Economic Survey glosses over the problems that lie ahead for India

Looking back at the year that has passed and with a hopeful prognosis of the year ahead, the Economic Survey has, under the guidance of Dr Arvind Surbamanian, grown in ease of readership, attractive presentation of facts and a distinct approach to the economy. But like past surveys, it remains shy on the problems ahead.

Taking an optimistic view of the economy, it places GDP growth for this year at 6.75 per cent, compared to 6.5 per cent predicted by the Central Statistical Office. It also posits a rather attractive figure for next year, with GDP growth at an optimistic 7-7.75 per cent. While not predicting a number for the fiscal deficit, aimed at 3.2 per cent, it doesn’t fail to present the problems that lie ahead.

The main problems are well known. The money sunk into ailing banks, a slowdown in public investment, rising petroleum prices, slowdown in remittances from Indian workers abroad, and the sharp rise in stock prices and the fear of their equally rapid fall with foreign investors pulling out. Insufficient notice has been given in the Survey to the lasting effects of demonetisation or the fall in economic activity due to the implementation of GST.

Another Rs 88,139 crores capital will be put into banks — Rs 80,000 crores via recapitalisation bonds and Rs 8,139 crores in budgetary allocations. Of this, 46 per cent more capital will go into the weaker banks instead of better performing ones. This begs the question — are we really at the bottom of the NPA cycle? If not, the Centre’s big bank recap plan could fall flat on its face. Most of the money it gets to shore up the banks will be from the sale of PSUs, including possibly Air India. The government looks set to bring asset sales of about Rs 92,500 crores in this financial year, well above the initial Rs 72,500-crore target. A substantial amount is expected to come from the sale proceeds of the airline.

Overseas remittances from Indian workers, mainly in West Asia, has been an unsung part of our foreign exchange earnings, being larger than software exports. This is expected to fall in the next few years, and it has not been sufficiently taken into account. Together with an expected rise in petroleum prices, this would pressure on our current account deficit. The rising prices of petroleum will also put the government in a bind. Crude oil has gained 25 per cent in the past year, and the government has to do a balancing act between lowering excise and government income or raising fuel prices and angering its middle-class supporters.

Another big bonanza for the government has been the rise of the stock market to unsustainable levels. The price/equity ratio of the Sensex (an indicator of market performance) is now 26.4, compared to 21.9 for the American Dow, 19.6 for Germany and 11.0 for Singapore. Unsustainable values of this kind are bound to lead to a crash in share prices as foreign investors move out.

The Survey puts an optimistic spin on the effects of demonetisation and GST’s introduction. On GST, the Survey notes that despite more long-term challenges, the number of GST taxpayers has gone up by 50 per cent. But it doesn’t take into account the fact that GST receipts fell by 14 per cent to just over '80,000 crores in December 2017. Besides, it takes an unfairly optimistic view of the effects of demonetisation. The GDP growth rate fell to 5.7 per cent in April-June 2017 before rising to 6.3 per in the next quarter, largely because of the festive season. The effect of demonetisation is far from over, and to ignore that is only to say what the current government wants its economists to project.

The fiscal deficit is also expected to cross the 3.2 per cent target since from April to November, the government’s fiscal deficit was 112 per cent of its ' 5.5 trillion target for the current fiscal year 2017-18. With the fiscal deficit target being dropped, the overall position of the government gets weaker as it is an important indicator for foreign investors. But it should not be so if the deficit is needed to kickstart the economy (as Keynes had sometimes recommended).

Apart from the fiscal slowdown, the Survey presents its long-term view in five chapters devoted to the challenges of long-term economic convergence, gender inequality, climate change and agriculture, delays in the appeals and judicial process, and science and technology.

The Survey warns that climate change could affect farmers’ incomes by up to 20 to 25 per cent in the medium term, and suggests a “dramatic” improvement in irrigation, use of new technologies and better targeting of power and fertiliser subsidies to tackle the results. The main drivers of growth — manufacturing and agriculture — are both in the doldrums. In the case of manufacturing, this is because there is no government investment and the private sector has no money to invest.

In agriculture, despite Prime Minister Narendra Modi’s shrill rhetoric, there has been no major investment by the State in recent years. Agriculture is one of those sectors where we have seen no reforms, whether in terms of export-import policies or domestic constraints. Higher productivity and incomes will come from a shift from cereal crops to animal husbandry growing fruits and vegetables. To increase productivity, it requires massive investment in water and further investments are needed to generate full-time jobs in rural services.

The Union Budget which finance minister Arun Jaitley will present in Parliament on Thursday will indicate how closely the government follows the findings of the Economic Survey.