Despite global headwinds, India will remain the world’s fastest-growing major economy and a “haven of stability” in a shaky world economy, indicates the pre-Budget Economic Survey for 2015-16 which was tabled in Parliament on Friday just three days before Finance Minister Arun Jaitley presents the Union Budget on Monday.
The Government has indicated that its annual report card has pegged Gross Domestic Product (GDP) growth for 2016-17 at 7-7.75 per cent, against the 7.6 per cent estimated for this year.
Using the analogy of the Chakravyuha mentioned in the Mahabharata — that it is easier to enter than to exit — a team of economists in the Finance Ministry offered several pragmatic insights in the Economic Survey.
The survey said that many of the reform proposals of the Government are meant to deal with this problem, be it the new bankruptcy law, Goods and Services Tax (GST), rehabilitation of stalled projects, inflation, deficit target, subsidy issues, bank capitalisation, global crude scenario, the proposed changes in the anti-corruption law and other key agendas as well.
The Economic Survey has been classified into three categories, such as state of the economy, its challenges and forward-looking solutions to existing problems.
Pegging growth at 7-7.75 per cent for the next fiscal, the survey, authored by Chief Economic Adviser (CEA) Arvind Subramanian, has asked the Government to press ahead with reforms, cut subsidies and introduce GST, while advocating a review of mid-term fiscal targets to create space for additional expenditure.
looking to accelerate the growth rate to 8-10 per cent in two to five years on account of structure reforms and encouraging competitive federalism, Subramanian said, “Basically, in the next two to five years, we will reach 8-10 per cent growth. There is no contradiction in saying that this year the world economy is weak and therefore, we need to focus on domestic demand.”
India will take a couple of years to achieve the potential 8-10 per cent growth, the survey said.
“In medium to long-term, we have to have exports as engine of growth that is necessary for us to attain 8-10 per cent growth. India is a bright spot for pursuing structural reforms like implementation of GST and promoting competitive federalism which will push growth,” Subramanian told reporters, adding there were reasons to believe that good economics makes good politics.
Commenting on the survey, the CEA said, “This has been done without any bad intent, and hopefully we have been non-discriminatory in making enemies but I will say if we haven’t treaded on toes we would not have done a good job. I think in the end the survey is about producing challenging analysis and ideas.”
As the Government faces many challenges, including a Rs 1.02 lakh crore bill in pay hike for Central staffers and another Rs 1.8 lakh crore towards bank capitalisation, the survey has favoured a review of fiscal deficit targets, saying the Budget deficit target of 3.9 per cent of the GDP in the current year will be adhered to, the next fiscal will be ‘challenging’ given the additional resources needed.
As per the survey, there is an option to narrow down the deficit by 0.2 or 0.3 percentage points of the GDP each year over the next five years, which would take the gap to 3 per cent of the GDP by March 2021. The target is to cut fiscal deficit to 3 per cent by 2017-18.
“It estimated that over Rs 1 lakh crore worth of subsidies go to the well-off and advocated that they should be cut for better fiscal welfare management. It also called for a phasing out of the Tax Exemption Raj that benefited the richer private sector and reasonable taxation for better-off individuals,” the survey said.
However, on the question of a deviating deficit target for the next fiscal, Subramanian said, this was a call the Government had to take keeping in view various factors as there were arguments both for and against this.
“There are very good arguments for a strategy of aggressive fiscal consolidation, as earlier envisaged, and equally good arguments for a strategy of moderate consolidation, that can place the debt on a sustainable path while avoiding imparting a major negative demand shock to a still-fragile recovery. The Union Budget will carefully assess these options,” he said.
The survey also asked the Government not to raise the tax exemption limit for individuals, while it suggesting bringing in Property Tax and widening the Income-Tax net from 5.5 per cent of earning individuals to over 20 per cent.
“The increase in wages and benefits recommended by the 7th Pay Commission is not likely to destabilise prices and will have little impact on inflation. It advised an easier monetary policy saying oil prices would keep costs low, even though the magnitude may decline in the coming year,” the survey said.
Inflation is projected to decline to 4.5-5 per cent in 2016-17, within the target of Reserve Bank of India (RBI), while the Current Account Deficit would remain low at 1-1.5 per cent of the GDP. “low inflation has taken hold and confidence in price stability has improved. Prospect of lower oil prices, around $35 per barrel as compared, over medium term is likely to dampen inflationary expectations,” it said.
The survey, however added that the Rupee’s value must be fair, avoiding strengthening. “Fair value can be achieved through monetary relaxation. Stating that gradual depreciation in the Rupee can be allowed if capital inflows are weak, it said India needs to prepare itself for a major currency readjustment in Asia in the wake of a similar adjustment in China,” it added.
The survey also called for increasing tax-GDP ratio, and spending more on health and education. It advocated scrapping tax benefits for savings like PPF and taxing investments at time of withdrawal, saying the incentives are availed mostly by the well-offs. Calling for sweeping reforms in the fertiliser sector, it pitched for deregulation of the urea market through payment of fixed subsidy directly to farmers and freeing imports.
Also, there was a three-point agenda, suggested by the survey, to push GDP growth rate to 8-10 per cent include moving away from anti-market policies, major investment in health and education and more focus on agriculture sector. “The Government has been able to pursue meaningful reforms and deal with palpable and pervasive corruption,” it said.
The survey also pitched for allowing industries to use excess power generation capacity via open access in a push for ‘Make in India’ while allowing power discoms to explore the possibility of progressivity in tariff setting so that charges for the poor come down.
“India needs to create a large number of formal sector jobs and deal with regulatory issues that force firms to opt for contract workers due to slow labour reforms,” it said, adding that capital requirement for banks is projected at around Rs 1.8 lakh crore by 2018-19.
In a bid to attract more investment into the country, Foreign Direct Investment (FDI) has been liberalised across the board and vigorous efforts have been undertaken to ease the cost of doing business. “The stability and predictability has been restored in tax decisions reflected in the settlement of the Minimum Alternate Tax (MAT) imposed on foreign companies,” it said.
The survey also said that corporate and bank balance sheets remain stressed affecting the prospects for reviving private investments. Elaborating on the global situation, it said that the upcoming Budget and economic policy would have to contend with an unusually challenging and weak external environment.