Economic Survey 2016 17

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Economic Survey 2016-17

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Economic Survey 2016-17

Contents ......................... ..... _ ........ ...... ..... ...................................................... Model Questions .................................................................................................................................................. 3 Introduction .......................................................................................................................................................... 4 Difference between Budget and Economic Survey ...................................................................... 5 Economic Survey 2016-17 ................................................................................................................. 5 Summary of Economic Survey Chapters ........................................................................................................ 5 Chapter-0: Eight Interesting Facts About India .................................................................................... 5 Chapter-1: Economic Outlook and Policy Challenges ......................................................................... 6 Key Economic Reforms in 2016 ...................................................................................................... 6 Dubious perception of the ratings agencies .................................................................................. 7 Current Structural challenges for Indian Economy ..................................................................... 8 Key Global Developments and Their implications for India ...................................................... 8 Political Carrying Capacity of the West for Openness and Impact on India .......................... 9 Outlook on GDP ................................................................................................................................. 9 Trends in Inflation ............................................................................................................................. 10 Trends in External Sector ................................................................................................................ 10 Trends in Fiscal Sector ..................................................................................................................... 10 nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Economic Outlook for 2017-18 ...................................................................................................... 11 Chapter-2: Economic Vision For Precocious, Cleavaged India ......................................................... 11 From Socialism to something like a Washington Consensus ................................................... 12 Reforms of 25 years and transformation of India ....................................................................... 12 Challenges that make India a “precocious, cleavaged democracy” ........................................ 12 Ambivalence towards private sector and property rights ......................................................... 13 Weak state capacity to deliver the essential services .................................................................. 13 Extensive but Inefficient Redistribution ......................................................................................... 14 Explaining the precocious, cleavaged democracy ....................................................................... 14 Chapter -03: Demonetisation: To Deify or Demonize? ................................................................... 14 The Helicoptor Hoover .................................................................................................................... 14 Rationales of demonetisation ........................................................................................................... 15 Reason for targeting high denomination ...................................................................................... 15 Impact of demonetization ................................................................................................................ 15 On Money/interest rates .................................................................................................................. 15 On Financial System Savings ........................................................................................................... 16 On Corruption .................................................................................................................................... 16 On Private Wealth .............................................................................................................................. 16 On public sector wealth ................................................................................................................... 16 On formalization / Digital transactions ........................................................................................ 16 On real estate ...................................................................................................................................... 16 On broader economy ........................................................................................................................ 16 © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 On GDP ............................................................................................................................................... 16 Benefits of demonetization .............................................................................................................. 16 Steps taken by Government to promote digital transaction .................................................... 17 Way forward and Survey Recommendations .............................................................................. 17 Chapter-04: The Festering Twin Balance Sheet Problem ............................................................... 18 Understanding Twin Balance Sheet Problem .............................................................................. 18 Effect on corporate ............................................................................................................................ 18 Effect on banks ................................................................................................................................... 18 What is unique about TBS in Indian context? ............................................................................. 19 Is the financing strategy sustainable? ............................................................................................ 19 What has been done and issues with it? ...................................................................................... 20 Chapter-05: Fiscal Framework: The world is changing should India change too ? ................... 21 Fiscal Activism .................................................................................................................................... 21 Why Fiscal activism? .......................................................................................................................... 21 Case for India ...................................................................................................................................... 21 The 1991 and 2013 experience ...................................................................................................... 22 Turning to Debts ............................................................................................................................... 22 Fiscal Activism: Gyan for Finance Ministry and Way Forward ............................................... 22 Chapter-06: Fiscal Rules: nikaloprelims Lessons| [email protected] from the States ............................................................................ 23 | www.gktoday.in/iaspoint/target2017 Fiscal Responsibility Legislations .................................................................................................... 23 Assessment of FRL and Lessons to be Learnt ............................................................................. 24 Chapter-07: Clothes and Shoes: Can India Reclaim Low Skill Manufacturing? ........................ 24 Why textile and footwear? .............................................................................................................. 24 Why East Asia Example? .................................................................................................................. 25 Issues in India ..................................................................................................................................... 25 Measures taken .................................................................................................................................. 26 What more needs to be done? ....................................................................................................... 26 Chapter-08: Review of Economic Developments .............................................................................. 26 GDP Growth Rate ............................................................................................................................ 26 GVA {Gross Value Added} Growth Rate .................................................................................... 26 GVA Growth in Agriculture ........................................................................................................... 26 GVA Growth in Industry ................................................................................................................. 27 Growth in Service Sectors .............................................................................................................. 27 Gross Fixed Capital Formation (GFCF) to GDP Ratio ............................................................. 28 Fiscal Deficit ....................................................................................................................................... 28 Expenditure ......................................................................................................................................... 28 Prices .................................................................................................................................................... 28 Food inflation ..................................................................................................................................... 28 Core inflation ..................................................................................................................................... 28 Asset Quality and Profits of Banks ................................................................................................ 29 Credit growth .................................................................................................................................... 29 © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 Measure to strengthen corporate bond market ......................................................................... 29 Foreign portfolio investments ......................................................................................................... 29 India’s merchandise trade ................................................................................................................ 29 Export: ................................................................................................................................................. 29 Import: ................................................................................................................................................. 29 Balance of payment ......................................................................................................................... 29 External Debt ..................................................................................................................................... 29 Outlook for the economy: 2017-18 ............................................................................................. 30 Agriculture and Food management: ............................................................................................. 30 Agriculture credit .............................................................................................................................. 30 Industrial, service corporate and infrastructure sector ............................................................. 30 Service sector ...................................................................................................................................... 31 Social infrastructure, employment and Human development ................................................. 31 Education sector ................................................................................................................................ 33 Health Sector ...................................................................................................................................... 33 Inclusive policies ................................................................................................................................ 33 Climate change .................................................................................................................................. 34 Chapter-09: Universal Basic Income .................................................................................................... 34 Idea and Componentsnikaloprelims ...................................................................................................................... 35 | [email protected] | www.gktoday.in/iaspoint/target2017 Why UBI Needs Attention? ............................................................................................................. 35 Argument in favour of UBI ............................................................................................................. 35 Argument against UBI ..................................................................................................................... 36 Problems with existing welfare programmes .............................................................................. 36 UBI and Psychological benefits ...................................................................................................... 37 How Universality can remain but at the same time exclude rich? ......................................... 37 How to implement UBI gradually ? .............................................................................................. 38 Conclusion .......................................................................................................................................... 38 Chapter-10: Income, Health & Fertility: Convergence Puzzle ......................................................... 38 The Convergence Puzzle ................................................................................................................. 39 Explanation ......................................................................................................................................... 39 Case of Health Convergence .......................................................................................................... 39 How does this progress compared on a global scale ? ............................................................ 40 Case of Fertility ................................................................................................................................. 40 Conclusion .......................................................................................................................................... 40 Chapter-10: One Economic India: For Goods and in the Eyes of the Constitution ................... 40 De facto, India is economically integrated internally ................................................................ 40 Balance of Trade between States ................................................................................................... 41 Chapter-12: India on the Move and Churning: New Evidence ........................................................ 41 Chapter-13: The ‘Other Indias’: Two Analytical Narratives (Redistributive and Natural Resources) on States’ Development .............................................................................................. 42 Peninsular Model of Development ................................................................................................ 43

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Economic Survey 2016-17 Other models of development ........................................................................................................ 43 Does foreign aid translate into growth? ...................................................................................... 43 What is RRT? ..................................................................................................................................... 44 Way ahead for development ........................................................................................................... 45 Making governance- contingent transfers ................................................................................... 45 Chapter-14: From Competitive Federalism To Competitive Sub-Federalism: Cities As Dynamos ................................................................................................................................................................ 45 Need to study the changing dynamics of urbanization ............................................................ 45 Understanding Competitive sub-federalism ................................................................................ 46 Zipfs law and India ........................................................................................................................... 46 Challenges Faced by Urban Local Bodies .................................................................................... 46 Poor Governance Capacities .......................................................................................................... 46 Large infrastructure deficits ............................................................................................................ 47 Inadequate finances .......................................................................................................................... 47 Resource mobilization Problems of ULBs ................................................................................... 47 Empowering ULBs financially ........................................................................................................ 47 Dilemma in devolution of fund with respect to political economy challenge ..................... 48 Data and transparency ..................................................................................................................... 48 Key Concepts ..................................................................................................................................................... 48 nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Total Social Financing {TSF} ................................................................................................................. 48 Credit Expansion ....................................................................................................................................... 48 Objective of Credit Expansion ........................................................................................................ 48 Link between Credit Expansion and Economic Growth .......................................................... 49 Credit Expansion in India and China ............................................................................................ 49 Trade-GDP Ratio ...................................................................................................................................... 50 Trade GDP Ratio – World, India and Other countries ............................................................ 50 Trade-GDP Ratio as indicator of Globalization .......................................................................... 51 Gross Domestic Product .......................................................................................................................... 51 Calculation of GDP ........................................................................................................................... 52 The Components of GDP from expenditure side ...................................................................... 52 Consumption ...................................................................................................................................... 52 Investment ........................................................................................................................................... 52 Government Spending ..................................................................................................................... 53 Exports and Imports ......................................................................................................................... 53 GDP at Current Prices and Constant Prices ................................................................................ 53 GDP at Factor Cost .......................................................................................................................... 53 India’s GDP in 2016-17 ................................................................................................................... 54 Gross Value Added ................................................................................................................................... 54 Difference between GDP and GVA .............................................................................................. 55 Trends in India’s GDP and GVA ................................................................................................... 55 GVA {Gross Value Added} Growth Rate ..................................................................................... 55 © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 GVA Growth in Agriculture ........................................................................................................... 55 GVA Growth in Industry ................................................................................................................. 56 Growth in Service Sectors .............................................................................................................. 56 JAM .............................................................................................................................................................. 57 Demographic Dividend ............................................................................................................................ 57 Demographic Dividend Across the World .................................................................................. 58 Essential Policy Environment .......................................................................................................... 58 Survey Notes: Demographic Dividend for India ........................................................................ 58 Consequences .................................................................................................................................... 60 Cash-to-GDP Ratio .................................................................................................................................. 60 Implications of higher Cash-GDP Ratio ....................................................................................... 61 India’s Cash-to-GDP Ratio vis-a-vis other countries ................................................................. 61 Public Sector Asset Rehabilitation Agency ........................................................................................... 61 The NPA Problem ............................................................................................................................. 61 Twin Balance Sheet Problem (TBS) ............................................................................................. 62 Current Institutional Framework around Bad Loans ................................................................ 62 Different Approach ........................................................................................................................... 63 Working of PARA ............................................................................................................................. 63 Comment and Conclusion .............................................................................................................. 63 nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Economic Territory .................................................................................................................................. 63 Savings, Investment and Capital Formation ........................................................................................ 64 Trends in Gross Savings ................................................................................................................. 64 Gross Capital Formation ................................................................................................................. 65 Trends in Capital Formation .......................................................................................................... 65 Tax-GDP Ratio .......................................................................................................................................... 66 India’s Tax-GDP Ratio ..................................................................................................................... 66 Reasons for Low Tax GDP Ratio .................................................................................................. 67 Ways to Increase Tax-GDP Ratio ................................................................................................. 68

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Economic Survey 2016-17

Model Questions Prelims MCQ Topics Difference between Budget and Economic Survey, Washington Consensus, property rights, evergreening of loans, Helicoptor Money, Helicoptor Hoover, Fiscal Activism, Fiscal Responsibility Legislations, GDP and GVA Growth rates, Share of Agriculture and Industry in current GVA, Trends in Service Sector, Fiscal Deficit, Tax-GDP Ration, Cash-GDP Ratio, UDAY scheme and its implications for fiscal deficits of states, Peninsular Model of Development, Redistributive Resource Transfers’ (RRT), Dutch disease, Zipfs law, Total Social Financing {TSF}, Credit Expansion and Contraction, Demographic Dividend, Public Sector Asset Rehabilitation Agency, Economic Territory, Savings, Investment and Capital Formation.

Mains Model Questions 1. Critically examine the key structural challenges faced by Indian economy in current times. 2. “While competitive federalism has been a powerful agent of change in relation to attracting investment and talent, it has been less in evidence in relation to essential service delivery.” nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Discuss critically. 3. Examine the current trends with respect to globalization across the world and their significant consequences for India. 4. “Despite of being a successful democracy and a achieving a remarkable growth, the country has not been able to reach an optimal development model.” Discuss explaining the reasons. 5. Examine the steps taken by Government in recent times to promote digital transactions. 6. In what way the over-leveraged & distressed corporate and bad loans encumbered banks create problem for Indian Economy? What has been done so far to solve these problems? Is there any alternative solution available? Discuss. 7. “India’s fiscal position has an inbuilt bias towards higher deficit and it must be the aim of the government to prevent high spending during booms and constrains during downturns.” Elucidate. 8. What are Fiscal Responsibility Legislations {FRLs}? To what extent, they have been able to help the states to achieve their fiscal targets in recent years? Discuss. 9. What are the reasons that India has underperformed in comparison to East Asian countries with respect to industries such as leather? Discuss. 10. In the light of the misallocation of resources and leakage in the welfare schemes, do you think that Universal Basic Income is a pragmatic alternative idea. Discuss highlighting its pros and © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 cons. 11. It is argued that despite of economic growth, the developed states are not catching up; instead they are on average falling behind richer states. Analyze the reasons. 12. “Despite of low level of health expenditures, there has been convergence on key health indicators among states in India.” Elucidate. 13. Discuss the key trends in inter-state trade in India keeping in focus the first ever estimates for inter-state trade. 14. Analyze the key trends in Internal migration in India in recent years. 15. To what extent, Geography has helped the peninsular states in India to enable them to grow faster and advanced more rapidly economically? Discuss. 16. “The key challenges faced by Urban local bodies include Poor governance capacities, Large infrastructure deficits and Inadequate finances.” Amplify. 17. Discuss various Resource mobilization Problems of Urban Local Bodies in India. 18. Establish the link between Credit Expansion and Economic Growth. Why uncontrolled credit expansion is dangerous for economies? Discuss. 19. Critically examine the nikaloprelims recently| [email protected] proposed Public Sector Asset Rehabilitation Agency (PARA) | www.gktoday.in/iaspoint/target2017 towards solving India’s Twin Balance Sheet problem.

Introduction Economic survey is presented every year shortly before presenting the Union Budget. This document sets the backdrop for the Budget. The rationale of an Economic survey is that the Parliament can better appreciate the Budget proposals with the background Knowledge provided by the Survey. Economic Survey also provides an opportunity for the government to spell out its economic agenda. India’s first economic survey was presented for the financial year 1950- 51. We can find the Economic Survey documents from the finance ministry website from 1957-58 onwards. Before 1964, Economic Survey was circulated along with the Budget documents. However, from 1964 onwards, it was de-linked from the budget and circulated in advance, so that a context to the budget can be provided. The first draft of the economic survey is prepared by the department of economic affairs in the finance ministry. Then, this draft is cleared by the Chief Economic Advisor and secretary of economic affairs. The final version is scrutinized by the Finance Secretary and Finance Minister. Most of the data are given by Central Statistical Office (CSO) of Ministry of Statistics & Programme GJBYG © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 Implementation (MOPSI).

Difference between Budget and Economic Survey The constitution of India neither uses word budget or economic survey. Article 112 says that every year the president of India shall cause to be laid in parliament an “annual financial statement”. This statement and some other documents are commonly called budget. Thus, while budget is a constitutional obligation for Union government, Economic Survey is neither a constitutional nor statutory obligation. Further, while budget is prepared in utmost secrecy in the North Block, which houses finance ministry; Economic Survey is printed outside in one of the government presses. Most of its data is already in public domain, so there is no secrecy about it.

