Economic Scenario2017-18

AT A GLANCE

President Pranab Mukherji addressed Joint Sessionof Parliament on January 1, 2017. This is a historicsession heralding the advancement of the Budget cycleand merger of the Railway Budget with the GeneralBudget for the first time in independent India.

Key highlights of the President’s address are thefollowing :

The ideal of saha na vavatu, saha nau bhunaktu—May we be protected together and blessed togetherwith bliss has inspired our civilisation from timeimmemorial.The resilience and forbearance demonstrated byIndians, particularly the poor, recently in the fightagainst black money and corruption, is remarkable.The same spirit has driven the LPG '‘Give It UpCampaign’. Over 1.2 crore consumers have volun-tarily given up their LPG subsidy, which has helpedthe underprivileged in accessing LPG connections.This janashakti has transformed Swachh BharatMission into a janandolan. 1.4 lakh villages, over 450cities, 77 districts and 3 states have declared them-selves Open Defecation Free.Financial inclusion is key to poverty alleviation. Anunprecedented 26 crore plus Jan Dhan accountshave been opened for the unbanked. Over 20 croreRUPAY debit cards have been issued to enablecashless payments. Moving swiftly from ‘Jan Dhanto Jan Suraksha’ close to 13 crore poor have beencovered under various social security schemes.To take the banking system to the doorstep of thepoor and the unbanked, the Indian Postal PaymentBank has been started on January 30, 2017. Thepostal network with wider reach and deeppenetration of over 1.5 lakh post offices will alsofunction as postal banks. Besides the over 1 lakhbank-mitras appointed by banks, over 2·5 lakhGram-Dak-Sewaks will also function as bankingcorrespondents.Over 2 lakh crore has been provided through 5·6crore loans sanctioned under Pradhan MantriMudra Yojana to ensure collateral-free bank financ-ing for the unfunded, and to promote small busines-ses. Seventy per cent of this has been availed of bywomen entrepreneurs.Under the Deen Dayal Antyodaya Yojana, whichaims to empower women, particularly from thedeprived sections, over Sixteen Thousand crorehave been made available to Self Help Groups in thecurrent Financial Year. The scheme aims to reach outto nearly 5 crore women soon.

The Government is committed to provide shelter toevery houseless poor household through thePradhan Mantri Aawas Yojana with appropriateinterest subvention on housing credit.Swachh Bharat Abhiyan aims to ensure health andsanitation, particularly for the poor. Under thismission, more than 3 crore toilets have beenconstructed.The Pradhan Mantri Ujjwala Yojana will make cleanenergy accessible to the poor. This scheme aims tosafeguard the health of women and children byproviding them with a clean cooking fuel LPG,liberating them from the ill-effects of smokykitchens, and long hours of collecting firewood. Freegas connections are being provided to 5 crore poorhouseholds. Already 1·5 crore connections havebeen provided in the current financial year. It isnoteworthy that 37 per cent of the Ujjwala bene-ficiaries belong to the Scheduled Castes andScheduled Tribes.Under Deen Dayal Upadhyay Gram Jyoti Yojana,out of the over 18,000 villages which have been indarkness since independence, over 11,000 have beenelectrified in a record time. Under UJALA (UnnatJyoti by Affordable LEDs for All) programme, over20 crore LED bulbs have been distributed, resultingin savings of more than 10,000 crore in the electri-city bills of consumers, majority of whom are poor.Several steps have been taken to make healthcareaffordable and accessible to every citizen of ourcountry, particularly the poor. Mission Indra-dhanush commits to vaccinate ‘every child every-where’ against preventable diseases. It has so farbenefited 55 lakh children. Pradhan MantriBharatiya Jan Aushadi Pariyojana has been launchedto ensure that the poor have access to qualitymedicines at affordable prices. Special facilitiescreated to control the endemic Japanese encephalitishave yielded encouraging results in significantlyreducing mortality due to this disease.Government has taken various steps to transformthe lives of our farmers. Focus has been on holisticdevelopment of agriculture sector making availableaffordable credit, ensuring assured supply of seedsand fertilizers, improving irrigation facilities,comprehensive risk coverage, improving producti-vity through Soil Health Cards, assured market andremunerative prices for the produce through e-NAM(National Agriculture Market).

