Economic Survey 2016-17: Chapter-08 – Review of Economic Developments

In this chapter, the survey has given a crisp overview of latest data and facts on Indian economy 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.

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.

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 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

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.

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.
• 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 exchange reserves provided a cover of 76.8 percent to the total external debt stock.  At end-September 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 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;

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:

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

As shown in the below figure, there is growing casualization of labour taking place and one 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.

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) 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.
• 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:

• 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.