Economic Survey 2016-17 The Economic Survey 2016-17 is a 335 page single volume document with 14 chapters. It has been divided into 3 sections viz. Perspective, The Proximate, and The Persistent. It has also an added section called “Eight Interesting Facts About India“. Economic Survey highlights its piracy at Amazon Economic Survey’s official paperback copy is published by Oxford University Press. nikaloprelims | [email protected] However, numerous unauthorized publishers| www.gktoday.in/iaspoint/target2017 have sold the pirated copies of the survey on online e-commerce sites such as Amazon.in last year. Survey has highlighted this issue in its preface saying – “There is indeed a higher form of flattery than imitation: brazen pirating” We note here that if government wishes, they can collaborate with Amazon or other such sites to get the pirated copies delisted. However, this was not done. Interestingly, the authors of the survey console themselves with these lines – “anguish suffered by this violation of our intellectual property rights was more than offset by the gratitude we felt in achieving wide circulation for the Survey. We strive to do better this year, risking that the Survey might be consigned to the ranks of popular fiction.”

Summary of Economic Survey Chapters Chapter-0: Eight Interesting Facts About India The survey 2016-17 has put together eight interesting facts, which actually hint towards larger issues related to the country. These facts are as follows: 1. The work-related migration in India is increasing

The Railway passenger traffic data reveals that around 9 million people migrate for work within the country annually. This is double of what was suggested by 2011 census. 2. Rating agencies follow dubious practice in sovereign ratings

India’s rating by rating agencies such as “Standard & Poor’s” is questionable. Why? They have © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 upgraded China’s rating since 2010 despite of a historic credit expansion and record credit-GDP ratio of that country. On the other hand, despite of dramatic improvement in growth and macroeconomic stability since 2014 in India, the rating has been kept unmoved at BBB-. Thus, the survey slams the S&P for its double standard and not considering India for a ratings upgrade. 3. Welfare scheme in India suffer from acute misallocation

The poorest districts in the country have greatest shortfall of funds. The poorest districts in many states have received least / insufficient funds. The survey says that the districts accounting for the poorest 40% receive 29% of the total funding. 4. India is largely as tax non-compliant country

India has 7 taxpayers for every 100 voters ranking us 13th amongst 18 of our democratic G-20 peers. Thus, while we are a political democracy, we are far away from fiscal democracy. 5. India is fast approaching its demographic dividend peak

They survey points that India’s demographic dividend will peak by 2020; as the share of working age to non-working age population is to reach its max by that year. It also points out the peninsular states would be peaking sooner than the hinterland states. 6. India’s Trade-GDP Ratio is now greater than China

Since 2011, India’s trade-GDPnikaloprelims ratio [aka openness]| www.gktoday.in/iaspoint/target2017 has overtaken that of China. This is interesting | [email protected] because so far, China is known for using trade as engine of growth. 7. Spatial dispersion in income is rising

The survey points out that spatial dispersion in income in the country is still rising, the poor becoming more poor and richer becoming richer. The forces of convergence are still elusive in the country 8. Property Tax Potential Unexploited

The survey says that governments in India have been not able to exploit the property tax. We note here that the previous economic surveys have also advocated higher property taxes in the country to improve “local government finances”.

Chapter-1: Economic Outlook and Policy Challenges This is a summary of the chapter 1 of the Economic Survey 2016-17. Key Economic Reforms in 2016 At domestic front, year 2016 was marked by two major policy developments viz. passage of GST bill and demonetisation. The GST will create a common Indian market, improve tax compliance and governance. The government enacted demonetisation of higher currency notes as a radical governance-cumsocial engineering measure with four major aims viz. curbing corruption, counterfeiting, terror finance, and accumulation of black money. Demonetisation is expected to give long term benefits GJBYG © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 despite of its short term costs. However, the public debate on demonetisation has raised three questions viz. design and implementation of the move; its economic impacts in short and long term; and future conduct of the economic policy. Apart from this, the government has: overhauled the bankruptcy laws to address the exit problem that pervades Indian Economy. Codified the institutional arrangements on monetary policy with RBI {Monetary Policy Committee}. Solidified the legal basis of Aaadhar by passing the Aadhaar law to realise long term gains from JAM {Jan Dhan-Aadhar-Mobile}. Enacted a package of measures to assist the export oriented clothing sector. NPCI successfully finalized the Unified Payments Interface (UPI) to unleash the power of mobile phones in achieving digitalization of payments and financial inclusion, and making the “M” an integral part of the government’s JAM initiative. Implemented FDI reforms which allowed India to become world’s one of the largest recipients of FDI. | [email protected] | www.gktoday.in/iaspoint/target2017 At international front, Brexit nikaloprelims and Trump victory in US Presidential elections may herald a tectonic shift in global environment with “darker possibilities” for Indian economy. The follow up to these policy actions are fast and demand-driven remonetisation; further tax reforms {which include bringing land and real estate into GST}, reducing tax rates and stamp duties, and allay fears of tax administration.

Dubious perception of the ratings agencies They survey has questioned the role of rating agencies and accused them of biased perception towards India’s sovereign ratings. The key arguments given are as follows: The role of rating agencies was questionable in US financial crisis also when some of them had given AAA ratings to dubious mortgage-backed securities. The rating agencies They could not warn in advance the financial crisis. Often, they downgrade the ratings “post-facto“, which means that they fail to identify the problem in advance. Their perception of India has also been questionable. In 2016, the S&P had ruled out possibility of rating upgrade for India for considerable period. It was not clear what methodology was followed to come at this conclusion. They have been unimpressed by the strong fundamentals, fiscal discipline and growth trajectory of India. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17

Current Structural challenges for Indian Economy The Key structural challenges faced by Indian economy at the moment are: reducing inefficient redistribution strengthening the state capacity in delivering the essential services and regulating markets dispelling ambivalence about property rights; and embracing the private sector. Government needs not only political will but also overcome the vested interests to address these challenges. Reducing inefficient distribution

The survey points out that there are 950 central sector and centrally sponsored schemes and subschemes run by central government alone. There are rationales for many of them but then there are intrinsic limitations for many of them in terms of effectiveness of targeting. The government has been making efforts to improve redistributive efficiency and one of the vital components towards this is JAM {currently pilot scheme for DBT transfer in fertilisers is on}. Strengthening the state capacity

In terms of state capcity, the survey points out that the delivery of services such as health and education, which are mainly in domain of state governments, continue to remain impaired. The nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 survey notes that “while competitive federalism has been a powerful agent of change in relation to attracting investment and talent, it has been less in evidence in relation to essential service delivery“. But there are exceptions as well, for instance, improvement in PDS in Chhattisgarh, incentivisation of agriculture in Madhya Pradesh, power sector reforms in Gujarat, efficient social programmes of Tamil Nadu and so on. However, there are no good models on delivery of health and education, that can be replicated throughout India. The survey says that: “Competitive populism needs a counterpart in competitive service delivery.” dispelling ambivalence about property rights and embracing the private sector

For decades, there are no signs of political dynamic to remove the ambivalence towards private sector and property rights. Some of the major issues in this context are inability to advance in strategic disinvestments, over-indebtedness if the corporate and banking sectors, issue of retroactive taxation and litigations, intellectual property rights in seeds; reforms on civil aviation sector etc.

Key Global Developments and Their implications for India There are three main external developments that are of significant consequence for India. First is the implications of US elections on that country’s fiscal / monetary policy and its implications for India. Second, the world appears to have reached to political carrying capacity for globalization in the wake of recent events. This hints towards a stagnant of declining trade at global level. Third, the developments in US may lead to rise in Dollar and will have implications for China’s currency. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 Implications on India will depend on how China handles this issue. If China successfully rebalances its economy, it will have positive spill over impacts for Indian economy. However, if Chinese Yuan further declines, it will have negative impacts for India. China has to handle its domestic credit expansion, which is posing as a threat to it for short as well as long term.

Political Carrying Capacity of the West for Openness and Impact on India The economic survey has highlighted the fear of rise of anti-globalization and protectionist trends in US and other countries in west. It says that “world cannot bear too much globalization.” and has tried to link stagnant Indian exports with this. The key things which survey has pointed out are as follows: The political backlash against globalization and China’s difficulties in rebalancing its economy may have major implications for Indian exports. The political carrying capacity for globalization is not only relevant for India’s goods exports but also services exports. India is a service based economy. Currently, global service-exports/GDP ratio is 6.1%. If India’s service exports grow rapidly, this ratio can increase by 0.5% which shall be substantial. Thus, India’s service exports growth would test the globalization carrying capacity in services. World’s carrying capacity may be much larger for India’s services exports in comparison to nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 China’s goods exports. This is a positive aspect of inherent strength of Indian Economy. We note here that this statement comes at a time when Trump was preparing executive orders on H1-B and other visas and stringent curbs on them.

Outlook on GDP The baseline forecast for 2016-17 for GDP is 7%. As per economic survey, this is expected to slow by 0.25-0.5% showing the after-effects of demonetisation. The survey says that economic will recover in next fiscal and could grow between 6.75 to 7.5%. The below graphics shows the relative growth of various sectors in recent years in terms of GDP.

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Economic Survey 2016-17

As per the survey, the main highlights of sectoral growth outcome in first half of 2016-17 are as nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 follows: There has been a moderation in industrial and nongovernment service sectors There was modest pick-up in agricultural growth on the back of improved monsoon; and strong growth in public administration and defence services.

Trends in Inflation As per the survey, Retail inflation is likely to be well below RBI’s target of 5 per cent in the current fiscal mainly because demonetization would discourage any price rise.

Trends in External Sector In the first half of FY 2017, the current account deficit is 0.3% of GDP. Foreign exchange reserves are at comfortable level at USD360 billion at December 2016 end. Net FDI inflows grew from 1.7% of GDP in FY2016 to 3.2% of GDP in FY2017. These have helped India in balance of payments. The trade deficit has declined in first half of 2016 mainly because of contraction of imports as well as exports whereby fall in imports was much steeper. The ongoing rise in oil prices would put upward pressure on the import bill in medium term.

Trends in Fiscal Sector The survey has been a bit pessimistic over fiscal sector. It says that government is committed to achieve its fiscal target of 3.5% of GDP. The key points highlighted by survey are as follows: Government committed to contain fiscal deficit within targets © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 There was an increased consumption in petroleum products (gasoline/ diesel) and this helped to get more excise duties. The scene in non-tax revenue is not so bright because there was a shortfall in spectrum and disinvestment receipts also. The public sector enterprises are still stressed and thus have given out lesser dividends. The scene at states is also not encouraging as their consolidated deficit has increased from 2.5% to 3.6% of GDP {from 2014-15 to 2015-16}.

Economic Outlook for 2017-18 The economic survey presents an outlook for Indian Economy in the light of pangs of demonetisation. While the short terms effects of demonetisation are clear viz. aggregate demand shock and aggregate supply shock, the survey is not very clear on long term impacts. The GDP outlook as mentioned earlier is 25 basis points lower than earlier projected. The exports may recover in the wake of increased global activities. Fiscal position of the government would strengthen due to rise in Tax-GDP ratio and oil windfall {due to fall oil prices}. Also the survey hopes it best that government would get high profits from high denomination notes which don’t return to RBI {though stats show otherwisenikaloprelims that most of these notes have already returned}. It also emphasises | [email protected] | www.gktoday.in/iaspoint/target2017 improvement in fiscal position of the government due to increases collection of taxes in Pradhan Mantri Garib Kalyan Yojana. It also underpins the importance of smooth transition to GST but also cautions the central government about its commitment to states for any shortfalls in GST collections. With respect to exports, it cautions the government to increase India’s competitiveness, particularly due to rise in competitiveness of the countries such as Vietnam, Bangladesh and Philippines. With respect to trade, survey cautions the government about the possible resurgence of protectionist pressures in west and makes a case for need for reaching to open markets aboard. It says that events such as US withdrawal from TTP may result in increased relevance of WTO. Thus, there is a need for India to proactively pursue for “multilateralism” and revival of WTO.

Chapter-2: Economic Vision For Precocious, Cleavaged India “Democracy” has allowed India to show a robust performance in economic growth yet, there are serious challenges that underline the poor democracy with deep social fissures in the country. Due to these challenges, the economic survey calls India a precocious, cleavaged democracy. As highlighted in chapter-1, these long-standing challenges include: ambivalence about property rights and the private sector; deficiencies in state capacity, especially in delivering essential services, and inefficient redistribution.

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Economic Survey 2016-17

From Socialism to something like a Washington Consensus After independence, socialism remained the economic vision for India for around half a century, marked by economic nationalism and protectionism, dominance of public sector and government monopoly, and its interference in private firms and their investment, production and trade. This came to an end in 1991 with the advent of liberalization, privatisation and globalization in 1991. What followed was an economic vision that resembled the so called “Washington Census” i.e. open trade, open capital, and reliance on the private sector. This development model has been successful in several countries in Eastern Asia.

Reforms of 25 years and transformation of India Due to continuous reforms in last 25 years, there has been a remarkable transformation of India from a closed economy to an open and thriving economy with respect to several standard measures such as openness to trade, openness to foreign capital, share of government expenditure in overall spending etc. With respect to openness to trade, the fundamental fact is that geographically larger countries tend to trade less with other countries mainly because of presence of large internal markets in them. India also follows this principle but overall India’s trade is much larger than what one nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 of would expect of its geographical size. In last 25 years, India’s trade GDP ratio has shown steep rise and it has become larger than China and United States. {note that India’s trade-GDP ratio has been around 55-58% in recent years}. With respect to the openness to foreign capital, the survey says that despite significant capital controls, India’s net inflow of foreign capital has been quite normal and is comparable to other emerging economies. India’s FDI has risen sharply over the time and in most recent year, India received FDI of USD 75 Billion which is not very short of China. With respect to the share of government expenditure in overall spending, the survey says that when we compare the size of the government expenditure to GDP ratio, India’s share is much larger than other countries with similar development levels. In summary, these reforms have allowed Indian economy to grow significantly and the survey pats the country on its back for remarkable development on these three standard measures. This growth has been particularly remarkable because it has been achieved in a fully democratic political system.

Challenges that make India a “precocious, cleavaged democracy” Despite of being a successful democracy and a achieving a remarkable growth, the country has not been able to reach an optimal development model. There may be numerous reasons but survey has particularly highlighted three reasons – (1) the country is still not able to embrace the private sector

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Economic Survey 2016-17 and protect the property rights. There is still over-reliance on state for the activities that could be left for private sector (2) the state capacity to deliver the essential services has been week (3) extensive but inefficient redistribution {of income}. Ambivalence towards private sector and property rights

Though ambivalence towards private sector is everywhere because of the intrinsic paradox – the profit maximization aim of private sector does not match with social concerns of government. However, this ambivalence is greater in India, if we compare attitudes to the private sector in India with other countries. This ambivalence manifests in several forms, for example: It is difficult to privatise the public sector enterprises even if there are strong arguments for the same. This is evident in civil aviation sector, banking & finance sector. We have still to wait for the day when our airlines are “world class”. In farming sector, the requirement to sell the produce only via APMC is archaic. It distorts the prices against the favour of both producers and consumers; and when the prices rise much far, the Essential Commodities Act is invoked to impose stock limits etc. With respect to property rights, these rights were initially included as Fundamental Right {Article 19 (1) (f)} but nikaloprelims later were converted to ordinary legal right {Article 300-A} via 44th | [email protected] | www.gktoday.in/iaspoint/target2017 amendment. But this downgrade of rights to property has resulted into the “retrospective taxation’ problem and is lingering around even today {survey say so, I think they overlooked the circumstances in which the 44th amendment was enacted}. This was evident in a number of recent cases such as those involving Vodafone and Monsanto. This is further aggravated by the Twin Balance Sheet Problem – in corporate and in banking sector {discussed later}. Weak state capacity to deliver the essential services

Almost all emerging economies started as weak states at the time of their independence. However, as their economies developed, the state capacity also improved. Unfortunately, this did not happen in India. Indian state has low capacity and high level of corruption, clientalism, rules and red tape. The survey says that while competitive federalism in the country has been a powerful agent of change with respect to attracting investment and talent, it has failed to improve essential services delivery with few exceptions such as improved PDS of Chhattisgarh, incentivasation of agriculture in Madhya Pradesh, power sector reforms of Gujarat, and improved delivery of social services in Tamil Nadu etc. As far as delivery of health and educational services is concerned, the competitive federalism has not been able to bring much changes. The weakness of state capacity has not only resulted in inhibition of service delivery but also heavy constraints in policy making. Since the policy making needs to be such a way that it does not result in vested interests, there is an adherence to strict rules which may sometimes not be optimal public GJBYG © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 policy {example- auction of public assets}. For example, the transparent spectrum auction may be a socially optimal policy, but it has undermined the other methods than auction. This apart, there is too much caution in bureaucratic decision making, which actually favours status quo. For example, senior managers of banks fear in writing down the loans for the fear of being seen as favouring corporate interests; and becoming targets of 4Cs viz. courts, CVC, CBI and CAG. What happens due to this is “evergreening of loans” and postponing the solution of the problems. Extensive but Inefficient Redistribution

In India, the redistribution is not efficient with respect to targeting the poor. The welfare schemes suffer not only from shortfall of funds but also from misallocation. This results in exclusion errors {deserving poor are excluded}, inclusion errors {non-poor receiving benefits} and leakages. The government has tried to solve the leakage problem via subsidy reforms and use of technology.