4 ECONOMIC SCENARIO

Pradhan Mantri Fasal Bima Yojana expanded theambit of risk-coverage, doubled the sum insured,and facilitated lowest-ever premium for the farmers.During Kharif 2016, around 3.66 crore farmers wereinsured for a sum of 1.4 lakh crore.With the objective of digitisation of all the live KisanCredit Cards, another three crore cards will beconverted into RUPAY debit cards soon. The corpusof NABARD fund has been doubled to 41,000crore to ensure easy credit access to farmers.With focus on Per Drop More Crop and ‘Har Khetko Pani’, coverage under Pradhan Mantri KrishiSinchayee Yojana has been expanded. More than12·7 lakh hectares have been brought under microirrigation in the last two years.To ensure fair price for farmers and to protectconsumers, a buffer stock of 20 lakh tonnes of pulseshas been envisaged against which 8 lakh tonnes ofpulses have already been procured.The Beti Bachao Beti Padhao scheme that addressesthe issue of declining Child Sex Ratio, is yieldingencouraging results. Under the Sukanya SamridhiYojana, launched with an objective of ensuring asecure future to our girl child, over one croreaccounts have been opened and an amount of over 11,000 crore has been deposited. The PradhanMantri Surakshit Matritva Abhiyan will providecomprehensive antenatal care by a qualified medicalpractitioner to all pregnant women. The revision ofMaternity Benefit Act and enhancement of maternityleave from 12 weeks to 26 weeks will supportpregnant women at the workplace.65 per cent of the population today is below the ageof 35. Our youth is our greatest strength and yuvaurja needs to be effectively channelised. With themotto of ‘Har Haath ko Hunar’, the government hastaken several steps for skilling the youth andimproving their employability. The work of skilldevelopment, that was earlier spread across 21ministries and 50 departments, has been broughtunder one umbrella Ministry. The Pradhan MantriKaushal Vikas Yojana has been launched with abudget outlay of 12,000 crore, to train one croreyouth over the next four years. Over 20 lakh youthhave already benefited. National ApprenticeshipPromotion Scheme has been launched with a budgetoutlay of 10,000 crore. 978 employment exchangesspread across the country have been integrated aspart of the National Career Service Portal.Government has opened new avenues and madehigher technical education more accessible tostudents from economically weaker sections. For thefirst time, ITI trainees have been provided withacademic equivalence at matriculation and highersecondary level through bridge courses to enablethem to pursue higher education. With the objectiveof providing training of international standards toyouth, a nation-wide network of 50 India Inter-

national Skill Centres is being established. ThePradhan Mantri YUVA Yojana has been launchedfor promoting entrepreneurship education andtraining amongst 7 lakh students.Government has announced a package of 6,000crore to boost employment generation and exportsin the apparel and made-ups sector. This package isexpected to generate over 1.1 crore jobs, mostly forwomen.Shrameva Jayate ·Jeso t;rs‚ is one of the foremostguiding principles of the government and severalmeasures have been taken for the welfare of theshramik. For the first time ever, minimum wageshave been increased by 42 per cent in bothagricultural and non-agricultural sectors. For bonuscoverage, the calculation ceiling limit has beendoubled to 7,000, and the eligibility limit increasedfrom 10,000 to 21,000. This will directly benefitan additional 55 lakh workers. The UniversalAccount Number has ensured portability of EPFaccounts and has safeguarded the interest of croresof workers.Through the Stand-up India initiative, Union govern-ment plans to empower over two and a half lakhScheduled Castes, Scheduled Tribes and womenentrepreneurs. For promoting entrepreneurship, theNational Scheduled Castes/Scheduled Tribes Hubhas been launched, with an initial allocation of 490crore.Under the Forest Rights Act, about 16.5 lakhIndividual Forest Rights titles have been grantedover an area of 55.4 lakh acres of forest land.Further, Community Forest Rights titles have beendistributed over an area of about 47 lakh acres offorest land.The Pradhan Mantri Khanij Kshetra Kalyan Yojanawill serve the dual purpose of ensuring sustainablemining activity as well as local area development forthe betterment of the tribals and the poor inhabitantsin the mining areas. District Mineral Foundation is anovel initiative in this regard.Central government has increased the allocationunder the Tribal subplan. Fourteen different sectorshave been identified under the Vanbandhu KalyanYojana for the empowerment of tribals. 100 out ofthe 300 clusters envisaged under the Shyama PrasadMukherjee Rurban Mission, will be developed intribal areas.The success of the Indian cricket team at the WorldCup for the Blind, 2014 and the Indian Paralympicscontingent at Rio 2016 demonstrates that Divyangjan can scale great heights, if afforded an oppor-tunity. Union Government is committed to provid-ing the Divyang jan equal opportunities for develop-ment. Besides increasing the percentage of reserva-tion for Divyang jan from 3 to 4 per cent in govern-ment jobs, Central government has acceleratedfilling up of backlog vacancies. Over 6 lakh Divyang

