The Union Finance Minister Shri Arun Jaitley tabled the Economic Survey 2016-17 today, the first day of the Budget Session of the Parliament. The Economic Survey says that the adverse impact of demonetisation on GDP growth will be transitional and the economy will recover with remonetisation. The Survey states that once the cash supply is replenished, which is likely to be achieved by end of March 2017, the economy would revert to normal. The GDP growth in 2017-18, as per the survey, is projected to be in the range of 6¾-7½ percent. The Survey suggests a few measures to maximise long-term benefits and minimise short-term costs. One, fast remonetisation and early elimination of withdrawal limits. This would reduce GDP growth deceleration and cash hoarding. Two, continued impetus to digitalisation while ensuring that this transition is gradual and inclusive, and appropriately balances the costs and benefits of cash versus digitalisation. Three, following up demonetisation by bringing land and real estate into the GST. Four, reducing tax rates and stamp duties.

1. The Economic Survey 2016-17 tabled today in the Parliament by the Union Finance
Minister Shri Arun Jaitley reflects the Indian economy’s resilience to turbulent
external environment, as well as extreme governance measures. In accordance with
projections that real GDP growth rate would range between 7.0 and 7.5 percent, the
economy has recorded a growth rate of 7.0 percent during the fiscal year 2016-17.
GDP growth rate is now targeted at 6.75 percent-7.5 percent for 2017-18, with the
International Monetary Fund also revising its growth projection for India downwards
to 6.6 percent for 2016-17 and 7.2 percent in 2017-18.
Much of the deceleration in India’s GDP growth rate has been attributed to the
November 8, 2016 note ban by the Government, which has shaved off the economic
growth for the current fiscal by 0.25 per cent to 0.50 per cent. The demonetisation
efforts, although reducing discretionary consumer spending and cash money supply
in the short term, are expected to bolster economic activity in the medium and long-
terms. Transparency through greater digitalisation and tax compliance will increase
tax-based revenue collection, with these benefits expected to be evident by as early
as April 2017 with remonetisation coming into effect. The impact on the informal
sector is expected to normalise by year-end, with currency in circulation expected to
align with demand, and, allow growth to converge to a trend by FY 2017-18.
Volatility in the international economic environment, coupled with increased capital
expenditure and governance efforts by the government last year had encouraged
predictions that India would be amongst the world’s fastest growing economies in
2016-17. With speedy remonetisation measures, incentivisation to create a robust
digital economy, early elimination of withdrawal limits, inclusion of land and real
estate in GST, and reduction of tax rates and stamp duties, the country can be
expected to continue to maintain its momentum as one of the world’s fastest growing
economies.
As per the Economic Survey, there has been an improvement in the financial
position of the States over the last few years. The average revenue deficit has been
eliminated, while the average fiscal deficit was curbed to less than 3 percent of
Gross State Domestic Product (GSDP).
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2. The average debt to GSDP ratio has also fallen. However,
the fiscal challenges are likely to mount for the states
owing to the Pay Commission recommendations, and
increasing payments from the UDAY bonds. Therefore,
the Survey recommends to continue fiscal prudence both
by the Centre as well as the States and to incentivise
good fiscal performance, to maintain overall fiscal health
of the economy.
The Survey has suggested setting up of a centralised
Public Sector Asset Rehabilitation Agency (PARA) to solve
the stressed asset problem. It suggests that the PARA
could be given the charge of working out the largest and
most complex cases in a centralised manner. This
approach, as per the Survey could eliminate most of the
obstacles currently plaguing loan resolution. It could solve
the coordination problem, since debts would be
centralised in one agency; it could be set up with proper
incentives by giving it an explicit mandate to maximise
recoveries within a defined time; and it would separate the
loan resolution process from concerns about bank capital.
On PARA’s functions, broadly, the Survey suggests that it
could purchase specified loans (for example, those
belonging to large, over-indebted infrastructure and steel
firms) from banks and then help resolve it. This could be
done either by converting debt to equity and selling the
stakes in auctions or by granting debt reduction,
depending on professional assessments of the value-
maximising strategy.
3.5% fiscal deficit, down
from 3.9%
0.3% CAD, down from
1.5%
3.4% WPI inflation, up
from -2.5%
3.4% CPI inflation, down
from 4.9%
Net INR 23,079 cr FPI
outflow
4.1% agri growth, up
from 1.2%
5.2% industry growth,
down from 7.4%
8.8% service sector
growth, down from 8.9%
4.6% trade deficit,
improved from 7.6%
3.2% net FDI growth, up
from 1.7%
Nominal growth, of USD
11.8 bn forex reserve
16.4% Revenue Expenditure
growth up from 3.2%
-10.4% Capital Expenditure
growth, down from 30.8%
Annual GDP Growth
2014-15 2015-16 2016-17
7%
7.6%
7.2%
The government would then recapitalise them, thereby
restoring financial health and allowing them to shift their
resources – financial and human – back towards the
critical task of making new loans. Similarly, once the
financial viability of the over-indebted enterprises is
restored, they will be able to focus on their operations,
rather than their finances. And they will finally be able to
consider new investments.