Explaining the precocious, cleavaged democracy The survey tries to explain why India is a precocious, cleavaged democracy while comparing it with other democracies. It says that at the time of independence, India was a highly poor society and also a highly socially cleavaged society in terms of languages, castes, religions, regions, gender and classes. Further, the founders of India took the country on path of socialism whereby the wanted to build the nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 country by developing industry under state’s control. Obviously, embracing private sector in such circumstances was not possible.

Chapter -03: Demonetisation: To Deify or Demonize? In its third chapter, the survey tries to analyze {and to justify} the rationale behind governments move to demonetize, impacts of demonetisation, benefits of demonetisation and way forward. We note that there were two previous instances of demonetization, one was in 1946 and other was in 1978, but the demonetization of 1978 did not have any significant effect on cash the way the current demonetization drive has done. The Helicoptor Hoover The economic survey has used the phrase “helicoptor hoover” to the way demonetization was conducted. This term, derived from earlier concept of Helicopter money. This particular word is a metaphor {not implemented practically anywhere} and involves printing large sums of money and distributing it to the public to increase money supply and stimulate the economy in deflationary periods. The metaphoric imagination is that the printed currency should be dropped from helicopters {Helicoptor drop}. The survey has called demonetization as “Reverse Helicopter Drop” or “Helicoptor Hoover“. GJBYG © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17

Rationales of demonetisation The key rationales enumerated behind government’s move to demonetize the high currency notes are: To curb corruption To prevent Counterfeiting of notes, where high denomination notes are counterfeit to be used for terrorist activities To curb accumulation of “black money” which is generated by income that has not been declared to the tax authorities. The survey recounts the earlier efforts of the government to curb the illicit activities viz. Creation of the Special Investigative Team to probe Black money; Passage of legislation such as Black Money and Imposition of Tax Act 2015 and Benami Transactions Act 2016; Information exchange agreement with Switzerland; Changes in tax treaties with Tax haven countries such as Mauritius, Cyprus and Singapore to prevent money laundering and income disclosure scheme to give one time opportunity to hoarder of Black money to disclose his income which is not taxed.

Reason for targeting high denomination There are few reasons cited by the survey as to why Rs. 500 and Rs. 1000 notes were targeted. Firstly, nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

the soil rate of higher denomination is less. Soil rate is the rate at which notes are considered to be too damaged to use and have been returned to the central bank. Survey says that soil rate of currency notes of Rs. 500 and Rs. 1000 is 22% and 11% which is much lower than soil rate of lower denomination which is 33%. This suggested that notes of higher denomination are not used for transaction, instead used to stash black money. Secondly, the link between higher denomination and illicit activities is well established across the globe. The higher the amount of cash in circulation, the greater the amount of corruption, as measured by Transparency International and this made the 500 and 1000 denomination the soft target. Thirdly, high value notes are easier to store and carry in comparison to smaller denominations or other stores of value such as gold. The economic survey mostly tells us the things which we already know and does not tell us what we want to know. The above rationales are correct but still we are unable to understand the rationale of introducing Rs. 2000 currency. Is that a stop gate currency and yet another demonetisation is in cards? This is not hinted by Survey, which talks of rapid remonetisation rather.

Impact of demonetization The impacts of demonetisation are summarized in economic survey as follows: On Money/interest rates

In the short term, the cash declined sharply; Bank deposits increased sharply. In the long term, the cash will recover but settle at a lower level. Deposits will decline, but probably settle at a slightly © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 higher level. RBI’s balance sheet will shrink, after the deadline for redeeming outstanding notes. Loan rates could fall further, if much of the deposit increase proves durable. On Financial System Savings

Increased in the short term and will increase in long term to the extent that the cash-deposit ratio falls permanently. On Corruption

In the short term, the stock of black money fell, as some holders came into the tax net. In the long term, the corruption and black money could decline if “incentives for compliance improve“. In the long term, the formalization would reduce the flow of unaccounted income. On Private Wealth

In the short term, the private sector wealth declined because some of the high denomination notes did not return to the system; and the prices of real estate fell. In long term, the private wealth could fall further if real estate prices continue to decline. On public sector wealth

In short term, there was no impact on public sector wealth. However, in long term, the RBI’s wealth will increase due to extinguished liability of RBI towards unreturned notes. On formalization / Digital transactions nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

The demonetisation has set off the digital revolution and many new users adopted digital payments for the first time. In long term, some of them would return to cash mode but digital revolution will continue. On real estate

In short term, the prices declined and wealth fell. In long term, the prices could further fall because people have invested unaccounted income in real estate. On broader economy

In the short term, there were job losses, decline in farm incomes, social disruption, particularly in cash intensive sectors. In long term, the economy should stabilize with remonetisation. On GDP

In short term, the GDP reduced demand, supply as well as working capital and increase uncertainty in cash intensive sectors. However, the impact will be lesser on recorded GDP. In the long term, as the economy becomes more formalized, the underestimation would decline and recorded GDP will give realistic picture. GDP will increase with more share of formal economy.

Benefits of demonetization The survey has enumerated various benefits of demonetization as follows: Taxing black money

It has resulted in a transfer of wealth from holders of illicit black money to the public sector, which could have been used in various productive ways such as recapitalization of the banks and retire the © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 government debts. Tax Compliance

The move would lead to increased “tax compliance” because evaders may decide that it is better to pay regular tax than face a sudden penalty and social condemnation. Tax on informal savings

The informal savings will be channelized into formal financial system and the deposits would provide a base for banks to provide more loan at low interest rates. Digitalisation

One of the intermediate objectives of demonetization is to create a less-cash economy in India. This would ensure that the savings are done through formal financial system and tax compliance. The survey notes that India has very high predominance of cash consumer transactions relative to other countries. The Watal Committee recently estimated that cash accounts for about 78% of all the consumer payments. However, the survey also points out to impediments to digital transactions which include – lack of internet connectivity, lack of smart phones which are needed for mobile transactions, lack of enough POS (points of sales), lack of digital literacy and cybercrimes.

Steps taken by Government to promote digital transaction The following are steps taken by the government to| www.gktoday.in/iaspoint/target2017 promote digital transactions: nikaloprelims | [email protected] Launch of the BHIM (Bharat Interface for Money) app for smart phones. This is based on the new Unified Payments Interface (UPI) which has created inter operability of digital transactions. Launch of Aadhaar Merchant Pay, aimed at the 350 million who do not have phones. This enables anyone with just an Aadhaar number and a bank account to make a merchant payment using his biometric identification. Reductions in fees (Merchant Discount Rate) paid on digital transactions and transactions that use the UPI. Encouraging the adoption of POS devices beyond the current 1.5 million, through tariff reductions.

Way forward and Survey Recommendations The most important effort must be to replenish the cash shortage as quickly as possible. The faster remonetisation takes place, the shorter and less severe will be the impact of demonetization. The RBI should re-establish internal convertibility, guaranteeing to give the public the amount of currency that the latter wants by elimination of withdrawal limit Hence Demonetization is a powerful stick which now needs carrots as complements. A multipronged strategy could be adopted to complement demonetization needs to be adopted. Firstly, GST © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 with broad coverage to include activities that are sources of black money should be implemented. Secondly, Individual income tax rates and real estate stamp duties could be reduced. Thirdly, Income tax net could be widened gradually and, consistent with constitutional arrangements. Finally, tax administration could be improved to reduce discretion and improve accountability.

Chapter-04: The Festering Twin Balance Sheet Problem In the fourth chapter, the survey has discussed the Twin Balance Sheet {TBS} problem and made a case for establishment of a Public Sector Asset Rehabilitation Agency (PARA). Understanding Twin Balance Sheet Problem The centre-piece of TBS problem are Non-performing assets (NPAs) which have resulted into two inter-twined economic issues viz. over-leveraged & distressed corporate and NPA encumbered banks. The menace of NPAs or stressed assets in looming large in the Indian Economy for past few years. In the mid-2000s, economies all over the world were booming, and India was no exception to that. The growth rate of the country was around 9-10 % and there were optimism that India would dash into Double digit growth that would persist for several decade. In this phase of optimism, funds worth lakhs of crores were readily infused particularly in infrastructure related areas such as power | www.gktoday.in/iaspoint/target2017 generation, steel and telecoms,nikaloprelims setting| [email protected] off the biggest investment boom in the country’s history. The implications of all this was that the Capital inflows in 2007-08 reached 9 percent of GDP; Investment-GDP ratio soared by 11 percentage points, reaching over 38 percent by 2007-08; and firms abandoned their conservative debt/equity ratios and leveraged themselves up to take advantage of the perceived opportunities. However, in 2008 the Global financial crisis set in. It derailed the growth bonanza and had serious consequence on the world economy like loss of market, inflationary tendency etc. Moreover there were significant bureaucratic friction and rules rigidity in granting land and environmental clearances, which led to increased project cost. Effect on corporate

Due to fall in revenue due to financial crisis, increased cost due to lack of clearance, and high financing cost due to RBI tightening of monetary policy,- cooperates cash flow got squeezed. By 2015, the share of company 40% of debts were owed to IC1 companies (Company who’s interest coverage ratio is less than 1 which means they don’t earn enough to even honour their interest obligation) Effect on banks

Their ROA (return on assets) became uncertain, and in many cases the principal amount got stuck in the loop, leading to eroding of bank’s capital base

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Economic Survey 2016-17

What is unique about TBS in Indian context? World over whenever the problem of balance sheet has occurred at this scale it has been followed by the economic crisis Ex in Japan after 1990s, and USA and Europe after the Global financial crisis of 2008. However in India’s case, the non-occurrence of economic stagnation can be attributed to following reasons: The banking structure in the country is such that there are both public and private entities. And since bulk of the problem was with public banks which not only have their capital base but also backing of the government, NPA problem has so far being tackled. Thus guarding the investors’ confidence. In addition, as an emerging economy India economy requires huge investment and development of supply side infrastructure. So unlike US economy where once the Housing sector got saturated there wasn’t need for funds for other critical development infrastructure, in India the need for such infrastructure still holds relevance and thus gives plenty of scope for India to stay on growth trajectory. Moreover, in other economy creditors would have by now triggered bankruptcies. But in case of India, Stressed assets issues arose in early 2000’s too, where the bank followed “giving nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 time to time strategy” and these issues eventually got subsided. Similar optimism still holds the economy especially when there is still wide untapped market potential, to resolve the current issue. However owing to this strategy to a large extent there have been instances of ever greening of loan and huge NPAs.

Is the financing strategy sustainable? For financing strategy to work, where the funds would continue to be provided to the corporates, either of the scenario must occurPhoenix scenario: Under this the fund flow to the companies would be uninhibited till the point comes, where the growth in the economy would be able to resolve the existing problems with banks and companies via increased earning. Containment scenario: This involves containing the NPAs, so that over the period of time as the economy is growing at the nominal level of 10%, they became insignificant. Both these approaches assume growth to take place, however as has been observed the condition of the economy is not in a good shape: When looking into the stressed companies, their aggregate cash flow which even wasn’t enough to service their debts has roughly by 40%. Debts of the top 10 stressed corporate groups in particular, have tripled in the last six years.

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Economic Survey 2016-17 Looking into industry we finds following: Power sector industries suffers from low plant load factor (actual electricity production as a share of capacity) which stands around 59.6% for April and December. Even the Telecom sector is also reeling under pressure from new entry competition. Also the MSMEs who have fared well due to their cautious approach in mid-2000, since recent years have been contributing significant proportion of the increases in NPAs. As per estimates four-fifths of the slippages during the second quarter of 2016, incurred by MSMEs due to poor sales and profitability. Also the public sector banks shares prices have fallen to just two- thirds of their book value. On the other hand, due to rising stressed assets banks are exercising control over credit creation. Also the banks have increased their lending rates (though got trimmed due to post demonetization). However this is resulting in Disintermediation of banks, as the firms are resorting to capital market. But for MSMEs who requires Handholding support from banks, capital market still stands elusive. All this above mentioned situations have drastically reduced investment in the economy, even though public investment has been unleashed by the| www.gktoday.in/iaspoint/target2017 government. nikaloprelims | [email protected]

What has been done and issues with it? Initially RBI did rescheduling of instalments to give firms more to pay. However in the backdrop of widening stressed assets, RBI took slew of the following measures: Establishment of private Asset Reconstruction Companies(ARCs) under SARFESI Act 2002, with the aim that bank would be able to focus on their core competency of loan -deposit operation and the body of specialist could relieve the banks from resolving stressed assets issues. However owing to difficulty with resolving the assets that ARC purchases, they are willing to purchase loans at low prices. This makes difficult for banks to accept Arc offer. In June 2014, RBI floated 5:25 scheme. Under this lenders were allowed to increase debt period up to 25 years with interest rates adjusted every five years. However owing to such long debt period, the companies find it difficult to endure high interest burden, forcing banks to infuse additional grants leading to ever greening of loan. In June 2015, the Strategic Debt Restructuring (SDR) scheme was introduced, under which creditors could take over firms that were unable to pay and sell them to new owners. However those firms who are not able to pay back despite restructured loan terms were to be selected. Banks can convert debt to 51% of equity and sell them, subject to authorization of the stakeholders.

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Economic Survey 2016-17

Chapter-05: Fiscal Framework: The world is changing should India change too ? In this chapter, the survey has reviewed the trends in fiscal policies around the world, comparing with those of India and done a critical assessment of India’s fiscal activism and FRBM Act of 2003. It also tries to provide an insight into what should India’s fiscal policy ahead. Fiscal Activism We all understand that monetary policy and fiscal policy are two main public finance policies for the governments around the world. The classic Keynes theory of “pump priming” is known to all of us. Pump priming implies more money supply in economy and near zero interest rates. The objective of pump priming is to stimulate an economy in recession. In today’s sense, one of the instruments of pump priming is Quantitative Easing {QE}. The survey highlights that after the 2008 Global Financial Crisis, the advanced economies experienced very low demand, low inflation, low employment and low economic growth thus making a downturn cycle. In such circumstances, the monetary policy makers of those countries took the path of quantitative easing i.e. supplying money in economy thereby bringing interest rates to near zero. Under monetary policy, they had no further options available, so to further stimulate the economy, they turned to nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 fiscal policy instruments under the so called “Fiscal activism“. Fiscal policy deals with the taxation and expenditure decisions of the governments including debts and public spending. The path chosen by the advanced economies under fiscal activism was to shift the emphasis “from debt to spending.” The more public spending is there, more will is generate economic activities. Thus, Fiscal activism implies that there is minimum concern about debt and greater emphases on public spending. Why Fiscal activism?