ECONOMIC SCENARIO 5jan have so far benefitted from 4700 special assis-tance camps organised across the country since May2014.The Sugamya Bharat Abhiyan is improving accessi-bility for the Divyang jan at public places. For thefirst time, Speech and Language Disability, andSpecific Learning Disability have been included inThe Rights of Persons with Disabilities Act, 2016. Acommon sign language is being developed for theentire country. The Niramaya Swasthya Bima Yojanaprovides Divyang jan affected by autism, cerebralpalsy, mental retardation, and those with multipledisabilities, a health insurance cover of up to onelakh rupees.Under its proactive ‘Act East’ policy, my govern-ment is focussing on reducing the isolation of theEastern region and Northeast by improving con-nectivity through road, rail, air, telecom, power andwaterways.Union Government has started the Pradhan MantriUrja Ganga with the execution of 2,500 kilometreslong Jagdishpur-Haldia-Bokaro-Dhamra NaturalGas Pipeline Project. With an investment of around

12,500 crore, this project will cater to energyrequirements of five states, covering 40 districtsand 2,600 villages. This project will also lead to therevival of three large fertilizer plants, industriali-zation of more than 20 cities and city gas networkdevelopment in 7 cities.Union Government sees the North Eastern states asthe Ashtalakshmi that can take India to new heights.The North East is the gateway to South East Asia.We are opening up road and rail routes to ourneighbouring countries to boost the economic deve-lopment of the region.To ensure unhindered support and development ofNorth Eastern states, Union government is conti-nuing with the special dispensation in the assis-tance pattern to the North-eastern states, and isproviding assistance in the ratio of 90:10 for corecentral schemes and 80:20 for non-core schemes tothese states.By the end of 2017, all Meter-Gauge tracks in thenorth-eastern states will be converted to Broad-Gauge. The railways have under-taken a majorexpansion in the region at a cost of around 10,000.Arunachal Pradesh and Meghalaya have been puton the rail map, Agartala in Tripura has been con-nected with broad gauge line.The Brahmaputra Cracker and Polymer Limited andNumaligarh Refinery Limited’s wax unit are bigprojects that will create huge employment oppor-tunities in the North East region. The Governmenthas approved North East BPO promotion scheme inthe Digital India programme for creation ofemployment opportunities.From highways to i-ways; from railways to water-ways; from seaports to airports; from water pipelines

to gas pipelines, from earth sciences to satellites,from rural infrastructure to smart cities, creation ofvital next-generation infrastructure has receivedspecial attention of the government.For modernization of Railways, the highest-evercapital outlay of 1.21 lakh crore has been pro-vided. Union government aims to connect all ruralhabitations with all weather roads. 73,000 kilometresof road has been built so far in rural areas. Morethan 5,000 kilometres of roads in 44 Left WingExtremism affected districts are being upgraded.The National Civil Aviation Policy, will give a majorboost to air connectivity in the smaller cities andtowns. Under the Bharat Net Project, Optical FibreCables now cover over 75,700 Gram Panchayats, upfrom only 59 in May 2014.India has launched 8 operational missions coveringmeteorological, navigation, and earth observationand communication satellites. ISRO completed theseven-satellite constellation of Indian RegionalNavigational Satellite Systems, NaviC ·ukfod`‚. ISROadded another feather to its cap this year bysuccessfully launching 20 satellites in a highest-eversingle launch.Union government is committed to optimally har-ness India’s marine wealth and give a new impetusto ocean-led development. Under the Sagarmalaprogramme on port-led development, a total of 199projects with an outlay of over 3,00,000 crore havebeen identified for implementation in the next threeyears. Of these, projects of more than 1,00,000crore are already under implementation. The seassurrounding the Indian Peninsula contain Onethousand Three hundred and Eighty Two of ourislands, out of which, to begin with, 26 have beenearmarked for integrated development. The BlueEconomy, with focus on sustainable development offisheries will continue to receive our special atten-tion.As a reaffirmation of India’s commitment to cleanenergy, Union government has taken giant strides inincreasing country’s renewable energy capacity to 47Giga Watts so far, against our target of 175 GigaWatts.Placing fresh impetus on rural infrastructure, untiedfinancial resources of over 2,00,000 crore are beingtransferred to Gram Panchayats during 2015-20. Theallocation to Mahatma Gandhi National RuralEmployment Guarantee Scheme in 2016-17 has beenover 47,000 crore which is the highest ever sincethe inception of the programme and the focus isnow on creation of durable assets and rural infra-structure.Giving a major boost to creation of urban infras-tructure, annual action plan for 500 cities with anoutlay of 50,000 crore has been approved. MetroRail Projects have been sanctioned for four cities