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3. Outlook for 2017-18
As per the Survey, India’s exports are likely to recover,
based on an uptick in global economic activity. This is
expected to continue in the aftermath of the US elections
and expectations of a fiscal stimulus. The Economic
Survey also projects that given the high elasticity of Indian
real export growth to global GDP, exports could contribute
to higher growth next year, by as much as 1 percentage
point. The estimate for private consumption is less clear
as international prices of crude oil have started to trend up
after remaining stable for much of the last two years. This
along with rise in the prices of other commodities like coal,
etc. could exert inflationary pressure and have the
potential to adversely impact the trade and fiscal balance,
considering the significant reform measures initiated by
the government.
The fiscal outlook for the central government for next year
will be marked by three factors. First, the increase in the
tax to GDP ratio of about 0.5 percentage points in each of
the last two years, owing to the oil windfall will disappear.
Second, there will be a fiscal windfall both from the high
denomination notes that are not returned to the RBI and
from higher tax collections because of increased
disclosure under the Pradhan Mantra Garib Kalyan Yojana
(PMGKY). These are likely to be one-off in nature, and in
both cases the magnitudes are likely to be uncertain.
A third factor will be the implementation of the GST, which
is likely to be implemented later in the fiscal year. The
transition to GST, admittedly, is complicated from an
administrative and technology perspective. Therefore,
revenue collection will take some time to reach full
potential. Combined with the fact that government is
committed to compensate the states for any shortfall in
their own GST collections, the Survey indicates that the
outlook must be cautious with respect to revenue
collections. The fiscal gains from implementing the GST
and demonetisation is likely to take time to be fully
realised.
The Survey has also advocated the concept of Universal
Basic Income (UBI) as an alternative to the various social
welfare schemes to reduce poverty. The suggestion for a
universal income assumes that the two prerequisites for a
successful UBI are in place i.e., (a) functional JAM (Jan
Dhan, Aadhar and Mobile) system as it ensures that the
cash transfer goes directly into the account of a
beneficiary and (b) Centre-State negotiations on cost
sharing for the programme. The Survey says that the UBI
is a powerful idea whose time even if not ripe for
implementation, is ripe for serious discussion.
Global events, like the Brexit referendum and anticipated
protectionist measures by US President Donald Trump are
expected to significantly affect global trade.
India is well positioned to take advantage of China’s deteriorating competitiveness due to lower wage costs in most Indian
states. The Survey suggests that the Apparel and Leather & Footwear sectors are eminently suitable for generating jobs that
are formal and productive, providing bang-for-buck in terms of jobs created relative to investment and generating exports and
growth.
The Survey suggests a few measures to maximise long-term benefits and minimise short-term costs. One, fast remonetisation
and early elimination of withdrawal limits. This would reduce the GDP growth deceleration and cash hoarding. Two, continued
impetus to digitalisation while ensuring that this transition is gradual, inclusive, based on incentives rather than controls and
appropriately balancing the costs and benefits of cash versus digitalisation. Three, following up demonetisation by bringing
land and real estate into the GST. Four, reducing tax rates and stamp duties. And finally, an improved tax system could
promote greater income declaration and dispel fears of over-zealous tax administration.
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4. Anticipated Key Initiatives
Universal Basic Income
Public Sector Asset Rehabilitation
Agency
➡ Poverty and vulnerability will be reduced in one broad stroke
➡ Beneficiaries treated as agents, citizens entrusted with using
monetary welfare benefits as per their preferences
➡ All individuals targeted, exclusion error of poor being left out is
minimal, although 60 percent inclusion error of rich gaining access to
the scheme
➡ Income floor to provide a safety net against health, income and other
shocks
➡ Encourage greater use of bank accounts, endogenous improvement
in financial inclusion
➡ Increased income will enable access to credit to those with low
income levels
➡ Guaranteed income will reduce pressures of finding basic living on a
daily basis
➡ Replaces plethora of separate government schemes, reducing
administrative burden on the state
➡ Address Twin Balance Sheet problem of
overleveraged companies and bad-loan-
encumbered banks
➡ Make politically difficult decisions to
reduce debt
➡ Maximise recoveries within a defined
time through resolution of a small
number of large, complex cases in a
centralised manner
➡ Separate loan resolution process from
concerns about bank capital
➡ Purchase specified loans from banks
and then help resolve debt
• Cut in individual income tax and real estate stamp duty
• Gradual widening of income tax net
• Harness property tax potential to increase city incomes
• Accelerate cuts in corporate tax
• Inclusion of land & real estate in Goods & Service Tax
• Improve tax administration to reduce discretion & improve accountability
Tax Reform
Incentive for digital
economy
Rapid remonetisation & early removal of cash
withdrawal limits
Labour & tax reform to make Indian apparel & leather
industry globally competitive
• GDP can grow and economy stabilise with remonetisation
• Corporate taxes can increase with formalization and compliance requirements
• Cash shortage to resolve, but at lower levels
• Decline in loan rates anticipated on condition of deposit increases
• Reduced corruption and flow of unaccounted income if compliance adequately incentivized
• Decline in personal wealth expected if real estate sector does not recover
• Public sector liabilities will reduce, increasing overall wealth of government/RBI
• Digital transactions expected to maintain momentum; cash-based transactions expected, but at lower levels
• Real estate prices expected to fall with a higher tax liability if real estate sector included in GST
• Reduced tax arbitrarinessFuture impact of
demonetisation
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