There are several reasons for adopting this type of strategy. Firstly, it can be used in times when interest rates are near zero and no further viable options are available under monetary policy. Secondly, fiscal policy is effective in increasing GDP, it would lead to increase in tax revenue, meaning fiscal activism can partly pay for itself. Thirdly, the debt levels don’t bother much because interests are already near zero. Thus, the case for active fiscal policy in the advanced economies is mainly viable because of inability of addressing the same problem via monetary policy. Case for India

Though India is not facing such a severe problem of economic downturn yet, the survey analyzes the fiscal activism with respect to the Twin Balance Sheet Problem of the country. First, let’s see how India’s case is different. Firstly, the growth rates in India are substantially high and inflation rates are also substantially higher. Secondly, interest rates in India are nowhere near to zero. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 Using these arguments, survey says that India should not do what west is doing because our circumstances are entirely different from them. Thus, India should stick to its path of fiscal consolidation and should indulge itself into adventures of fiscal activism.

The 1991 and 2013 experience The survey uses 1991 and 2013 experience to further its point cautioning India to keep away from fiscal activism. In early 1980’s, the government had increased the spending to accelerate the growth, which resulted in higher fiscal deficits. But then, there was inability to rein in these deficits. This worsened the external situation and BoP crisis in 1991. A similar path was taken by UPA government in 2000s. During the mid-2000s growth boom, the UPA government introduced new spending programs which could not be continued when government receipts fell. After the Global Financial crisis, the budget deficit of the country rose sharply due to fiscal stimulus by the government close to 4% of GDP. But this was not withdrawn at time and it led to a near-currency crisis in 2013. However, in 2013, it did not turn up to be a full blown crisis. This is because of the difference between 1991 and 2013 episode that in the former there was fixed exchange rate which created a full blown crises, where as in the latter the exchange rate was floating, which attenuated disruption in other asset prices.

Turning to Debts

nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

The debt-GDP ratio of India is higher than many other countries, but that is not the only problem. The major problem is that India has a higher primary deficit {shortfall between receipts and noninterest expenditures}. This implies that governments in India {both centre and state} are not collecting enough revenue to cover their running costs, let alone the interest on its debt. Although having a large primary deficit is found in many other emerging economies but India is quite vulnerable because we have high interest rates as compared to other countries. As a result of running a primary deficit the government is dependent on growth and favorable interest rates to reduce the debt ratio, which means if one day growth were to weak and interest rates to rise on continues basis, the debt ratio could start spiral upwards. At this point there could be possible of debt explosion, its not theoretical possible but it’s exactly what happened in Greece. Generally India undertakes policy related fiscal adjustments only gradually.

Fiscal Activism: Gyan for Finance Ministry and Way Forward In the light of the above discussion, let’s try to crystallize what Gyan has been given by Survey to Finance Minister and what are policy suggestions. Firstly, the survey points out that India’s fiscal position has an inbuilt bias towards higher deficit and it must be the aim of the government to prevent high spending during booms and constrains during downturns. Thus, it cautions the government against UPA likes doles {it’s worth recall that UPA had written of loans of farmers worth Rs.60,000 © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 crore in 2008. This was one of the many instances of fiscal adventurism. The current government is committed to fiscal consolidation (from 4.5% in 2013-14 to 3.5% target currently)}. Secondly, it says that India has great track record when it comes to fiscal commitments, because India never defaulted on its domestic and external debt commitments. In that sense India is very different from many other emerging markets especially those in Latin America and Russia which have defaulted on their domestic obligations. Thirdly, it calls for updating of the FRBM Act, 20013 which was enacted at a time when India’s economy was relatively smaller and far behind than other emerging markets. This will be the task of the FRBM Review committee to set out new vision on FRBM for the 21st century.

Chapter-06: Fiscal Rules: Lessons from the States In chapter 6, the survey has focussed on the states and has analyzed the role played by Fiscal Responsibility Legislations (FRLs) towards their Fiscal discipline along with other factors that contributed in containing fiscal deficit and lessons to be learnt for future fiscal rules. Fiscal Responsibility Legislations The FRBM Act, 2003 mandated the central government to take certain measures to contain its fiscal deficits and present certain documents with the budget documents in parliament. This law was not nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 for the states. In the 10th plan, the planning commission highlighted the need for the states also to enact their own laws to reduce the overall debt-GDP ratio of India. Following such advices, some states such as Karnataka, Kerala, Punjab, Tamil Nadu, Maharashtra etc. have enacted their Fiscal Responsibility Legislations {FRLs}. These laws have imposed Fiscal discipline in states through various measures such as: Fixation of fiscal Target: For example overall deficit not to exceed 3% of GSDP and; revenue deficit to be eliminated by certain year. Market Borrowings: The 12th finance commission had allowed states to borrow from market in order to exercise discipline through investors, who will push up the interest rates on states whose fiscal position is not good. Annual report to project deficit: The states were required to publish annual Medium-Term Fiscal Policy reports which would Project deficits over the next three to four years The survey says that in last few years, the states have achieved fiscal targets in advance of the year 2008. In these states, the fiscal deficits fell to almost half while revenue deficit was almost eliminated. However FRL is not the sole reason of states deficit reduction there are other exogenous factors too that contributed in state achieving fiscal target. These exogenous factors include: Increase in central transfers to states Increase in tax revenues due to GDP growth and VAT adoption © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 Debt restructuring programmes which led to fall in interest payments Increase in non-interest revenue expenditures, which implies that the states used revenue gains to bring down deficits rather than ramping up the spending.

Assessment of FRL and Lessons to be Learnt The above discussion makes it quite clear that though FRL brought changes in outcome and behavior by improvement in budget forecasting procedures and a reduction in debt, but much of the improvement in financial positions was possible because of exogenous factors, most notably assistance from the centre in the form of increased revenue transfers, the assumption of state debt, and the introduction of centrally sponsored schemes. Coming to the conclusion, the survey says that role played by FRL has been more subtle because a few years after the FRL, all indicators of fiscal performance—deficits, expenditures, and especially off-budget activities—started deteriorating. It is possible that the Centre has prevented this deterioration by exercising Article 293 (3) of the Constitution which says that States must take consent of the Centre for additional borrowing. The survey has asked the union government to help states face fiscal challenge such as Pay Commission recommendations, slowing growth, and mounting payments from the UDAY bonds, there nikaloprelims is need| [email protected] to review how fiscal performance can be kept on track. It has | www.gktoday.in/iaspoint/target2017 asked the government to also implement 13th and 14th finance Commission recommendations.

Chapter-07: Clothes and Shoes: Can India Reclaim Low Skill Manufacturing? In this chapter, the survey has focussed on manufacturing sector, particularly, the textiles and leather industry, and asked the government to do as much good as possible for these sectors. It says that on one hand, India is celebrating its demographic dividend, while on other hand, the state has failed in providing good jobs to its labour force. One of the main reasons is less incentives given to labour intensive industries. Thus, taking clue from China and other East Asian Countries, the government should provide all possible policy support including subsidies, tax rebates, labour law reform etc. to seize the narrow window of demographic dividend. Why textile and footwear? In short, the measure of any business be attributed to these: Potential for creating more jobs relative to investment, Potential for social transformation, Creating jobs which are formal and productive and Boost up export and growth. In such context, greater development of footwear, apparel and leather can be a break through, as they suffice the aforementioned parameters. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17

Why East Asia Example? In the post war scenario in East Asia, nearly all economic rise has been associated with clothing and footwear business. Such was the case that, though economic rise growth was averaged around 7-10%, these sectors were exceptional. For apparel growth hovered around 20%, in some cases even 50% and for leather and footwear it touched around 25%. The survey points out that apparels are 80-fold more labour-intensive than autos and 240-fold more jobs than steel { Labour intensiveness is measured as jobs per unit of investment}. The comparable numbers for leather goods are 33 and 100, respectively. Even these sectors have female labour intensity which in turn would help in social transformation. Wage rate in these sectors are rising which presents an opportunity for India where labour cost is less as compared to china. However the space vacated by China is fast being taken over by Bangladesh and Vietnam in case of apparels; Vietnam and Indonesia in case of leather and footwear. Even Indian apparel and leather firms are relocating to Bangladesh, Vietnam, Myanmar, and even Ethiopia.

Issues in India India in its early economic take off, has underperformed especially in leather, than other East Asian nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 countries when they initially started off their economy. The various reasons cited by survey are as follows: Logistics

Cost and time involved in getting goods from factory to destination are greater than those for other countries. Further, few very large capacity containers(VLCC) come to Indian ports to take cargo so that exports have to be transhipped through Colombo which adds to travel costs and hence reduces the flexibility for manufacturers. Labour issues

Labour related issues like high mandatory over -time payment, high minimum pay in some cases, minimum contribution that eats up the disposable income of low paid workers. All this leads to small firm size thus reduce in competitiveness. Tax and Tariff policies

In case of apparel the policy favours cotton based export over manmade fibres, although internationally the latter has greater demand. Moreover there is high tariff on yarn and fibre on one hand and footwear on the other. Also there is a need to make India- exporter of non- leather footwear from leather based, as the former has more global demand. Issue in export market

Bangladesh owing to its Less Developed country (LDC) tag enjoys almost duty free access to EU, while India’s export of apparel faces an average 9.1% tariff. Ethiopia also enjoys duty free access in GJBYG © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 EU, US and Canada.

Measures taken Apart from the various schemes for these sectors, the government will contribute the employers’ 12 per cent contribution to the Employee Provident Fund (EPF) (This would be in addition to the Government’s contribution of 8.3 per cent). Apparel exporters will be provided relief to offset the impact of state taxes embedded in exports, which could be as high as about 5 per cent of exports.

What more needs to be done? FTA with countries like EU and US be given thrust and export and labour intensive sectors be given priority while finalising the deal. GST implementation should not discriminate between manmade and cotton fibres and Leather and non- leather based footwear. Labour laws reform be taken up, where choice be given to employees whether it wants 12% employees contribution deduction, whether 12% goes to EPFO or NPS and decide whether their health insurance premium goes to ESI(employees state insurance) or private health insurance companies. Thus main aim should be to offer choice to the employees.

Chapter-08: Review of Economic Developments In this chapter, the survey has given| [email protected] a crisp overview of latest data and facts on Indian economy nikaloprelims | www.gktoday.in/iaspoint/target2017 along with estimates for the coming year. This chapter is more relevant to your prelims paper and also MCQ based examinations. The key observations from this chapter are as follows: GDP Growth Rate As per first advanced estimates, GDP Growth Rate is estimated at 7.1% in 2016-17. The growth in the second half of 2016-17 works out to 7.0 per cent as against 7.2 per cent in the first half. However, estimates of second half are based on the economic situation prior to the demonetisation. GVA {Gross Value Added} Growth Rate As per the first AE, the growth rate of gross value added (GVA) at constant basic prices for 2016-17 is placed at 7.0 per cent, as against 7.2 per cent in 2015-16. The growth in the second half of 2016-17 is estimated at 6.7 per cent as against 7.2 per cent in the first half. Year India’s GVA*

2012-13

2013-14

2014-15

2015-16

2016-17

2016-17H1

2016-17H2

5.4

6.3

7.1

7.2

7.0

7.2

6.7

*at constant basic prices

GVA Growth in Agriculture As per data, the growth of agriculture & allied sectors improved significantly in 2016-17, following the normal monsoon in the current year which was preceded by sub-par monsoon rainfall in © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 2014-15 and 2015-16. Higher growth in agriculture sector in 2016-17 is not surprising; rabi sowing so far and the first advance estimates of the kharif crop production for the year attest to this.

nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

GVA Growth in Industry After achieving a real growth of 7.4 per cent in terms of value added in 2015-16, the growth in industrial sector, comprising mining & quarrying, manufacturing, electricity, gas & water supply, and construction sectors moderated in 2016-17. This is in tandem with the moderation in manufacturing, mostly on account of a steep contraction in capital goods, and consumer non-durable segments of Index of Industrial Production (IIP). The contraction in mining and quarrying largely reflects slowdown in the production of crude oil and natural gas.

Growth in Service Sectors As in the previous years, the service sector continued to be the dominant contributor to the overall growth of the economy, led by a significant pick-up in public administration, defence & other © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 services, that were boosted by the payouts of the Seventh Pay Commission. Consequently, the growth in services in 2016-17 is estimated to be close to what it was in 2015-16

Gross Fixed Capital Formation (GFCF) to GDP Ratio As per the survey, the Fixed investment (gross fixed capital formation(GFCF)) to GDP ratio (at current prices) is estimated to be 26.6 per cent in 2016-17, vis-à-vis 29.3 per cent in 2015-16. This fall in GFCF was little offset by Government final consumption expenditure, which witnessed a rise of 23.8%, thus was the driver of economy. The Private final consumption remained at a reasonable level and import of good and services reduced largely due to contraction of gold, silver and other bullion demands.

Fiscal Deficit

nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

Fiscal Deficit came down from 3.9% in 2015-16 to 3.5% for the current year. This consolidation was mainly due to 11.9% increase in gross tax revenue. Even non tax revenue and non-debt capital receipt witnessed a rise.

Expenditure Revenue Expenditure witnessed a surge owing to 7th pay commission, rise in food subsidy and grants for creating capital asset. Capital expenditure which composed of internal debt, other internal liabilities like provident funds, small savings, etc. and external debt, remained fairly the same.

Prices An average CPI inflation declined to 4.8% during April- December 2016 from 4.9% in 2015-16. An average WPI inflation on the other hand, rose from -2.5 in 2015-16 to 2.5% for April-December 2016, partly due to the rise in global commodity prices and partly due to adverse base effect.

Food inflation It is mainly driven by narrow set of food items that is Pulses, in particular Tur and Urad; sugar and vegetables. Except sugar, the two has dipped by the December 2016 making CPI food inflation to two year low of 1.4% in December 2016.

Core inflation While the headline inflation has fallen for this year, core inflation (exclusive of food and fuel) remains sticky.

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Economic Survey 2016-17

Asset Quality and Profits of Banks Asset quality of banks as reflected via Gross non-performing assets to total advances ratio of scheduled banks have deteriorated further and stands around 9.1% between march and September. Even the Profit after tax has contracted for these banks due to higher growth in risk provisions, loan write off and decline in net interest income.

Credit growth Personal loans and Agriculture and allied activities related loan continue to grow, however for corporate it remained low even this year.

Measure to strengthen corporate bond market In order to ensure due availability of fund, especially due to risk aversive stand of banks, bond market can be a great source for credit. In this regard, going by the khan committee recommendation, RBI has taken following measures: Commercial banks are allowed to issue rupee denominated bonds for their capital requirement and for financing infrastructure and affordable housing. Banks allowed to increase the partial credit enhancement they provide for corporate bonds to 50% from 20%. This will have low rated corporates to access the bond market. nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Making G-sec more accessible to retail investors.

Foreign portfolio investments For the first time since economic meltdown of 2008, FPI turned negative for India. Also in other emerging economy they have pulled out in a big way due to higher returns in advanced economy.

India’s merchandise trade Export:

Owing to global subdued demand, India’s export declined by 15.5% in 2015-16. However for April November 2016 it has registered a modest growth. For India, USA, followed by UAE and Hong Kong were top export destination. Import:

Because of fall in oil prices and fall in demand of gold, silver and other bullions, India’s export declined by 7.4% for April-November 2016. China, followed by UAE and USA, remained India’s top three import destination. India’s trade deficit thus, declined by 23.5% in 2016-17.

Balance of payment The current Account Deficit narrowed in 2016-17(H1) to 0.3% of GDP. With net capital flows remaining higher than the CAD, there was net increase to foreign exchange reserve.