6 ECONOMIC SCENARIOincluding Ahmedabad, Nagpur and Pune, and anextenion of Chennai Metro has also been approved.To combat the evils of black-money, corruption,counterfeit currency and terror financing, Uniongovernment took the decision on November 8, 2016to demonetize old five hundred and one thousandrupee currency notes. The passing of Black Money(Undisclosed Foreign Income and Assets) andImposition of Tax Act, 2015, Benami Transactions(Prohibition) Amendment Act, 2016, amendments totreaties with Singapore, Cyprus and Mauritius toprevent misuse of provisions in such treaties for taxevasion and movement of blackmoney in India andthe Taxation Amendment Act providing for PradhanMantri Garib Kalyan Yojana, have together resultedin a comprehensive policy backed initiative againstblack-money.The four-decade old demand of one-rank-one-pension (OROP) of Armed Forces veterans has beenfulfilled. The total financial implications would bearound 11,000 crore. More than 6,200 crore havebeen released in two tranches benefiting over 19.6lakh veterans.The Direct Benefit Transfer programme of subsidiesthrough the Jan Dhan-Aadhaar-Mobile (JAM) Trinityhas prevented leakages and helped save 36,000crore. PAHAL is the world’s largest cash benefittransfer scheme that has saved over 21,000 crore intwo years. Digidhan Abhiyaanand Two lakh Com-mon Service Centres are providing employment toover 5 lakh youth, and spreading digital literacy.The launch of mobile app - BHIM–Bharat Interfacefor Money is a tribute to the vision of Dr. BhimraoAmbedkar who sought economic empowerment ofthe poorest.Over Eleven hundred obsolete laws have beenrepealed and 400 more are in the process of beingrepealed. Legislations relating to Women, Divyangjan, Labour, Apprentices, Factories, Benami Trans-actions, Aadhaar and Real Estate, to mention a fewmirrors my Government’s guiding philosophy ofTransparency, and Social Justice.

Celebrating the cultural diversity along with therichness of language and heritage of every state,Union government has started the Ek BharatShrestha Bharat programme. The uniqueness of thisprogramme is to pair and entwine two differentstates with diverse cultures for over a year so thateach state can assimilate the cultural spirit of theother.Taking forward the concept of cooperative fede-ralism through One nation-One tax and One nation-One market, both Houses of Parliament passed theGoods and Services Tax Act. 17 states governed bypolitical parties across the political spectrum ratifiedthis in a record 23 days.FDI inflows in 2015-16 were US $ 55·6 billion, thehighest-ever for any financial year. Central Govern-ment further liberalized FDI policy provisions invarious sectors in June 2016.The rankings of the States/UTs show that thenational implementation average of reforms standsat around 49 per cent, much higher than last year’s32 per cent. India is ranked third in the list of topprospective host economies for 2016-18 in the WorldInvestment Report 2016 released by UNCTAD·vad`VkM‚.Realising the importance of developing tourism,Central Government has approved the new e-VISApolicy and expanded the scope of e-tourist visa toinclude purposes such as short-term medical treat-ment and business trips. 161 countries are nowcovered under e-VISA. With over 88 lakh foreigntourist arrivals in 2016, tourism sector has shown agrowth rate of over 10 per cent.India ratified the Paris agreement on October 2,2016, thereby sending a strong message of our com-mitment to combating climate change with focus onclimate justice and sustainable lifestyle. The UnitedNations Environment Programme has recognizedIndia as one of the countries on track in achieving itsvoluntary goals. 25 nations have signed the Frame-work Agreement of International Solar Alliance, thefirst treaty based organisation initiated by India.

Union Finance Minister Arun Jaitley presentedEconomic Survey :2016-17 in the Parliament on January31, 2017. The Economic Survey : 2016-17, written by Dr.Arvind Subramanian, Chief Economic Advisor, bears acomplete new look in terms of the format and the subjectmatter. The Economic Survey for 2016-17 provided arefreshingly realistic assessment of the many challengesfacing the Indian economy in the coming years. It out-lined these challenges, including possible global eco-nomic turbulence and the after-effects of demonetisation,

Eight Interesting Facts about IndiaIndians on the Move: New estimates based on railwaypassenger traffic data reveal annual work-related migra-tion of about 9 million people, almost double what the2011 Census suggests.Biases in Perception: China’s credit rating was upgradedfrom A+ to AA- in December 2010 while India’s hasremained unchanged at BBB. From 2009 to 2015, China’scredit-to-GDP soared from about 142 per cent to 205 percent and its growth decelerated. India, despite a sluggishgrowth rate in the third quarter of 2016-17 is most likelyto manage to click 7.1 per cent growth rate in the currentyear. At one time Indian economy became the fastestgrowing economy of the world.New Evidence on Weak Targeting of Social Programs:Welfare spending in India suffers from misallocation. Thedistricts accounting for the poorest 40% receive 29% ofthe total funding.Political Democracy but Fiscal Democracy? India has 7taxpayers for every 100 voters ranking us 13th amongst18 of our democratic G-20 peers.India’s Distinctive Demographic Dividend: India’sshare of working age to non-working age population willpeak later and at a lower level than that for othercountries but last longer. The peak of the growth boostdue to the demographic dividend is fast approaching,with peninsular states peaking soon and the hinterlandstates peaking much later.India Trades More Than China and a Lot Within Itself:As of 2011, India’s openness - measured as the ratio oftrade in goods and services to GDP has far overtakenChina’s, a country famed for using trade as an engine ofgrowth. India’s internal trade to GDP is also comparableto that of other large countries and very different fromthe caricature of a barrier-riddled economy.Divergence within India, Big Time: Spatial dispersionin income is still rising in India in the last decade (2004-14), unlike the rest of the world and even China. That is,despite more porous borders within India than betweencountries internationally, the forces of “convergence”have been elusive.Property Tax Potential Unexploited: Evidence fromsatellite data indicates that Bengaluru and Jaipur collectonly between 5% to 20% of their potential property taxes.

