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The Economic Survey of 2017-18, prepared by Chief Economic Advisor Arvind Subramanian and his team was tabled in the Parliament on 29 January 2018. While it depicts a feel-good factor on the prospects of the Indian economy, the ‘devil’ lies in the details.
A thorough reading of the survey suggests all is not well with the Indian economy ––the impact of demonetisation and GST are not over yet and the economy is poised to face significant headwinds in the next financial year.
Economic Survey’s Nod to Note Ban Impact
The Economic Survey says, “a pick-up in growth to between 7 and 7.5 percent in 2018-19 can be forecasted”. It projects that the economy will grow by 6.75 percent in 2017-18 (FY18), 6 percent in H1 FY18 and 7.5 percent in H2 FY18. This has been showcased as an acceleration, a pick-up in growth. If the economy is projected to grow by 7.5 percent in H2 FY18, how does a 7 percent -7.5 percent growth in FY19, suggest an improvement?
At best it means status quo, assuming GDP is growing at the higher end of the range at 7.5 percent. If the economy grows at 7 percent (lower end) or 7.25 percent (mid-point), it actually shows deceleration in FY19 versus H2 FY18.
For FY18, last year’s Economic Survey projected 6.75 percent -7.5 percent growth. This has been revised to 6.75 percent in this survey – this shows growth could well land at lower end of range, that is, 7 percent for FY19.
The Survey concedes subtly the significant impact demonetisation has had on GDP growth. GDP growth has declined from 8 percent in FY16 to 7.1 percent in FY17, to 6.75 percent in FY18 and now projected to grow at 7 percent -7.5 percent in FY19. It busts the myth about significant increase in taxpayers post demonetisation. The Survey estimates increase of tax base by 1.8 million, just 3 percent of the existing tax base.
I-T Dept’s Low Success Rate
That’s not all. It also states that ‘new filers reported an average income, in many cases, close to the income tax threshold of Rs 2.5 lakhs, limiting the early revenue impact.’ Clearly there has not been substantial tax revenue gain as expected from unaccounted money deposited in the banking system. The Income Tax (I-T) department has identified 18 lakh people with suspicious deposits and sent notices.
The Survey highlights the poor success rate of I-T Department, so hopes of significant revenue through levies and fines is also not substantiated:
“The I-T Department unambiguously loses 65 percent of its cases. Over a period of time, the success rate of the Department has only been declining, while that of the assesses has been increasing”.
The Survey clearly points out that the ‘honeymoon’ of the Modi government with low crude oil prices is over. With India importing more than 85 percent of its crude oil requirements, rising international prices are not good news for the Modi government. Low crude oil prices led to significant reduction in our import bill, resulting in an increase in GDP and played a crucial role in reducing inflation, one of the big achievements claimed by this government.
No Scope for ‘Lazy Economics’ in Election Season
Low inflation has given leeway to central banks to reduce interest rates. “In the last three fiscal years, India experienced a positive terms of trade shock. But in the first three quarters, of 2017-18, oil prices have been about 16 percent greater in dollar terms than in the previous year. It is estimated that a USD 10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points, increases Wholesale Price Inflation (WPI) by about 1.7 percentage points and worsens the Current Account Deficit (CAD) by about USD 9-10 billion dollars.”
The increase in oil prices is likely to push up inflation. An increase in net imports will negatively impact our GDP. The government raised significant taxes by increasing excise duty on fuel in the last three years. Excise duty collections on fuel went up from Rs 0.8 lakh crore in FY14 to Rs 2.2 lakh crore in FY17.
In fact, the price of petrol in Mumbai on 30 January 2018 is higher than when Modi took oath in May 2014. In election season, this lazy economics can't go on for long. The Petrol Ministry has already written to the Finance Ministry to reduce special excise fuel on petrol to provide relief to consumers. The consequent reduction in excise collections would impact revenues of the government and jeopardise its already tight fiscal deficit position.
‘Real’ Relief to Farmers Needed & NOW
The Survey points out that while the Modi government has set a target of doubling farmers’ income by 2022, in the “last four years, the level of real agricultural GDP and real agriculture revenues has remained constant, owing in part to weak monsoons in two of those years.”
The last few seasons have witnessed farm revenues declining for a number of crops and market prices falling below the Minimum Support Price (MSP). Sowing has been lower in both kharif and rabi for 2017-18, the Survey states.
India is getting warmer as average temperature has increased by 0.52 degrees (1950-80). It is also getting drier, given average rainfall has declined by 82 mm (2005-15).
These twin factors are likely to result in farm incomes dropping by up to 20-25 percent in the medium term.
The biggest employment sector is under deep stress with no quick fixes available. Whatever fixes have been suggested are all long-term and have not been successful in the last 70 years since Independence.
The Survey has carried a detailed study on formal employment in the economy given the noise around the Modi government’s failure on this front. It suggests that “from a tax perspective formal employment is 11.2 crores; adding government employment yields a total count of 12.7 crores”.
Even if one assumes this number to be correct, the survey doesn’t answer how many of them have joined the formal sector after Modi came to power. So it doesn’t answer how many jobs were created by this government in the last 4 years.
Discrepancies in Survey
However, this calculation doesn’t stand the reconciliation test. If there are 12.7 crore people in formal employment, why are they not filing tax returns? How come only 5.9 crore people filed IT returns in 2015-16?
Secondly, India has approximately 27-30 crore households. 12.7 crore in formal employment implies that one out every 2.5 households has at least one member employed in the formal sector. This is highly unbelievable. The Survey lists ‘finding good jobs for the young and burgeoning workforce’ as an area of policy focus.
Lastly, the Survey points out that growth in FY19 will be driven by a boost in private investment and exports – the ‘two truly sustainable engines of growth’. However, it also concedes ‘growth and investment are continuing to run below take-off speed’.
It states that acceleration of global growth should provide a solid boost to export demand and at the same time states that hyper-globalisation is dead. It suggests that if NPA matter is resolved quickly, “stressed firms will be put in the hands of stronger ownership, allowing them to resume spending.”
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Notably, Gross Fixed Capital Formation as a percentage of the GDP has been declining for the past five years from 34.3 percent in FY12 to 29.08 percent in FY17. One year is too short a period to assume resolution as well as recovery of these NPA accounts so that they are in a position to revive their investment plans, in my opinion.
While exports have been growing over the past few months reversing the trend, the key question is: Can the increase in exports offset the increase in crude oil import bill?
(Amitabh Tiwari is a former corporate and investment banker turned political strategist, commentator and consultant. He is co-author of ‘Battle of Bihar’ and can be reached @politicalbaaba.)
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