External Debt The shares of Government (Sovereign) and non-Government debt in the total external debt were 20.1 percent and 79.9 percent respectively, at end-September 2016. To the external Debt, foreign

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Economic Survey 2016-17 exchange reserves provided a cover of 76.8 percent to the total external debt stock. At endSeptember 2016, long-term external debt accounted for 83.2 percent of India’s total external debt. World Bank’s annual publication titled ‘International Debt Statistics 2017’, which contains the external debt data for the year 2015, indicates that India continues to be among the less vulnerable countries.

Outlook for the economy: 2017-18 In terms of challenges -Protectionism can have negative effect on trade and investment, Poor investment rate, and the fall in foreign portfolio investment together can have dampening effect on the economy. Keeping such variables the GDP growth rate for 2017-18 can be 6¾ percent to 7½ percent in 2017-18.

Agriculture and Food management: Agriculture sector witnessed a growth rate of 4.1 %- Owing to sub-par monsoon in the preceding years followed by normal monsoon in the current year. In terms of agriculture, higher production under Kharif and increased acreage for Kharif and Rabi crops have been found. However there have instances of acute shortage of certain crops like pulses. So to rectify this scenario government set up a Committee on ‘Incentivizing Pulse Production through Minimum Support Price (MSP) and Related nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Policies’. To increase productivity of pulses, a new extra early maturing, high yielding variety of Arhar (Pusa Arhar-16) has been developed to be made available for farmers in the next Kharif season. Even MSP for pulses have been increased substantially.

Agriculture credit This has been increased to 9 lakh crore against Rs 8.5 lakh for 2015-16. Up to September 2016, 84% of this target has been achieved.

Industrial, service corporate and infrastructure sector Industrial growth has been 5.2%, which Contracted from 7.4% of the preceding year due to contraction in capital goods and consumer non-durable segments. The Eight core industries which represent 38% in the IIP registered a cumulative growth of 4.9% during April-November 2016-17. However, the Growth of corporates remained low due to external and banking related issues. FDI equity inflows reflected a 30.7% surge. Sectors like Services, construction, computer software and hardware and telecommunication have attracted highest FDI equity inflows. However to pump up the economic growth following steps have been taken by Government: Make-in-India, Invest India, Start up India and e-biz Mission Mode Project under the National e-Governance Plan. Measures to facilitate ease of doing business include online application for Industrial License and Industrial Entrepreneur Memorandum through the eBiz website 24×7 for entrepreneurs; © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 Simplification of application forms for Industrial License and Industrial Entrepreneur Memorandum; limiting documents required for export and import to three by Directorate General of Foreign Trade; and setting up of Investor Facilitation Cell under Invest India to guide, assist and handhold investors during the entire life-cycle the business.

Service sector Service grew by 8.8%. Thrusted by the Seventh pay commission, services remains close to what it was in the previous year-(8.9%)

Social infrastructure, employment and Human development As per the Reserve Bank of India data, expenditure on social services by Centre and States, as a proportion of GDP was 7.0 per cent during 2016-17 (BE), with education and health sectors accounting for 2.9 percent and 1.4 percent respectively. A broader coverage on labour employed and related statistics is provided by the Annual Employment and Unemployment (EUS) Surveys conducted by Labour Bureau, which is shown in below figure:

nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

The following Figures depict the change in occupational status across the sectors:

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Economic Survey 2016-17

As shown in the below figure, there is growing casualization of labour taking place and one nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 important reason behind it is labour laws of the Government. At present there are 39 central labour laws, which the government aim to reduce into to five or four labour codes which would ensure due security to the workers and increase formalization in the economy.

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Economic Survey 2016-17

Education sector As per Annual Survey Of Education Report (ASER) 2014- there has been improvement in access and retention but learning outcome still looms as a cause of concern. Some of the reasons for this are teacher absenteeism and the shortage of professionally qualified teachers. In order to solve it following steps have been suggested: Biometric attendance of teachers for each lecture/session and to infuse transparency, such data be put into public domain. This should be complemented by adequate teaching aids, recorded lectures etc. Moreover there should be flexibility at the local level so that top driven model is not imposed.

Health Sector With the objective of providing affordable and equitable health services in the country, and to fulfil health related SDG goal (Ensure healthy lives and promote well-being for all at all ages) along with reaping the benefit of demographic dividend, following milestones have been achieved: Life expectancy has doubled and infant mortality and crude Death rate has reduced sharply. Infant Mortality Rate (IMR) has declined to 37 per1000 live births in 2015 from 44 in 2011. India’s total fertility rate (TFR) has been steadily declining and was 2.3 (rural 2.5 & urban 1.8) nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 during 2014. Even Maternal Mortality ratio has reduced from 301 maternal death per 100000 live births during 2001-03 to 167 maternal death per 100000 live birth during 2011-13. However there remains following challenges: Huge gap remains between IMR rural (41 per 1000 live birth) and urban (25 per 1000 live births) areas There remains huge regional disparity in MMR. Solution So to solve regional disparity in MMR and achieve SDG target health – nutritional status of women be improved. In this direction, under National Health Mission, Government of India has programme to address the issue of anemia through Health and nutrition education to promote dietary diversification, inclusion of iron foliate rich food as well as food items the promote iron Absorption.

Inclusive policies In order to further the inclusive development in the country the government has come up with following programme for the betterment of the marginalised and vulnerable: For social empowerment: ‘Nai Roshni’ scheme for leadership development of minority women, ‘Padho Pardesh’, a scheme of interest subsidy on educational loans for overseas studies for the students belonging to the minority communities, etc. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 For skill development and economic empowerment of minorities, schemes like ‘Seekho Aur Kamao'(Learn & Earn), Upgrading Skill and Training in Traditional Arts/Crafts for Development (USTTAD) and ‘Nai Manzil’- a scheme to provide education and skill training to the youth from minority communities are in operation. For Disabled: Accessible India campaign has been initiated.

Climate change Paris agreement on climate change entered into force on 4th November 2016. To further overlook its implementation COP22 meeting took place in Morocco. The outcome of this meeting was Marrakesh Action Proclamation for climate and sustainable Development, which also talked about strengthening support to eradicate poverty, ensure food security and enhance resilience of agriculture, apart from the mobilization of 100 billion per year. In consonance with Paris agreement, India has made its INDCs which talks about reducing emission intensity of GDP by 33 to 35% by 2030 from 2005 levels, to increase the share of non-fossil fuels based power generation capacity to 40% of installed electric power capacity and to create additional carbon sink of 2.5-3 billion tons of CO2 3 billionthrough forest and tree cover, by 2030. In order to materialize its targets under INDCs, India has taken following initiatives: nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Started International Solar Alliance. To which 24 countries have signed the framework agreement. Also, once 15 countries ratify the agreement ISA would be registered under article 102 of the UN charter and with the legal framework already in place, will be a major organisation Headquartered in India. Also there is National Adaptation Fund for Climate Change to assist States and Union Territories to undertake projects and actions for adaptation to climate change. Moreover in Budget 2016-17, Clean Environment Cess” was doubled from Rs. 200 per ton to Rs.400 per ton. And the proceeds from it will go to National Clean Environment Fund. This Fund would in turn finance Green Energy Corridor for boosting up the transmission sector, Namami Gange, Green India Mission, Jawaharlal Nehru National Solar Mission, installation of SPV lights and small capacity lights, installation of SPV water pumping systems, SPV Power Plants and Grid Connected Roof to SPV Power Plants.

Chapter-09: Universal Basic Income In chapter 9, the Economic Survey 2016-17 has advocated for the idea of Universal Basic Income (UBI) saying it’s a powerful idea and would be more effective at combating poverty than existing state benefits.

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Economic Survey 2016-17

Idea and Components The idea of Universal Basic Income is based in the premise that a just society needs to guarantee to each individual a minimum income which they can count on, and which provides the necessary material foundation for life with access to basic goods and life of dignity. It would ensure that every person should have a right to basic income to cover their basic needs just by virtue of being citizens. There are three components of UBI viz. Universality, Unconditionality and Agency.

Why UBI Needs Attention? According to Economic Survey, there is a need to ponder over this idea because of various reasons as follows: Social Justice

It is a test of a just and non-exploitative society. It promotes equality by reducing poverty. Poverty Reduction

Universal Basic Income may simply be the fastest way of reducing poverty. Agency

Our current welfare system, even though well intentioned, inflicts an indignity upon the poor by assuming that they cannot take economic decisions relevant to their lives. The circumstances thatnikaloprelims keep individuals trapped in poverty are varied; the risks they face and | [email protected] | www.gktoday.in/iaspoint/target2017 the shocks they face also vary. UBI liberates citizens from paternalistic and clientelistic relationships with the state by taking the individual and not the household as the unit of beneficiary. Employment

It creates flexibility by allowing for individuals to have partial or calibrated engagements with the labour market without fear of losing benefits. Administrative Efficiency

UBI is gaining currency because of the weakness of existing welfare schemes which are riddled with misallocation, leakages and exclusion of the poor and with adoption of JAM trinity this will make administrative more efficient.

Argument in favour of UBI The arguments in favour of UBI are as follows: Poverty Reduction

The argument in favour says that UBI can remove poverty and vulnerability in one fell swoop. Choice

The UBI treats the beneficiaries as agents and entrusts them with the responsibility of spending the money as they wish. Better targeting of poor

In UBI, all individuals are targeted and this exclusion error (poor being left out) is zero. Also the

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Economic Survey 2016-17 inclusion error (rich gaining access to scheme) is 60%. Insurance against shocks

The income floor will provide a safety net against health, income and other shocks. Improvement in Financial Inclusion

The payment transfers will encourage greater use of bank accounts, leading to higher profits for banking correspondents (BCs) and an endogenous improvement in financial inclusion. The increased income will release the constraints in access to credit. Psychological benefits

A guaranteed income will reduce the pressures of finding basic living on daily basis. Administrative Efficiency

UBI will replace the plethora of schemes with a single initiative thus, will be more efficient administratively.

Argument against UBI The key arguments against UBI are as follows: Wasteful expenditures

Households, especially the male members may spend this additional income in wasteful activities. Constraints on labour markets nikaloprelims | will [email protected] | www.gktoday.in/iaspoint/target2017 Such minimum guaranteed income make people lazy and they would opt out of the labour market. This is not only a moral hazard but also will lead to reduction in labour supply.

Too much constraint on banking system

The current status of financial access among poor is such that a scheme like UBI will create too much stress on banking system. Difficulty to wind up

Once introduced, this scheme will be very difficult to wind up in case of failure because of enormous political costs involved. Market risks

Unlike food subsidies, which are price neutral, the cash may lose purchasing power and is subject to market fluctuations.

Problems with existing welfare programmes The survey has highlighted two main problems of the current welfare programmes viz. misallocation of resources and leakage in the scheme. Regarding misallocation, the survey points out that the poorest areas of the country often obtain lowest share of the government resources when compared to their richer counterparts. This is primarily due to the fact that the allocation to districts are often a function of the district’s ability to spend them– richer districts have better administrative capacities to effectively implement schemes which result in more resource allocation to them. The consequence of misallocation is exclusion error. If a state or a district with more poor is allocated very little © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 resources, then it is almost certain that some deserving households would be excluded. For instance, the states of Bihar, Madhya Pradesh, Rajasthan, Orissa and Uttar Pradesh account for over half the poor in the country, these states access only a third of the resources spent on the MGNREGS in 2015-16. This almost certainly implies that some deserving individuals are left out. An estimate of the exclusion error from 2011-12 suggests that 40 percent of the bottom 40 percent of the population are excluded from the PDS. How can UBI overcome these Issues?

The UBI can solve the misallocation problem to districts as follows: Beneficiaries are simply required to withdraw money from their accounts as and when they please, without having to jump through bureaucratic hoops. Focusing on universality, UBI reduces the burden on the administration further by doing away with the tedious task of separating the poor from the non-poor UBI can also help to curb out the of system leakage as follows: UBI reduces out of system leakage because transfers are directed straight to the beneficiaries of bank accounts. The scope for diversionnikaloprelims is reduced considerably, since discretionary powers of authorities are | [email protected] | www.gktoday.in/iaspoint/target2017 eliminated almost wholly It can help in checking Exclusion error as follows: Given the link between misallocation and exclusion errors, a UBI that improves allocation of resources would mechanically bring down exclusion error.

UBI and Psychological benefits The World Development Report (2015) argues that individuals living in poverty have A preoccupation with daily hassles and this results in a depletion of cognitive resources required for important decisions; Low self-image that tends to blunt aspirations; Norms that may require investments in social capital to the detriment of private opportunities. UBI act as a potential psychological benefit by addressing the problem faced by an individual according to world development report. How Universality can remain but at the same time exclude rich?

If universality has powerful appeal, it will also elicit powerful resistance. It is, therefore, important to consider ideas that could exclude the rich . Below, is a list of four guideline to exclude rich: Define the non-deserving based on ownership of key assets Adopt a ‘give it up’ scheme wherein those who are non-deserving chose to opt out of the © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 programme just as in the case of LPG Introduce a system where the list of UBI beneficiaries is publicly displayed Self-targeting: Develop a system where beneficiaries regularly verify themselves in order to avail themselves of their UBI. This is based on the assumption that the rich, whose opportunity cost of time is higher, would not find it worth their while to go through this process and the poor would self-target into the scheme.

How to implement UBI gradually ? By giving Choice to persuade and to establish the principle of replacement, not additionality: Rather than provide a UBI in addition to current schemes, it may be useful to start off by offering UBI as a choice to beneficiaries of existing programs. In other words, beneficiaries must be allowed to choose the UBI in place of existing entitlements However this raises concern of being administratively cumber some. UBI for women: UBI for women can, therefore, not only reduce the fiscal cost of providing a UBI (to about nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 half) but have large multiplier effects on the household. Giving money to women also improves the bargaining power of women within households and reduces concerns of money being splurged on conspicuous goods. Universalize across groups: Another approach is to phase in a UBI for certain vulnerable groups – widows, pregnant mothers, the old and the infirm – first. Previous studies show that leakages in pensions are already low Phasing out gradually will help to weigh the cost and benefit at each and every step

Conclusion If, as appears to be the case, that thinkers on both the extreme left and right have all become its votaries, then UBI is a powerful idea whose time even if not ripe for implementation is ripe for serious discussion.

Chapter-10: Income, Health & Fertility: Convergence Puzzle India’s continued success as a federation depends on the progress of each of its individual states, so a reasonable standard for assessing how well the states are doing. In Chapter 10, The economic survey has focused on how different states of India have fared in terms of Income, Health and Fertility; Inequalities among states; and comparison of states with its international peers. While © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 making these comparisons, the survey has used two broad indicators into account viz. economic and health/demographic indicators. The Convergence Puzzle The survey says that despite overall growth, there is a striking evidence of divergence or widening gaps in income as well as consumption across the Indian states. This pattern is opposite to many other countries in the world including China. Across the world, the poorer countries are catching up with richer countries. Across China, the poorer Chinese provinces are catching up with richer ones, but in India, the less developed states are not catching up; instead they are on average falling behind richer states. Explanation The income convergence occurs through trade and mobility of the factors of production {land, labour, capital}. Despite the fact that India has least restrictions on inter-state trade and mobility, the convergence is increasing. This makes this puzzle more complicated and further research is needed to understand the underlying reasons. The survey presents two hypothesis regarding this. First hypothesis is that the convergence fails to occur due to governance or institutional traps. This implies that capital, as a factornikaloprelims of production, is unable to move to capital scarce states because of | [email protected] | www.gktoday.in/iaspoint/target2017 governance and institutional reasons. Second hypothesis links this divergence to India’s pattern of development. India unlike other most growth successes in Asia has relied on growth of skill intensive sectors rather than on low skills ones. This implies that skilled jobs have been drivers of growth in India and less developed states failed to catch up because of shortage of skilled labour. Case of Health Convergence While taking example of health sector, the survey says that despite of low level of health expenditures, there has been convergence on key health indicators among states in India. Two of these key indicators are Life expectancy (LE) and Infant Mortality Rate (IMR). Two possible primary reasons for convergence in key health indicators could be: The worse initial situation but progress occured because many medical technologies such as antobiotics and other medical practices. These are commonly available across the world and India but despite such availability the progress is comparatively slow. Measurement issue: There are much clearer bounds on health indicators which would naturally lead to convergence. For example: once a country has reduced its IMR to near zero, its almost impossible for it to further reduce, while countries with high IMR have much more room for improvement. This type of natural limit found in LE and IMR does not exist for Income. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17

How does this progress compared on a global scale ? When LE is compared, there is strong evidence of international convergence where all the Indian states lie below the global average which means Indian states are making slower progress than the other average country. For example: Kerala’s LE increased by 1.7% in 11 years. Interpretation on IMR: Nearly all the Indian states posted larger decline in the IMR then average country. For example: Odisha registered a 38 point decline in IMR, over 2000’s, where as the average country with similar IMR’s in 2000’s posted only a 28 point decline. Convergence with in India on two health indicators are not fare too badly compared to other countries, this also suggest that there are no traps as discussed earlier that prevent technology from flowing freely with in India.