before discussing policies that could revive investmentand restore growth. Launching India to a high-growthtrajectory would take “shifts in the underlying vision”.

ECONOMIC OUTLOOK AND POLICYCHALLENGES

Against the backdrop of robust macro-economicstability, 2016-17 was marked by two major domesticpolicy developments,(I) The passage of the Constitutional amendment,

paving the way for implementing the transforma-tional Goods and Services Tax (GST). The GST willcreate a common Indian market, improve taxcompliance and governance, and boost investmentand growth; it is also a bold new experiment in thegovernance of India’s cooperative federalism.

(II) Demonetisation of high denomination currencynotes, which has had short-term costs but holds thepotential for long term benefits.These actions would allow growth to return to trend

in 2017-18, following a temporary decline in 2016-17.The aim of the action was fourfold :(i) to curb corruption,(ii) To curb counterfeiting,(iii) To control the use of high denomination notes

for terrorist activities, and(iv) Control the accumulation of ‘black money’,

generated by income that has not been declaredto the tax authorities.

The action followed a series of earlier efforts to curbsuch illicit activities, including the creation of theSpecial Investigation Team (SIT) in the 2014 budget,the Black Money Act, 2015; the Benami TransactionsAct of 2016; the information exchange agreementwith Switzerland, changes in the tax treaties withMauritius and Cyprus, and the Income DisclosureScheme.At the same time, demonetisation has the potential togenerate long-term benefits in terms of reducedcorruption, greater digitalization of the economy,increased flows of financial savings, and greaterformalization of the economy, all of which couldeventually lead to higher GDP growth, better taxcompliance and greater tax revenues.The GST is a bold new experiment in the governanceof cooperative federalism. In addition, the govern-ment :(i) Overhauled the bankruptcy laws so that the

‘exit’ problem that pervades the Indian eco-nomy—with deleterious consequences can beaddressed effectively and expeditiously;

8 ECONOMIC SCENARIO

(ii) Codified the institutional arrangements onmonetary policy with the Reserve Bank of India(RBI), to consolidate the gains from macroeco-nomic stability by ensuring that inflation controlwill be less susceptible to the whims of indivi-duals and the caprice of governments; and

(iii) Solidified the legal basis for Aadhaar, to realisethe long-term gains from the JAM trifecta (JanDhan-Aadhaar-Mobile), as quantified in lastyear’s Survey.

The government enacted a package of measures toassist the clothing sector that by virtue of beingexport-oriented and labour intensive could providea boost to employment, especially female employ-ment.The National Payments Corporation of India (NPCI)successfully finalized the Unified Payments Inter-face (UPI) platform. By facilitating inter-operabilityit will unleash the power of mobile phones inachieving digitalization of payments and financialinclusion, and making the ‘M’ an integral part of thegovernment's flagship ‘JAM’-Jan Dhan, Aadhaar,Mobile— initiative.Further FDI reform measures were implemented,allowing India to become one of the world’s largestrecipients of foreign direct investment.

Global Context for IndiaFor India, three external developments are of signi-

ficant consequence.1. In the short-run, the change in the outlook for global

interest rates as a result of the US elections and theimplied change in expectations of US fiscal andmonetary policy will impact on India’s capital flowsand exchange rates.

2. The medium-term political out-look for globalisationand in particular for the world’s “political carryingcapacity for globalisation” may have changed in thewake of recent developments.

3. Developments in the US, especially the rise of thedollar, will have implications for China’s currencyand currency policy. If China is able to successfullyre-balance its economy, the spillover effects on Indiaand the rest of the world will be positive. On, theother hand, further declines in the yuan, even ifdollar-induced, could interact with underlyingvulnerabilities to create disruptions in China thatcould have negative spillovers for India.

