with better quality seed standards, pest and disease resistant seeds.

  • Trade and domestic policy changes should stay same from much before sowing till procurement.

  • Enhance women’s involvement in the dairy projects with funds.

  • Provide affordable formal and institutional credit to small and marginal farmers.

  • Provide timely interventions

Industry and Infrastructure

  • Station redevelopment, vacant station buildings, and monetize land along tracks- promote horticulture, tree plantation, advertisement and parcel earnings.

  • Develop non-major port and enhance their efficiency and operational capacity.

  • Privatize and disinvest Air India, create aviation hubs, and reconsider 0/20 rule

Social Infrastructure, Employment and Human Development

  • India is emerging as a knowledge based economy- needs to invest in health and education.

  • Education policies should focus on learning outcomes and remedial education with interventions to maximize the efficiency of expenditure.

  • Promote biometric attendance of school staff, independent setting of examination papers, neutral examination and DBT for schools.

  • Adopt outcome measures and skilling activities to improve effectiveness of schemes programs.

  • Government reforms like ‘Ease of Compliance to maintain Registers under various Laws Rules, 2017’ and e-Biz Portal make labour market system dynamic and efficient.

  • Skill training - Pradhan Mantri Kaushal Vikas Yojana (PMKVY) and long-term training by Industrial Training Institutes (ITIs).

  • Model Skill Centers in every district are operating under PM Kaushal Kendra Scheme for quality of skill training and promoting competency-based framework.

  • Reforms in health sector-

    • Address quality issues

    • Standardize rates for tests

    • Awareness about alternative health systems

    • Introduction of punitive measures like fines on hospitals and private health providers for false claims through surgery, medicines etc.

    • Providing health benefits and risk cover to poorer sections of the society.

  • National Health Policy, 2017 to attain highest level of good health and well-being, through preventive and promotive health care orientation, and universal access to good quality health care.

  • Vulnerable workers in the informal economy should be prioritized with safety women.

Overview and Outlook for Policy

Optimism due to structural reforms like GST, positive impacts of demonetization, decision to privatize Air India, rationalization of energy subsidies and determination to address the Twin Balance Sheet (TBS – balance sheet of both public sector banks and corporate houses). Following are important findings:

  • Growing confidence in macro-economic stability due to government and RBI actions and structural changes in the oil market reducing risk of sustained price increases.

  • Anxiety because of a series of deflationary impulses weighing on an economy- stressed farm revenues, as non-cereal food prices have declined, farm loan waivers and the fiscal tightening, and declining profitability in the power and telecommunication sectors.

  • India might not undergo shift toward low inflation with oil market imparting a downward bias to oil prices. In addition, farm loan waivers would reduce aggregate demand by 0.7% of GDP, imparting deflationary shock to an economy.

  • Increase in new tax payers and reported income after demonetization- 5.4 lakh new tax payers. Demonetization increased demand for social insurance.

  • MGNREGS provides social safety net but sustaining current growth trajectory requires action on investment and exports and cleaning up of balance sheets to facilitate credit growth.

  • Ratio of stressed companies in the power sector steadily rising this year, reaching 70%, with an associated vulnerable debt of over Rs. 3.6 lakh crore.

  • Telecommunications sector has “renewables shock” as a new entrant (Jio) has dramatically reduced prices and increased access to data benefitting consumers- after launching of services average revenue per user (ARPU) for the industry has come down by 22%.

  • Outlook for Growth 2017-18- Survey (Volume I) forecast a range for real GDP growth of 6.75% to 7.5% for FY 2018.

  • Outlook for Prices & Inflation 2017-18- Inflation in the near-term determined by factors like:

  • The outlook for capital flows and exchange rate- in turn influenced by the outlook and policy in advanced economies, especially the US

  • Nominal exchange rate appreciation

  • Monsoon

  • Introduction of the GST

  • 7th Pay Commission awards

  • Farm loan waivers

  • Output gap

  • Current inflation running below 4% target- inflation by March 2018 is likely to be below the RBI’s medium term target of 4%.

Review of Economic Developments 2016-17

  • Real economy grew by 7.1% in 2016-17 compared with 8% the previous year- higher than range predicted in the Economic Survey (Volume I) in February.

  • Economy was relatively resilient to the large liquidity shock of demonetization which reduced cash in circulation by in second half of 2016-17.

  • Resilience was strong because both nominal GVA and GDP growth accelerated by over point in 2016-17 compared with 2015-16.

  • Annual inflation averaged 5.9% in 2014-15 and has since declined to in FY 2017.

  • During 2016-17 inflation declined sharply from 6.1% in July 2016 to in June 2017.

  • Sharp dip in WPI inflation in FY 2015-16 owed to deceleration in global commodities prices, especially crude oil prices. With global commodity prices recovering wholesale inflation perked up during FY 2017

  • External position robust with merchandise trade recovering, and robust capital flows- lead to rising reserves and strengthening exchange rate.

  • Current account deficit narrowed in 2016-17 to 0.7% of GDP, down from 1.1% of GDP the previous year

  • Export growth turned positive after two years and imports contracted marginally- trade deficit narrowed to of GDP (US$ billion) in FY 2017 as compared to (US$ 130.1 billion) in the previous year.