Case of Fertility The survey finds that as far as fertility is concerned, India has done exceptionally well. This is evident from the fact that 12 out of 23 reporting states have reached below replacement level of fertility (2.1). Thus, as in case of LE and IMR, there is evidence of strong convergence across the states. Further, nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 compared globally all Indian states (Except Kerala) are performing much “better” than countries on average in reducing TFR. These developments have strong implications for demographic dividend in future.

Conclusion This chapter concluded that India is still witnessing growing regional inequalities and this is a matter of concern because the forces for strong convergence viz. strong and increasing movements of goods and people are evident but still there is growing inequality. The problem is further compunded due to the fact that governance traps persist even when competitive federalism is forcing to change the lagging states. However, there is convergence in terms of health and demography in the country.

Chapter-10: One Economic India: For Goods and in the Eyes of the Constitution In this chapter, the survey has analyzed the degree of economic integration done in last 70 years while keeping in focus the inter-state trade within the country. India’s internal trade to GDP ratio is around 54% which is comparable to that of other large countries. However, there is enormous across states in terms of their trade patterns. Key points from this chapter are as follows: De facto, India is economically integrated internally The first ever estimates for inter-state trade in the country show that India’s inter-state trade to GDP ratio is 54%, which is 1.7% larger than international trade. This figure is not as high as that of United

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Economic Survey 2016-17 States (78% of GDP) or China (74% of GDP) but still higher than many other large economies. Thus, this figure says that at least de facto, India seems to be well integrated economy.

Balance of Trade between States The states with the positive balance of trade include large manufacturing states such as Gujarat, Maharashtra, Tamil Nadu as well as small states such as Delhi, Haryana, UP {particularly due to manufacturing hubs located in them such as Noida, Faridabad, Gurgaon etc.} On the other hand, states such as Uttarakhand, Himachal Pradesh and Goa are among the most trade balance deficient states in India. Further, the survey notes that in many cases, the inter-state trade between contiguous states exceeds the intra-state trade! These figures are surprising for few reasons. Firstly, we have read so far that inter-state trade in India suffers due to friction caused by differences in state laws and taxes. We still witness five kilometer long jams created by trucks on state borders. Secondly, the survey suggests that the high levels of inter-state trade despite of fictions is because the current system of taxation creates distortions where the inter-state trade is more profitable than the intra-state trade due to value added offsets. This implies that goods are purposely moved across the borders {or at least shown moved across the nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 border}. Thirdly, the survey points that this anomaly {inter / intra-state distortion} may lead to a pullback in inter-state trade in case GST is implemented. This premise becomes important to understand and assess the impact of GST implementation.

Chapter-12: India on the Move and Churning: New Evidence In this chapter, the survey has done an analysis of strong patterns of internal migration in India. The survey says that labour moves to urban centres and across the states, we have always known this. The free movement of labour is one thing that makes sure that free market is working. The free movement of labour also buttresses the model of competitive federalism. The survey says that everywhere in the world, competition results in a scenario where a low income regions {states or nations or continents} grow quicker in comparison to high income regions. This leads to income convergence as low income areas start to catch up with the high income areas. The key features of migration in India as per Census 2011 data are as follows: People move from less affluent states to more affluent states 33 million or 8.1% of Indian workforce were migrants for economic reasons. Over 80% of these migrants were male. Labour mobility also appears to be low because urbanization rates have not picked up sharply © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 over the years, However, the survey points out that the new studies {based on so called Cohort based Migration Metric (CMM) / Gravity Model} have contradicted the census data and shown that there is much more migration in India. The new studies have suggested that: Migration trends in India tends to be circular in nature both in short term and long term and are not captured properly by Census. Female migration for work is concealed in ‘reason-for-migration’ statistics because the principal reason given to the enumerator is ‘marriage’ or ‘moved with household. Commuter migration for work across the rural-urban divide is also substantial in India, exceeding 10 million people in 2009-10. The slow pace of Indian urbanization is rooted in the demographic divergence between rural and urban natural growth rates and not necessarily in low or stagnant rates of migration Thus, the alternative measures estimated share of migrants in the workforce to lie between 17%, which is much greater than 8.1% indicated by census 2001. Further: | www.gktoday.in/iaspoint/target2017 Migrant flows betweennikaloprelims states| [email protected] are lower than flows within states. Estimates suggest that on average flows within states are around four times the flows across states. Within India, in both trade and labour flows, language doesn’t seem to matter for migrants which vindicate the founding fathers’ permissive approach to India’s linguistic cleavage. Distance has a strong negative effect on labor flows. The adjoining state border effect (contiguity) is positive suggesting that migration is higher in the adjacent states even after controlling for distance The largest recipient was the Delhi region, which accounted for more than half of migration in 2015-16, while Uttar Pradesh and Bihar taken together account for half of total outmigrants. Maharashtra, Goa and Tamil Nadu had major net in-migration, while Jharkhand and Madhya Pradesh had major net out-migration. Further, the Southern states have witnessed increased in-migration trends, reflecting the opening up of new migration corridors in recent years. Language is now NOT a significant barrier in migration of the people – this is something which allays the apprehensions of nations forefathers.

Chapter-13: The ‘Other Indias’: Two Analytical Narratives (Redistributive and Natural Resources) on States’ Development In this chapter, the survey has focussed on Models of development in India; Analysis of aid led © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 development in world; India’s redistribution transfer of resources on state development; Natural resources curses and the way ahead. Peninsular Model of Development Peninsular India enjoyed an advantageous geography which enable them to grow faster and advanced more rapidly economically. State such as Gujarat, Maharashtra, Tamil Nadu, Karnataka, Kerala, and Andhra Pradesh being close to ocean grew faster and are prosperous than other state. Because of the success of this state it led to the peninsular model of development. Peninsular India’s model of development can be categorised into The traditional East Asian mode of development based on manufacturing. Example are Gujarat and Tamil Nadu The remittance-reliant mode of development. Ex. Kerala “Precocious India” model based on specializing in skilled services Eg.Karnataka, Andhra Pradesh and Tamil Nadu. Other models of development Aid model: The “aid” model is most applicable to the erstwhile ‘Special Category’ states that .includes North-easternnikaloprelims states |and Jammu and Kashmir. [email protected] | www.gktoday.in/iaspoint/target2017 Natural resources model: The definition of natural resources includes coal, onshore oil and natural gas, major and minor minerals but excludes forest cover. Ex. Jharkhand, Chhattisgarh, Odisha, and Rajasthan. Does foreign aid translate into growth? Developing countries were poor because they lacked capital. And they were unable to overcome this problem themselves, because their people were too poor to save. So the key to development, the only way to solve the conundrum, was foreign aid. However Economist are finding it difficult to establish a positive relationship between aid and growth because One hypothesis is that aid perpetuates resource dependency, in the sense that since revenues flow in from outside, recipient countries may fail to develop their own tax bases or their institutions more generally. Another potential downside of aid is that it could trigger “Dutch disease”,( Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country’s other products less price competitive on the export market.) India’s model of development since independence has been a mix of foreign aid and self dependency © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 rather than completely relying on foreign aid. Despite International examples and the lessons of India’s own experience with foreign aid the country follows same model within India:

When it comes to development within India, the country has followed the path prescribed by the first development economists. It has provided extensive transfers to certain poorer states in an attempt to spur their development Is Aid akin to transfer? Did this strategy succeed?

State governments up to now have received funds from the Centre via different channels: A share of central taxes, as stipulated by Finance Commissions; Plan and non-plan grants; and Plan and non-plan loans and advances. These funds constitute “gross devolution to states” and the entire amount is not “aid”. Gross devolution entails a strong redistributive element. However, redistributed resources from the Centre differ from traditional “aid” in two important aspects First, these are intra-country transfers and do not augment overall national disposable income like foreign aid does nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Second, the donor recipient relationship is also very different because states benefiting from transfers are part of national governance structures that determine them. Transfer of resources to states are done to avert regional inequalities and correct fiscal imbalances and are therefore extremely crucial. Hence economic survey has used the concept of Redistributive Resource Transfers’ (RRT).

What is RRT? RRT to a state is defined as gross devolution3 to the state adjusted for the respective state’s share in aggregate gross domestic product. Thus RRT is not identical to gross devolution. The higher the RRT means The slower is growth of state The smaller is the share of manufacturing in GSDP. The lower is own tax revenues. The economic survey pointed out that there is no evidence of a positive relationship between these transfer and economic outcome including per capita consumption, GSDP growth, institutional quality. Why resource abundance state grow less rapidly than resource less state?

It is due to resource curse which is attributed due to following First, the exploitation of natural resources generates rents, which lead to rapacious rent© 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 seeking (the voracity effect) and increased corruption. Second, natural resource ownership exposes countries to commodity price volatility, which can destabilize GDP growth. Finally, natural resource ownership – like foreign aid — makes countries susceptible to “Dutch disease”.

Way ahead for development

Infrastructure and Connectivity:

“RRT curse” and “natural resource curse”, could be a result of poor connectivity in particular and poor infrastructure – physical, financial, and digital in general This is clearly true of the north-east but also true of many parts of resource-rich India. Enhancing connectivity – financial and physical – on a war footing (as the government has attempted for financial inclusion with the Pradhan Mantri Jan Dhan Yojana (PMJDY), expediting the optical fibre network, etc will have a moderating effect. Redistributive Resource Transfers

In a federal system the Centre must play a redistributive role: it will always have to redirect resources to under-developed states. Rather, the Centre will need to find ways of ensuring that the resources it nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 redistributes are used more productively. Redirecting flows to households

One possibility would be to redirect a certain portion of RRT and channel the resources directly to households as part of a Universal Basic Income (UBI) scheme. Conditioning transfers on fiscal performance

Finance Commissions could revert to the practice of the 13th FC of conditioning transfers on the tax effort of states .This will offset the fiscal bias. Making governance- contingent transfers

To encourage better governance and sound institutional practices, the fund transfer mechanism could explicitly include a few monitorable institutional indicators as criteria for receiving transfers.

Chapter-14: From Competitive Federalism To Competitive Sub-Federalism: Cities As Dynamos In this chapter, the survey has focussed on “urbanization” and “competitive sub-federalism” with respect to cities and districts of the country. It has also discussed the challenges faced by Urban local bodies. The summary of this chapter is as follows: Need to study the changing dynamics of urbanization There is a need to study the changing dynamics of urbanisation in India because urbanization will define the trajectory of Indian development. The exodus of rural Indians into the cities over the

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Economic Survey 2016-17 coming decades will pose tremendous challenges for government, particularly the municipalities who will be primarily responsible for providing the services that the new migrants and established residents will need. Success in overcoming these challenges will be vital if the nation is to seize the opportunities that migration to the centres of economic activity can create.

Understanding Competitive sub-federalism Competition between states is becoming a powerful dynamic of change and progress, that dynamic must extend to competition between states and cities, and between cities. Hence broadening the dynamismladen competition between states to encompass the cities is what is called competitive subfederalism. Cities that are entrusted with responsibilities, empowered with resources, and encumbered by accountability can become effective vehicles for unleashing dynamism so that to competitive federalism India can add, and rely on, competitive sub-federalism.

Zipfs law and India The Zipfs law claims that the city with the largest population in any country is generally twice as large as the next-biggest; three times the size of the third biggest, and so on. In other words, the nth ranked city would be 1/nth the size of the largest city. This law holds true for many countries but not so for India because larger cities and smaller cities are unusually small in India. nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Why the large cities are unusually small in India?

One explanation might be that their infrastructure is overburdened. Another is that India is land scarce relative to most countries, discouraging migration particularly because distorted land markets render rents unaffordable. By 2050, its land-to-population ratio will have declined fourfold relative to 1960, and India will be amongst the most land-scarce countries in the world.

Challenges Faced by Urban Local Bodies The primary responsibility for development of urban areas lies with the state governments and the municipal corporations, municipalities and nagar panchayats, commonly known as urban local bodies (ULBs). The key challenges faced by Urban local bodies include Poor governance capacities, Large infrastructure deficits and Inadequate finances. Poor Governance Capacities

Cities do not have a single city government or a local self-government, leading to functional overlap. Fragmentation of responsibilities and service delivery across a gamut of institutions: the municipality, state departments (Police, PWD, Health, Education, Housing), and parastatal agencies or civic agencies reporting directly to the state government. There are also transparency/ accountability issues, as even the most basic information on © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 ULBs finances and quality of basic services is lacking. Large infrastructure deficits

Every Indian city faces serious challenges related to water and power supply, waste management, public transport, education, healthcare, safety, and pollution. As per the ranking of global cities based on urban infrastructure (State of World Cities 2012/13), New Delhi and Mumbai are placed at 47th and 50th positions, showing comparatively lower levels of infrastructure in these cities. Inadequate finances

According to the High Powered Expert Committee (HPEC) appointed by the Ministry of Urban Development (MoUD), about Rs. 39 lakh crore (at 2009-10 prices) was required for creation of urban infrastructure over the next 20 years. To address this infrastructure deficit would require huge resources.

Resource mobilization Problems of ULBs The Fourteenth Finance Commission (FFC) has recommended a grant of around Rs. 87,000 crore to the municipalities for the period 2015-20, constituting assistance of around Rs. 500 per capita per annum on average. The rest of the required funds would have to come from local resources. They www.gktoday.in/iaspoint/target2017 key difficulties in raising fund nikaloprelims by local| [email protected] bodies are as |follows: The 74th amendment, leaves it to the discretion of state legislatures to devolve finances so that ULBs can fulfil these functions. Twenty-five years on, there are glaring inter-state disparities in term of devolution of functional and financial powers to the ULBs. Some states have not even allowed the municipalities to levy property taxes. While property tax is the most important constituent of own revenues, there are problems of low coverage, low rates, low collection efficiency, and lack of indexation of property values, making it a non-buoyant source of revenue ULBs by and large have not been able to levy adequate user charges to cover even the operation and maintenance costs. Issuing municipal bonds has been challenging owing to the poor state of ULB finances and governance.

Empowering ULBs financially The analysis shows that municipalities that have generated more resources have been able to deliver more basic services. The states should, therefore, empower cities to levy all feasible taxes. Municipalities also need to make the most of their existing tax bases. There is a need to adopt the latest satellite based techniques to map urban properties. The Government should leverage the © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 Indian Space Research Organization (ISRO)/ National Remote Sensing Agency (NRSA) to assist ULBs in implementing GIS mapping of all properties in the area of a ULB. Apart from power to impose tax there need to be efficiency in tax collection and level of economic activity in the area which will help in realizing more revenue.