Review of Developments in 2016-17(A) GDP and Inflation : Real GDP growth in the

first half of 2016-17 was 7.2 per cent, on the weaker sideof the 7.0-7.75 per cent projection in the Economic Survey2015-16 and somewhat lower than the 7.6 per cent raterecorded in the second half of 2015-16. The main problemwas fixed investment, which declined sharply as stressedbalance sheets in the corporate sector continued to take atoll on firms’ spending plans. On the positive side, theeconomy was buoyed by government consumption, asthe 7th Pay Commission salary recommendations wereimplemented, and by the long-awaited start of an exportrecovery as demand in advanced countries began toaccelerate. Nominal GDP growth recovered to respect-able levels, reversing the sharp and worrisome dip thathad occurred in the first half of 2015-16.

The major highlights of the sectoral growth outcomeof the first half of 2016-17 were :

(i) moderation in industrial and non-governmentservice sectors;

(ii) the modest pick-up in agricultural growth onthe back of improved monsoon; and

(iii) strong growth in public administration anddefence services

It produces a real Gross Value Addition (GVA)growth (7.2 per cent), quite similar to the one (7.1 percent) in H2 2015-16.

The Survey projected a dip of “between 0.25 and 0.5percentage points relative to the baseline of aboutseven per cent”, suggesting likely growth between6.5 per cent and 6.75 per cent in 2016-17. For 2017-18,the Survey projected growth of 6.75-7.5 per cent. TheSurvey went on to claim that growth could reach 8-10 per cent in the medium run through the imple-mentation of reforms, including follow-ups ondemonetisation and the Goods and Services Tax(GST). Inflation in 2016-17 has been characterized by twodistinctive features .1. The Consumer Price Index (CPI)-New Series

inflation, which averaged 4.9 per cent duringApril-December 2016, has displayed a down-ward trend since July when it became apparentthat kharif agricultural production in general,and pulses in particular would be bountiful.The decline in pulses prices has contributed

ECONOMIC SCENARIO 9

substantially to the decline in CPI inflationwhich reached 3.4 per cent at end-December2016.

2. The reversal of WPI inflation, from a trough of(-) 5.1 per cent in August 2015 to 3.4 per cent atend-December 2016 (Figure 2), on the back ofrising international oil prices.

(B) External Sector : The current account deficit hasdeclined to reach about 0.3 per cent of GDP in the firsthalf of 2016-17. Foreign exchange reserves are at com-fortable levels, having have risen from around US $ 350billion at end-January 2016 to US $ 360 billion at end-December 2016 and are well above standard norms forreserve adequacy. In part, surging net FDI inflows,which grew from 1.7 per cent of GDP in 2015-16 to 3.2per cent of GDP in the second quarter of 2016-17, helpedthe balance-of-payments.

The trade deficit declined by 23.5 per cent in April-December 2016 over corresponding period ofprevious year. During the first half of the fiscal year,the main factor was the contraction in imports,which was far steeper than the fall in exports. Butduring October-December 2017 both exports andimports started a long-awaited recovery, growing atan average rate of more than 5 per cent.The improvement in exports appears to be linked toimprovements in the world economy, led by bettergrowth in the US and Germany. On the import side,the advantage on account of benign international oilprices has receded and is likely to exercise upwardpressure on the import bill in the short to mediumterm.Meanwhile, the net services surplus declined in thefirst half, as software service exports slowed andfinancial service exports declined. Net privateremittances declined by $ 4.5 bn in the first half of2016-17 compared to the same period of 2015-16,weighed down by the lagged effects of the oil pricedecline, which affected inflows from the Gulf region.(B) Fiscal : Trends in the fiscal sector in the first half

have been unexceptional and the central government iscommitted to achieving its fiscal deficit target of 3.5 percent of GDP this year.

Excise duties and services taxes have benefittedfrom the additional revenue measures introduced in2015-16. The most notable feature has been the over-performance (even relative to budget estimates) ofexcise duties in turn based on buoyant petroleumconsumption : real consumption of petroleumproducts (petrol) increased by 11.2 per cent duringApril-December 2016 compared to same period inthe previous year.Non-tax revenues have been challenged owing toshortfall in spectrum and disinvestment receipts butalso to forecast optimism; the stress in public sectorenterprises has also reduced dividend payments.

State government finances are under stress. Theconsolidated deficit of the states has increasedsteadily in recent years, rising from 2.5 per cent ofGDP in 2014-15 to 3.6 per cent of GDP in 2015-16, inpart because of the UDAY scheme.