Dilemma in devolution of fund with respect to political economy challenge Higher level bodies (state governments) needing to cede power and sharing resources are daunting. Hence there are two options. Firstly, the Finance Commissions should take cognizance of this political economy challenge identified by and allocate even more resources to ULBs or Secondly, to respect the sovereignty of states and hope that they will themselves be forthcoming in decentralizing down – fiscally and governance wise commensurate with the needs of urbanization.

Data and transparency MoUD should give greater priority to compile and publish comprehensive data on ULBs and urban sector. ULBs should be more tightly linked to comprehensive and updated data disclosure and transparency by ULBs. NITI Aayog should compile comparative indices of municipalities’ performance annually based on the actual accountability and administrative capacity to deliver the core public services. nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

Key Concepts

Below is the compilation of important facts, concepts and new terms in Economic Survey.

Total Social Financing {TSF} Total Social Financing (TSF) is a liquidity measurement tool used in China since 2011. It has become prominent in recent times as a measure of monetary policy in that country. It sums up total fund raising by the non-state entities including individuals and non-financial corporate of China. It comprises Yuan loans from banks, foreign currency loans, trust loans, bank acceptance bills, corporate bonds and equity sales of the non-financial institutions.

Credit Expansion Credit means loan and credit expansion means that people are taking more loans. The increase in loans for the private sectors, individual, and public organisations is credit expansion. Credit to GDP ratio is seen as an indicator of credit expansion in the country. Objective of Credit Expansion The stated objective of Credit Expansion is to make credit abundant in the economy which in turn spurs the business activity, makes capital inexpensive, brings down interest rates, leading to a boom in the economy.

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Economic Survey 2016-17

Link between Credit Expansion and Economic Growth During credit expansion, the consumers have more money in their hand to spend and business can borrow to fund their activities. This leads to a quick boom in the economy. However, every creditinduced economic boom comes to at an end when an important sector of economy becomes incapable of repaying the interests. Thus, uncontrolled credit expansion will give an illusion of prosperity for short term and manifests in quick boom-bust cycle and may bust in little time. Thus, while sustainable credit expansion is one of the policies adopted by the governments to sustain economic growth and business activity; most economies remain cautious about uncontrolled credit expansion.

Credit Expansion in India and China In India, RBI uses a monetary policy tool called Credit Control to keep a check on unsustainable credit expansion and control the demand and supply of money (liquidity) in the economy. RBI does this by two methods viz. Quantitative control to regulates the volume of total credit and Qualitative Control to regulates the flow of credit. You may read more about it here. We note here that sustainable credit expansion has been a policy in India. The increased financial inclusion and increased access to credit by formal financial institutions to rural poor is also a manifestation of Credit Expansion. nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 India’s credit GDP Ratio

India’s credit GDP ratio has been between 5-6% as evident from the below graphics from Economic Survey 2016-17.

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Economic Survey 2016-17

nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

We note here that overall credit- GDP ratio as well as the proportion of total credit accounted for by the banking sector is not out of line for India. On the other hand, in 2009, China had launched an historic credit expansion, which has so far seen the credit-GDP ratio rise by an unprecedented about 63 percentage points of GDP, much larger than the stock of India’s credit-GDP. Its worth note that the Chinese growth has slowed from over 10 percent to 6.5 percent during this period, which echoes the perils of uncontrolled credit expansion.

Trade-GDP Ratio The trade-to-GDP ratio is obtained by dividing trade over a period by GDP of same period. It is expressed as percentage of GDP. It is also used as a measure of openness of an economy and thus is called trade openness ratio. Trade GDP Ratio – World, India and Other countries Global trade GDP Ratio was around 20% in 1995 and has increased to over 44% in 2015. India’s © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 trade-GDP ratio has increased substantially in last few decades mainly due to increased service exports from India. India’s ratio has been rising sharply, particularly over the decade to 2012, when it doubled to 53 per cent; the recovery from the global financial crisis in 2008 was also swift. As a result, India’s ratio now surpasses China and United States, which is remarkable.

Trade-GDP Ratio as indicator of Globalization Since degree of trade represents openness of an economy with respect to other economies, tradenikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 GDP Ratio also indicates degree of globalization, which implies that more is this ratio, more globalized an economy is. The trade-GDP Ratio of Singapore is highest in the world and thus, that country can be said to be most globalized country around the world.

Gross Domestic Product Economy refers to production, distribution and consumption of goods and services in a geographical region. The inputs to the production process are called factors of production. There are three classical factors of production viz. Land, Labour and Capital. Modern economists consider entrepreneurship or human capital (skill) as fourth factor of production. In terms of service industry, Time can also be a factor of production. Purpose of production is to produce goods (finished / unfinished / intermediary) and services, which are consumed via trade, distribution and final consumption. A good or a service is a product. A product is either tangible good or an intangible service. For example, a tourist guide does not sell anything but his product is his service. Every goods and service has a monetary value. When we combine all products of an entity, we may call it Gross Product. When we combine the monetary value of all the final goods and services produced in the economic territory of a country for a specified time such as a year, this will be called “Gross Domestic Product”. GDP is concerned with the final / finished goods and not the unfinished or intermediate goods. Unfinished / Intermediate goods are not © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 counted in GDP. This is done to avoid double counting, once in an unfinished form, and once in a finished form.

Calculation of GDP If we consider that unit price is P and number of units of final goods produced is G and final services rendered is S, then the GDP will be: GDP= P*G + P*S For example: If unit price is Rs. 100 for 500 units of goods produced, then total goods produced is Rs. 50,000 If unit price is Rs. 500 for 300 units of services rendered, then total services produced is Rs. 15000 GDP is Rs. 50000+ Rs. 15000= Rs. 65000

The Components of GDP from expenditure side In the direct method of GDP computation as discussed above, we sum up all the outputs of every class of enterprise to arrive at the total. There is an expenditure approach also to calculate the GDP, which has utmost importance. The Expenditure approach works on the principle that all of the product (goods or services) must be bought by somebody, therefore the value of the total product must be equal to people’s total expenditures in buying things. The four main components are nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 consumption expenditures by households (C), gross private investment spending principally by firms (I), government purchases of goods and services (G), and net exports (exports minus imports EX – IM). Here is an equation that sums it up: GDP = C + I + G + (X – I) Consumption

Consumption is consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Some examples are consumption expenditure in food, rent, jewellery, gasoline, and medical expenses. Investment

This includes construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. Here, we must note that buying Financial Instruments or putting money in saving account is not investment in this context but is a ‘saving’. For national accounting purpose, the reason to put financial investments in savings is to avoid double-counting. If one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times

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Economic Survey 2016-17 an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products. Similarly, personal savings we put in the bank is loaned to businesses so that they can put it to work. When we put our money in the bank, the banking system uses our personal savings to give industry its reservoir of money to work from. That is the reason that the savings are not counted in GDP. Government Spending

Government spending is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. However, it does not include any transfer payments, such as social security or unemployment benefits. Exports and Imports

X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations’ consumption, therefore exports are added. M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic. GDP at Current Prices and Constant Prices

GDP can be estimated at the current and constant prices. GDP at Current prices is the total nikaloprelims |prices [email protected] | www.gktoday.in/iaspoint/target2017 market value of goods and services at current market prices. For example, if the average unit price of 100 goods + services is Rs. 100 in 2010 and Rs. 150 in 2015; then the GDP will be Rs. 10000 in 2010 but Rs. 15000 in 2015 at current prices. Thus, this figure does not take into account the inflation and despite being an increased figure in value; the increase in production is zero. Due to this, GDP at Current Prices is also known as Nominal GDP. In this figure inflation is not adjusted, so can be misleading. When it is estimated on the basis of some fixed prices prevalent at a particular point of time, this is called GDP at constant prices. If the average unit price of 100 goods + services is Rs. 100 in 2010 and Rs. 150 in 2015; then the GDP at current prices will be Rs. 10000 in 2010 but Rs. 15000 in 2015. However, GDP at constant prices will still be Rs. 10000, so GDP growth is zero in this case. GDP at Factor Cost

The market value of the product includes cost plus indirect taxes (Excise or Service Tax, for instance) minus subsidies provided by the government. So, to arrive at a more accurate figure of the GDP, we add subsidy to GDP at Market Prices and reduce Indirect Taxes from it. This more accurate figure is called GDP at Factor Cost. The GDP at factor cost is nothing but an attempt to reach at a more realistic value of the GDP and it is represented by GDPFC GDPFC= GDP – Indirect Taxes + Subsidies © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 We note here that GDP at factor cost figures are generally lower than GDP at market prices because sum total of Indirect Taxes is much more than subsidies. However, GDP at factor cost figures can be higher than GDP at market prices in a bizarre condition when sum total of subsidy is higher than the indirect taxes. Further, whenever there is a recession in the economy, growth in indirect taxes tends to fall while expenditure on subsidies tends to increase. Due to this, the gap between GDP at Factor Cost and GDP at Market prices tends to decrease. Further, GDP at Factor Cost at Constant Prices is called Real GDP because it takes into account the inflation, indirect taxes as well as subsidies . In India, till January 2015, the Economic growth was measured as the percent rate of increase in GDP at Factor Cost at constant prices aka real GDP.

India’s GDP in 2016-17 As per first advanced estimates, GDP Growth Rate is estimated at 7.1% in 2016-17. The growth in the second half of 2016-17 works out to 7.0 per cent as against 7.2 per cent in the first half. However, estimates of second half are based on the economic situation prior to the demonetization.

Gross Value Added In January 2015, the MOPSI had released the new series of national accounts, revising the base nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 year from 2004-05 to 2011-12. With this, the GDP at Factor Cost has been replaced by Gross Value Added (GVA). With this change, GDP at market prices is now referred to in GDP in government accounts. This change is as per recommendations of the United Nations System of National Accounts in 2008 and Pronab Sen Committee. The idea behind this change was mainly to make India’s GDP numbers comparable with that of developed nations. Thus, the following are the key changes in India’s national accounts: Earlier, the economic growth was measured in terms of growth rate in GDP at factor cost at constant prices. Now the term GDP in India’s accounts refers to the GDP at constant market prices(2011-12 prices) and it reflects the headline growth rate in GDP. This figure is also used now for ascertaining the national income. The economic growth is measured by Gross Value Added (GVA). The relationship between GVA at factor cost, GVA at basic prices and GDP (at market prices) is as follows: GVA at basic prices = CE + OS/MI + CFC + production taxes less production subsidies GVA at factor cost = GVA at basic prices – production taxes less production subsidies GDP = ΣGVA at basic prices + product taxes – product subsidies or GDP = GVA + DITS, where DITS is the difference between indirect taxes and © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 subsidies. In the above: CE stands for compensation of employees OS refers to operating surplus MI stands for mixed income CFC stands for consumption of fixed capital.

Difference between GDP and GVA While GDP gives a picture of whole economy, GVA gives pictures at enterprises, government and households levels. In other words, GDP is GVA of all enterprises, government and households. Further, Gross Value Added (GVA) broadly reflects the supply or production side of the economy.

Trends in India’s GDP and GVA

GVA {Gross Value Added} Growth Rate

As per the first AE, the growth rate of gross value added (GVA) at constant basic prices for 2016-17 is placed at 7.0 per cent, as against 7.2 per cent in 2015-16. The growth in the second half of 2016-17 is estimated at 6.7 per cent as against 7.2 per cent in the first half.

nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

Year India’s GVA*

2012-13

2013-14

2014-15

2015-16

2016-17

2016-17H1

2016-17H2

5.4

6.3

7.1

7.2

7.0

7.2

6.7

*at constant basic prices

GVA Growth in Agriculture

As per data, the growth of agriculture & allied sectors improved significantly in 2016-17, following the normal monsoon in the current year which was preceded by sub-par monsoon rainfall in 2014-15 and 2015-16. Higher growth in agriculture sector in 2016-17 is not surprising; rabi sowing so far and the first advance estimates of the kharif crop production for the year attest to this.

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Economic Survey 2016-17

GVA Growth in Industry

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After achieving a real growth of 7.4 per cent in terms of value added in 2015-16, the growth in industrial sector, comprising mining & quarrying, manufacturing, electricity, gas & water supply, and construction sectors moderated in 2016-17. This is in tandem with the moderation in manufacturing, mostly on account of a steep contraction in capital goods, and consumer non-durable segments of Index of Industrial Production (IIP). The contraction in mining and quarrying largely reflects slowdown in the production of crude oil and natural gas.

Growth in Service Sectors

As in the previous years, the service sector continued to be the dominant contributor to the overall growth of the economy, led by a significant pick-up in public administration, defence & other services, that were boosted by the payouts of the Seventh Pay Commission. Consequently, the growth in services in 2016-17 is estimated to be close to what it was in 2015-16.

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Economic Survey 2016-17

We note here that since 1991, Services have grown tremendously in India and service sector has become engine of India’s economic growth. With double digit growth in finance, real estate, professional services etc. We recall here that the economic development is marked by a shift from the dominance of primary sector to that of the secondary and tertiary sector. In our country, the share of services has been consistently rising; more so since 2004-05. Even today, the growth in India’s service sector is second largest, only after China. But, this expansion of the tertiary sector is not balanced because of two reasons: Firstly, Indian economy skipped dominating secondary sector and instead, the tertiary (services) sector became dominating directly from primary sector. This growth has been at the cost of nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 manufacturing sector, which remained sluggish for several decades. Due to this, India’s growth has truly become a services led growth currently. Secondly, growth in tertiary sector cannot thrive if there is no growth in primary and secondary sector because these three sectors are inter-dependent via the inter-sectoral linkages. This is evident from the fact that the inputs for services sector come from the industrial and agricultural sectors. Thus, for long term sustainability of the services sector, there has been a need for revival in commodity producing sectors.

JAM JAM is an acronym which stands for Jan Dhan Yojna, ADHAAR and Mobile number. It is seen as the biggest reform regarding direct subsidy transfer in terms of cash. Currently there are multitude of subsidy schemes running for the poor through multiple channels. This entails a huge cost along with other problems of corruption, lack of transparency etc. This is where the government hopes that the JAM trinity can help. With ADHAAR will help in biometric identification of citizens with accuracy; Jan Dhan accounts and mobile numbers will facilitate direct transfer of cash in the accounts, thus, rebuilding the social safety system. You can read more about it here.

Demographic Dividend Demographic Dividend refers to a demographically linked economic boost caused by a rise in the © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 working age population {15-59 years or in some cases 15-64 years} and consequent drop in the dependency ratio. A country is expected to reap the demographic dividend when share of its working population is larger than share of its non-working population. India is currently going through a phase of demographic dividend. Demographic Dividend Across the World As per UN Population research, during last four decades, the nations in Asia and Latin America have been the main beneficiaries of demographic dividend. On the other hand, the countries in Europe, United States and Japan have got aging population mainly due to low birth rates and low mortality rates {read about Demographic Transition Theory}. Further, China’s one child policy reversed the demographic dividend it reaped since 1960s. Essential Policy Environment Demographic dividend does not occur automatically and can be reaped only when there is a boost in the economic activity due to large number of people in work force. Thus, in order to reap the dividend, the countries must be able to provide access to quality education, adequate nutrition and health including access to sexual and reproductive health to its young people. Given the right kind of policynikaloprelims environment, demographic dividend can help to produce sustained | [email protected] | www.gktoday.in/iaspoint/target2017 period of economic growth, as it has done in several East Asian Economies in later half of 20th century. The key policy areas which need to be focused include public health, family planning, education and economic policies that promote labour market flexibility. Further, the demographic dividend is not permanent but just by virtue of a particular phase when the nation has both increasing number of young people and also declining fertility. This window of opportunity needs to be exploited by the policy makers to make demographic dividend a reality. They need to consider how to optimally seize the window. Survey Notes: Demographic Dividend for India The below figure compares the evolution of Working Age (WA) and Non-Working Age population ration between 1970 and 2050 for India, Brazil, Korea and China.