Outlook 2016-17In the third quarter of 2016-17 (when demonetisa-tion was introduced), cash declined by 9·4 per cent,demand deposits increased by 43 per cent, andgrowth in the sum of the two by 11·3 per cent (thecorresponding figures in Q3 of the previous yearwere 12·5, 10·5, and 11·7 per cent).(A) Impact of demonetization on supply of cash

and money and interest ratesThe price counterparts of this unusual aspect ofdemonetisation are the surge in the price of cash(inferred largely through queues and restrictions),on the one hand; and the decline in interest rates onthe lending rate (based on the marginal cost offunds) by 90 basis points since November 9; ondeposits (by about 25 basis points); and ongovernment securities on the other (by about 32basis points).(B) Impact of demonetization on GDPEconomic Survey 2016-17 analysed the impact of

demonetization on the following sectors of the economy :Agricultural (rabi) sowing : Contrary to early fears,as of January 15, 2017 aggregate sowing of the twomajor rabi crops—wheat and pulses (gram)—exceeded last year’s planting by 7·1 per cent and 10·7per cent. Favourable weather and moisture condi-tions presage an increase in production. To whatextent these favourable factors will be attenuatedwill depend on whether farmers’ access to inputs—fertilizer, credit, and labour—was affected by thecash shortage.Indirect tax revenue, as a broad gauge of productionand sales : excise taxes bear little imprint ofdemonetization. Indirect tax performance stripped

10 ECONOMIC SCENARIOof the effects of additional policy changes in 2016-17look less robust than the headline number. Theirgrowth has also been slowing but not markedly soafter November 8, 2017.Auto sales, as a measure of discretionary consumerspending and two-wheelers, as the best indicator ofboth rural and less affluent demand: Passenger carsales bear little imprint of demonetization. Propertymarkets in the major cities and sales of two wheelersshow a marked decline; credit was already lookingweak before demonetisation, and that preexistingtrend was reinforced.Real credit growth: The balance of evidence leads toa conclusion that real GDP and economic activityhas been affected adversely, but temporarily bydemonetisation. The question is: how much? Eco-nomic Survey’s best estimate of growth in theabsence of demonetisation is 1114 per cent in nominalterms (slightly higher than last year’s Surveyforecast because of the faster rebound in WPIinflation, but lower than the CSO’s advance estimateof 11.9 per cent) and 7 per cent in real terms (in linewith both projections). To assess growth after demo-netisation, a simply model relating money to GDP isemployed. Then, making assumptions about the useof cash in the economy and the magnitude of theshift toward digital payments methods, Ministry ofFinance computed the impact on nominal and realGDP growth for 2016-17. Given the uncertainty, theestimates provided a range: a 0.25 percentage pointto 1.0 percentage point reduction in nominal GDPgrowth relative to the baseline of 11.25 per cent; anda 0.25 per centage point to 0.5 percentage pointreduction in real GDP growth relative to the baselineof estimate of about 7 per cent. Over the mediumrun, the implementation of the GST, follow-up todemonetisation, and enacting other structuralreforms should take the economy towards itspotential real GDP growth of 8 percent to 10 percent. For reasons–good and self–serving—the pro-jections for 2016-17 will be compared to those ofothers.

Outlook for 2017-18(A) Real GDP :Given the high elasticity of Indian real export growthto global GDP, exports could contribute to highergrowth next year, by as much as 1 percentage point.International oil prices are expected to be about 10-15 per cent higher in 2017 compared to 2016, whichwould create a drag of about 0.5 percentage points.On the other hand, consumption is expected toreceive a boost from two sources:1. Catch-up after the demonetisation-induced

reduction in the last two quarters of 2016-17;2. Cheaper borrowing costs, which are likely to be

lower in 2017 than 2016 by as much as 75 to 100basis points.

As a result, spending on housing and consumerdurables and semi-durables could rise smartly. It istoo early to predict prospects for the monsoon in2017 and hence agricultural production. But thehigher is agricultural growth this year, the less likelythat there would be an extra boost to GDP growthnext year.Economic Survey 2016-17 visualised three maindownside risks to the forecast of growth for 2017-18.

First, the extent to which the effects ofdemonetisation could linger into next year,especially if uncertainty remains on the policyresponse. Currency shortages also affectsupplies of certain agricultural products, espe-cially milk (where procurement has been low),sugar (where cane availability and drought inthe southern states will restrict production), andpotatoes and onions (where sowings have beenlow). Vigilance is essential to prevent otheragricultural products becoming in 2017-18 whatpulses was in 2015-16.Second, geopolitics could take oil prices upfurther than forecast. The ability of shale oilproduction to respond quickly should containthe risks of a sharp increase, but even if pricesrose merely to $ 60-65/barrel the Indianeconomy would nonetheless be affected by wayof reduced consumption; less room for publicinvestment; and lower corporate margins,further denting private investment. The scopefor monetary easing might also narrow, ifhigher oil prices stoked inflationary pressure.Third, there are risks from the possible eruptionof trade tensions amongst the major countries,triggered by geopolitics or currency move-ments.

(B) Fiscal outlook :

The fiscal outlook for the central government for2017-18 will be marked by three factors.

First, the increase in the tax to GDP ratio ofabout 0.5 percentage points in each of the lasttwo years, owing to the oil windfall will dis-appear. In fact, excise-related taxes will declineby about 0·1 percentage point of GDP, a swingof about 0·6 per centage points relative to2016-17.Second, there will be a fiscal windfall both fromthe high denomination notes that are not retur-ned to the RBI and from higher tax collectionsas a result of increased disclosure under thePradhan Mantra Garib Kalyan Yojana (PMGKY).Third, positive impact of implementation ofGST.

(C) The macroeconomic policy stance for 2017-18 :Economic Survey 2016-17 suggests the followingpolicy initiatives to boost up the economy :

ECONOMIC SCENARIO 11

On the assumption that the equilibrium cash-GDP ratio will be lower than before November8, the banking system will benefit from a higherlevel of deposits. Thus, market interest rates—deposits, lending, and yields on governmentsecurities—should be lower in 2017-18 than2016-17.Despite decline in central government’s fiscaldeficit from 4.5 percent of GDP in 2013-14 to 4.1per cent, 3.9 per cent, and 3.5 per cent in thefollowing years, fiscal policy needs to balancethe cyclical imperatives with medium termissues relating to prudence and credibility.Create a public sector asset reconstruction com-pany so that the twin balance sheet problem canbe addressed, facilitating credit and investmentrevival.

Introduce labour reforms in a big way. Theinitiatives can be following :I. Whether they want to make their own contri-

bution to the Employees’ Provident Fund Orga-nisation (EPFO); whether the employers’ con-tribution should go to the EPFO or the NationalPension Scheme; and whether to contribute tothe Employee State Insurance (ESI) or an alter-native medical insurance program.

II. There could be a gradual move to ensure that atleast compliance with the central labour laws ismade paperless, presence less, and cashless.

Introduce universal basic income concept to assessthe real impact of any government programme.

Other IssuesA. Redistribution: Universal Basic Income (UBI) as

a radical new visionB. Exchange rate policy : Vigilance and new ways

of monitoringC. Trade PolicyD. Climate Change and IndiaE. Ensuring Women’s PrivacyF. India’s Soon-to-Recede Demographic Dividend

THE ECONOMIC VISION FOR PRECO-CIOUS, CLEAVAGED INDIA

The Economic Survey 2016-17 accepts in clear termsthat India has replaced its erstwhile socialist vision withsomething resembling the ‘Washington Consensus’ :open trade, open capital, and reliance on the privatesector–essentially the same development model that hasbeen tried and proven successful in most countries ofEastern Asia1. Reforms along these lines have beenadopted by every Indian government over the pastquarter century.

The current government has institutionalized acommitment to low inflation in the new monetary policyframework agreement. There has also been a great effort

to reduce the costs of doing business and create an envi-ronment friendly to investment, both domestic andforeign. And in the last six months, the government hassecured passage of major measures such as the AadhaarBill, the Bankruptcy Code, and the GST constitutionalamendment.

The result of all these reforms over the past 25 yearshas been a remarkable transformation of India froma largely closed and listless economy to the openand thriving economy that we see today. Thecountry’s progress is not only qualitative. It is alsomeasurable. Consider, for example, four standardmeasures :1. Openness to trade : One can see India’s transfor-

mation even more starkly by comparing the evolution ofits trade-GDP ratio with that of China over the past threedecades. India’s ratio has been rising sharply, parti-cularly over the decade to 2012, when it doubled to 53per cent; the recovery from the global financial crisis in2008 was also swift. As a result, India’s ratio now sur-passes China which is remarkable.

2. Openness to foreign capital : India’s foreign capitalflows as a share of GDP reveals that despite significantcapital controls, India’s net inflows are, in fact, quitenormal compared with other emerging economies.India’s FDI has risen sharply over time. In fact, in themost recent year, FDI is running at an annual rate of $75billion, which is not far short of the amounts that Chinawas receiving at the height of its growth boom in themid-2000.

3. The extent to which public sector enterprises dominatecommercial activities : India has allowed the private sectorentry into, amongst others, civil aviation, telecommuni-cations, and financial services. These have all served toreduce the share of the public sector even if there has notbeen much exit of the PSU enterprises themselves.

4. The share of government expenditure in overallspending: India spends as much as can be expected givenits level of development.

DEMONETISATION TO DEIFY ORDEMONIZE ?

On November 8, 2016, the government announced ahistoric measure, with profound implications for theeconomy.The aim of the action was four-fold : to curbcorruption; counter-feiting; the use of high denomi-nation notes for terrorist activities; and especially theaccumulation of ‘black money’, generated by incomethat has not been declared to the tax authorities.India’s demonetisation is un-precedented in inter-national economic history, in that it combinedsecrecy and suddenness amidst normal economicand political conditions.In the wake of the Global Financial Crisis (GFC),advanced economies have used monetary policy tostimulate growth, stretching its use to domains here-

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