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It shows three distinct features of India’s demographic profile: First, India’s demographic cycle is about 10-30 years behind that of the other countries, indicating that the next few decades present an opportunity for India to catch up to their per capita income levels. nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Second, India’s WA to NWA ratio is likely to peak at 1.7, a much lower level than Brazil and China, both of which sustained a ratio greater than 1.7 for at least 25 years. Finally, India will remain close to its peak for a much longer period than other countries. The reason of this pattern can be explained on the basis of Total Fertility Rate (TFR) for comparable countries as shown below:

The above figure shows that all these countries started the post-World War II era with roughly the © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 same very high TFR rates. In China and Korea, TFR then declined rapidly to below-replacement levels (less than 2 children per female), causing the share of working age population to rise until the early 2000s, then to fall as ageing began to set in. However, the decline in TFR in India has been much more gradual. The consequence of this is that unlike East Asian successes, India should not expect to see growth surges or growth decelerations of the magnitudes experienced by the East Asian countries, at least not on account of the demographic dividend. This does not rule out accelerations for other reasons, elated to reforms and strength of domestic institutions. At the same time, India might be able to sustain high levels of growth (on account of the demographic dividend) for a longer time. A final distinctive feature in India is the large heterogeneity among the states in their demographic profile and evolution. There is a clear divide between peninsular India (West Bengal, Kerala, Karnataka, Tamil Nadu and Andhra Pradesh) and the hinterland states (Madhya Pradesh, Rajasthan, Uttar Pradesh, and Bihar). The peninsular states exhibit a pattern that is closer to China and Korea, with sharp rises and declines in the working age population. The difference, of course, is that the working age ratio of most of the peninsular states will peak at levels lower than seen in East Asia (West Bengal comes closest tonikaloprelims Korea’s| [email protected] peak because| www.gktoday.in/iaspoint/target2017 of its very low TFR). In contrast, the hinterland states will remain relatively young and dynamic, characterized by a rising working age population for some time, plateauing out towards the middle of the century. This divide in the WA/NWA ratio of the peninsular and the hinterland states can be traced to the difference in their levels of TFR. Demographically speaking, therefore, there are two Indias, with different policy concerns: a soon-to-begin ageing India where the elderly and their needs will require greater attention; and a young India where providing education, skills, and employment opportunities must be the focus. Of course, heterogeneity within India offers the advantage of addressing some of these concerns via greater labour mobility, which would in effect reduce this demographic imbalance.

Consequences This demographic pattern suggests that peak of the demographic dividend is approaching fast for India. This peak will be reached in the early 2020s for India as a whole; peninsular India will peak around 2020 while hinterland India will peak later (around 2040). This presents an overall good window of opportunity for states in the hinterland in comparison to peninsular India.

Cash-to-GDP Ratio Cash-to-GDP Ratio or Currency in Circulation (CIC) to GDP Ratio or simply currency-to-GDP ratio shows the value of cash in circulation as a ratio of GDP. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Implications of higher Cash-GDP Ratio There are two dimensions of cash viz. its function and its nature / origin. In terms of function, cash can be used as a medium of exchange but also as a store of value similar to gold. In terms of nature, cash can be either illicit or legal. The cash which is used as a store of value can be white {savings of households for emergency} while it can be black {if it was earned through tax evasion}. At the same time, cash as black money can be converted to white either through money laundering or declaring it to authorities and paying taxes and penalties. Across the globe, a link has been established between Cash and nefarious activities. Higher is the cash in circulation, greater is the amount of corruption. When cash is used as store of value, it not only blocks inflow of money into the mainstream economy, but also proves to be inefficient and costly. Cash as black money has always posed a challenge to the policy makers and planners, not only in India, but several parts of the world.

India’s Cash-to-GDP Ratio vis-a-vis other countries For over a century, coins, currency notes and cheques have been the prominent form of payment in India. With the intervention of information technology, the use of paper cheques as well as cash has undergone a dramatic transformation yet the use of cash as a mean to settle transactions and making payments continues to be very high. Despite of huge increase in usage of plastic cards and digital nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 transactions in recent years, the currency in circulation as a proportion of GDP is highest in India among the emerging economies. In March 2016, the cash-to-GDP ratio of India stood at 10.6%, which was highest in 16 years. This was also highest cash-GDP ratio among BRICS countries. It’s worth note here that China had seen a steady decrease in its Cash-to-GDP ratio over the last 16 years. China’s currency-to-GDP Ratio stood at 14.6% in 2000 and was at 9.1% at end of 2015. Similarly, for Russia it is high at 9% whole for Brazil it is 3% and South Africa it is 2.5% {lowest among BRICS}. However, the currency-GDP Ratio for developed countries such as US, UK and Japan has been much higher.

Public Sector Asset Rehabilitation Agency The Public Sector Asset Rehabilitation Agency (PARA) colloquially called “Bad Bank” is a proposed agency to assume the Non-Performing Assets (NPA) of public sector banks in India and to deal with the recovery of the bad loans. This agency has been proposed in Economic Survey 2016-17. The NPA Problem At end-September 2016, the NPAs of public sector banks stand at 12% of the gross advances. At this level, India’s NPA Ratio is much higher than any major emerging market {except Russia}. This has © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 resulted in a squeeze on the banks leading them to slow credit growth. The slow credit growth is not good for industries, particularly MSME sector. The continuous fall in credit growth to industries has resulted in overall negative investment.

Twin Balance Sheet Problem (TBS) The problem of bad loans is compounded by another problem of overleveraged corporate; and these two combine to create India’s twin balance sheet problem. On the one hand, the public sector banks are burdened with the high non-performing assets (NPAs) while on other hand, some of the corporate houses are also under stress due to sluggish global demand and overleveraged borrowings. This has been called the “TBS problem” or “Twin Balance Sheet Syndrome“.

Current Institutional Framework around Bad Loans The major components of the current framework around NPA are SARFAESI Act Asset Reconstruction Companies (including private companies. 5:25 scheme Strategic Debt Restructuring (SDR)Scheme SARFAESI Act nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act provides for the banks to take legal recourse to recover their dues. Under this act, when a borrower defaults the payments, the banks can take possession of the assets and can also give it on lease or sell it. Asset Reconstruction Companies (including private companies

If the NPA remains so for more than two years, the bank can also sell the same to Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL). This apart, the private Asset Reconstruction Companies(ARCs) under SARFESI Act 2002 were established so that the banks can remove focus from NPAs and focus more on their main business. However, ARCs purchase the bad loans in too cheap prices and banks are unable to accept their offers. 5:25 scheme

In June 2014, RBI had launched a 5:25 scheme under which the creditors were allowed to increase debt period up to 25 years with interest rates adjusted every five years. But since it is a long duration, the companies find it difficult to endure high interest burden, thus forcing banks to infuse additional grants thus leading to problem of “evergreening of loans”. Strategic Debt Restructuring (SDR)

RBI had launched the Strategic Debt Restructuring (SDR) scheme in 2015 under which the banks could take over firms that were unable to pay; and subsequently sell them to new owners. This

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Economic Survey 2016-17 scheme also has not been much successful so far.

Different Approach The economic survey suggests that these approaches have limits and for remedy, there is a need to consider a different approach. Under this approach, a central agency called “Public Sector Asset Rehabilitation Agency” should be established.

Working of PARA The main function of PARA would be to take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt. The funding of this body would come either by selling the bonds or by inviting private companies to buy its equities. The survey also suggests that instead of investing funds and recapitalize the banks year after year, it would be better for the government to focus on recovery.

Comment and Conclusion Since banks may remain risk averse in the near future as they clean up their balance sheets and their capital position may remain insufficient to support their higher credit growth. The problem is obviously more severe for PSBs since they have the most stressed books. The only possible solution is a bad bank that takes over the toxic debt of PSBs and leaves behind a good bank that can freely nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 lend. The solution is not without problems since with the bad loans off their books, banks can get reckless with lending again. The alternative, though, is that, with PSBs unable to lend fast enough, private banks will take their place- that’s privatization by stealth, with the government not even benefitting by the way of selling off PSB equity.

Economic Territory For the purpose of economic calculations such as GDP, GNP, GVA etc. the concept of economic territory is used in place of political or geographical territory. The Economic territory of India includes the following: Political / geographical boundaries of India including territorial waters and air space within which persons, goods, services and capital move freely Territorial enclaves such as embassies, consulates, military bases, scientific bases etc. which are located abroad but excluding similar conclaves of other countries within the political boundaries of India. Ships, aircrafts etc. operated by the Indian residents between two or more countries Fishing vessels, oil and natural gas rigs etc. operated by the resident Indians in the international waters or other areas over which the country enjoys the exclusive rights or jurisdiction such as territorial waters and exclusive economic zone, continental shelf etc. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 The above makes it clear that economic territory does not include extraterrestrial enclaves (i.e. the parts of the countries own geographic territory used by general government agencies of other countries, by the Institutions of the European Union or by international organisations under international treaties or agreements between states). This implies that Indian embassy in US comes in economic territory of India while embassy of US in India is in economic territory of United States.

Savings, Investment and Capital Formation GDP measures the total output of goods and services for final use occurring within the domestic territory of a given country, regardless of the allocation to domestic and foreign claims. A part of this is consumed and what left after the consumption is “saving”. So, gross domestic saving is the Gross Domestic Product minus final consumption. The saved money is either kept with the public or is invested back. When the money is invested back, we come to the figures known as Capital Formation. The Ratio of saving and investments is very important for the economic health of the country. The Gross Domestic Saving has two parts. One is Public Sector, another is Private sector. The largest segment of Private sector is the Household sector. Another segment of the Private sector is the nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 private corporate sector. The Household may keep the financial assets with them or the physical assets such as Gold and other valuables.

It’s worth note that in the last few years, the Gross Domestic Saving as a part of GDP has remained almost constant. But it does not mean that saving is not increasing. When GDP grows, the Savings too increase and so do the Investments.

Trends in Gross Savings As per First Revised Estimates of National Income, Consumption Expenditure, Saving and Capital Formation, 2015-16, Gross Saving during 2015-16 is estimated as Rs. 44.05 lakh crore as against Rs. 40.98 lakh crore during 2014-15. Rate of Gross Saving to GNDI for the year 2015-16 is estimated as 31.6 per cent as against 32.3 per cent, estimated for 2014-15. The highest contributor to Gross Saving is the household sector, with a share of 59.2 per cent in the year 2015-16. However, the share has declined from 62.0 per cent in 2014-15 to 59.2 per cent in © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 2015-16. This decline can be attributed to decline in household savings in physical assets, which has declined from Rs. 15.78 lakh crore in 2014-15 to Rs. 14.84 lakh crore in 2015-16. On the other hand, the share of Non-Financial Corporations has increased from 34.3 per cent in 2014-15 to 37.3 per cent in 2015-16. The share of Financial Corporations decreased from 8.3 per cent in 2014-15 to 6.5 per cent in 2015-16, while the dis-saving of General Government has decreased from 4.6 per cent of Gross Saving in 2014-15 to 3.1 per cent in 2015-16.

Gross Capital Formation In simple words Gross Capital Formation is Investment. When people save, they tend to invest. The percentage of the investment made each year out of the total GDP is called Gross Capital Formation. So, Rate of Gross Capital Formation is arrived as follows: Rate of Capital Formation = (Investments /GDP) X 100 Gross capital formation includes fixed capital formation, change in stock and valuables. The fixed capital formation or fixed investment reflects the addition to the productive capacity in the economy. Its importance lies in the fact that this is that part of GDP which helps in the growth of the GDP itself. This is a must for achieving high rate of production, capital formation, changes in production techniques and changing in thenikaloprelims outlook of the people themselves. | [email protected] | www.gktoday.in/iaspoint/target2017 To achieve, the Optimum rate of economic growth, the suggested rate of capital formation is above 40%.

Trends in Capital Formation In India, the GCF has been around 35% for last few years. As per latest available data, the Gross Capital Formation (GCF) at current prices is estimated as Rs. 45.45 lakh crore for the year 2015-16 as compared to Rs. 42.58 lakh crore during 2014-15. The rate of GCF to GDP declined from 34.2 per cent during 2014-15 to 33.2 per cent in the year 2015-16. In terms of the share to the total GCF (at current prices), the highest contributor is Non-Financial Corporations, with the share rising steadily from 45.7 per cent in 2011-12 to 51.3 per cent in 2015-16. The share of household sector in GCF is also significant, but has declined from 43.4 per cent in 2011-12 to 34.7 per cent in 2015-16. The share of General Government in GCF has increased from 9.6 per cent in 2011-12 to 12.4 per cent in 2015-16. This is a trend reversal because traditionally, the share of the household sector has been significantly larger than the private corporate sector. This apart, the Fixed investment rate has been declining since 2011-12 as shown in below graphics:

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nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

This trend needs to be reversed for medium to long term growth prospects. Being aware of the need to boost investment and growth, Government, in coordination with the Reserve Bank of India and other stakeholders, has taken a number of steps to improve the ease of doing business and to improve the balance sheet positions of banks and firms.

Tax-GDP Ratio Tax-to-GDP Ratio is obtained by dividing the GDP by gross tax collection. It’s an indicator of government income and is shown as percentage of GDP. Higher tax-GDP ratio also denotes higher equitable distribution of national income. India’s Tax-GDP Ratio In 1950-51, India’s tax-GDP Ratio was around 6% only. It rose to around 10% in 2010-11. In last few years, the tax-GDP Ratio has increased substantially but still India is very far from being a full taxpaying democracy. It’s worth note that only 5.5% of earning people in India pay tax while only 15.5% of the Net National Income is reported to the tax authorities. Further, at present, India has 7 taxpayers for every 100 voters ranking us 13th amongst 18 of our democratic G-20 peers. Ideally, this number should be close to 23%. Due to under-tax compliance and narrow tax net, the tax-to-GDP ratio of the country stands at around 16-17%. This is much below the developed countries for example; the tax-GDP ratio in OECD countries is around 34%. We note here that the highest tax© 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Economic Survey 2016-17 GDP ratio in the world is of Denmark.

Reasons for Low Tax GDP Ratio There are several reasons for low-tax-GDP ratio. Firstly, as mentioned above, India has a low population of tax payers. Low per capita income, low average income and high poverty are key reasons for this. nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017 Secondly, those who pay tax either pay less due to exemptions or under-report the income. One example is unorganized sector and MSMEs. MSMEs have strong profitability but government is generally not able to capture their earnings in tax revenues due to variety of exemptions, compliance issues etc. Thirdly, service tax in India was imposed late and imposed only on few sectors. Its share has been traditionally low in gross tax revenues of the government. Currently, services comprise about 60% of the GDP, yet the service tax collected is 15% of the Gross Tax Revenue as shown by below graphics:

Fourthly, the tax collections are always sensitive to growth trends. The corporate taxes are hit by recession, decreasing domestic demand etc. © 2017 GKToday | All Rights Reserved | www.gktoday.in IAS General Studies - 2017

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Ways to Increase Tax-GDP Ratio There are several ways to increase tax-GDP ratio. These include raising the taxes, lowering the tax exemption slabs, imposition of new taxes or cesses or surcharges, boosting the demand etc. Out of these, the easiest method in the hand of the government is to hike taxes. The survey recommendations for increasing tax-GDP ratio are: Don’t go with a populist measure of raising tax exemptions limits Try to impose some new small taxes or cesses Stick on fiscal consolidation path while taking measure to sustain growth Here, the Survey cautions that the democracies which have higher tax-GDP ratios have taken a lot of time to reach to those figures and it would be wiser to not to reach any harsh judgment of India’s performance because there is much difference between the evolution of Indian economy and economies of those countries.

nikaloprelims | [email protected] | www.gktoday.in/iaspoint/target2017

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