Chapter-1: State of the Economy: An Analytical Overview and Outlook for Policy

Any economic analysis is incomplete without quoting or borrowing wisdom from noted economist J M Keynes. The first chapter of the economic survey begins with a quote from Keynes – “The inevitable never happens. It’s the unexpected always.”

The key points for your examination from this chapter are as follows:

What are the three Key major reforms of 2017-18?

The three major reforms of the past year were:

1. Launching GST on July 1, 2017.
2. Sending most stressed companies for resolution under the new Bankruptcy Code
3. Implementing a major recapitalization package for public sector banks.

The latter two measures were aimed to address the Twin Balance Sheet (TBS) problem.

What is the TBS Problem? What have been efforts so far to address the TBS problem?

The Twin Balance Sheet Problems was discussed earlier in Economic Survey 2016-17 and is a by-product of the NPAs. The bad loans have affected both the corporate as well as banks as follows:

• While corporate were rendered over-leveraged and distressed, banks were laden with bad loans / poor quality assets.
• Many companies were having interest coverage ratio of less than 1, thus rendered unable to serve their interest obligations. For many banks, the principal amount got stuck in the loop and this eroded their capital base.

The key steps taken in 2016-17 to address the issue include:

• rescheduling the payments
• creation of private asset reconstruction companies
• 5:25 scheme whereby the lenders were allowed to increase debt period up to 25 years with interest rates adjusted every five years
• Strategic Debt Restructuring (SDR) scheme, under which the creditors could take over firms that were unable to pay and sell them to new owners.

In 2017-18, the steps taken were:

• focussing on 4Rs viz. recognition, resolution, recapitalization, and reforms.
• The Indian Bankruptcy Code (IBC) provided a resolution framework to help companies clean up their balance sheets and reduce their debts

Further, the government has recently announced a large recapitalization package (about 1.2 percent of GDP) to strengthen the balance sheets of the public sector banks (PSBs).

What should be the Government Agenda for Next Year?

The economic survey sets the agenda for next year as follows:

• The past efforts have alleviated the bad effects of earlier policy decisions to some extent and should continue with more reforms.
• The policy makers should keep a watch on high international oil prices (if they persist) and a sudden fall in share prices, which are due for correction.

The key priorities of the government should be on stabilizing the GST (revenues as well as platform), Privatizing Air India; keeping the threats to macro-economic stability away; implementing complimentary reforms to TBS actions; create good jobs; skilling the labour force; raising farm productivity and boost agricultural resilience. Further, government should leverage two engines of economic growth viz. investments and exports for macroeconomic stability.

What does it mean when survey says that India has moved from “crony socialism to stigmatized capitalism.”?

Economic Survey provides enough fodder material for the left / right leaning columnists to chew for several days. We generally come across the term “crony capitalism”. Crony means a pal. In crony capitalism, the wealthy people and corporate are able to spin the policy decisions towards their own favour. Crony socialism has also similar connotation. India’s economy has been based on socialistic pattern in past but the socialism has also been influenced by cronies. Various scams including coal gate, 2G etc. were result of crony socialism. The lifestyle of many socialist leaders and their kin are examples of how crony socialism has taken deep roots in Indian polity and society.

According to the survey, one of the malefic impacts of crony socialism was that confidence in Indian capital and corporate had gone down. The twin balance sheet problem is an example of its manifestation. The public perception of TBS is that:

• Indian corporate had borrowed money from banks without much liability (capitalism without equity)
• Indian Banks were hand in glove with corporate and risked their own equity by letting the assets turn NPAs.

The word stigmatized capitalism has been used for these two perception issues. The issue is that TBS is becoming difficult to manage mainly because of stigmatized capitalism. We recall here that the bad loans of state-run banks add up to around Rs 7.5 lakh crore and government has embarked on a two-pronged strategy on bad loans. On the one hand, it has brought in the Insolvency and Bankruptcy Code (IBC) which provides for a six-month time-bound insolvency resolution process. On the other hand, it has approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks. Earlier, the RBI had referred 12 accounts, totaling about 25 per cent of the gross NPAs, for resolution under the new IBC.

What was quantum of Increase in Taxpayers Post-Demonetization?

Greater formalization of the economy was one of the main objectives of demonetisation. Before demonetisation, India had around 5.93 crore individual tax payers, which was 24.7% of the total non-agricultural work force. Post-demonetisation, around 1 crore (10.1 million) new filers were added. The key issue is that most of the new filers have shown their taxable income close to 2.5 Lakh, which is equivalent to the income tax threshold. So, as of now, there is not much impact on revenue.

What was impact on ROSL scheme on textile exports?

India has been an underdog as far as textile / apparel exports are concerned. The market was previously dominated by China but in recent years, that share of China went down, India had an opportunity. However, India could not utilize this opportunity and let Vietnam and Bangladesh fill the vacuum created by China’s decreased global share.

In June 2016, the government announced a 6000 crore package for textile sector whose main component was Rebates on State Levies (ROSL) to offset VAT levied by states on apparel for exports. Such tax has been termed as “embedded export tax”.

This package increased the exports of readymade garments (RMG) made of man-made fibers (MMFs). On other fibers, it did not have any positive impact. On this basis, survey recommends that the GST council should make a comprehensive study of the other incidences of embedded export taxes in industries (such as those left out of GST i.e. petroleum) to provide boost to India’s manufacturing exports.

What has been GST’s revenue performance so far?

Revenue collection under the GST is doing well as of now. In 2016-17, all the taxes that were replaced by GST (VAT, Excise, service tax, countervailing duties/special additional duty (SAD) on imports) amounted to Rs 9.7 lakh crores. The GST collection is expected to in tune of 10.9 Lakh Crore. This represents a growth of around 10.5 percent and the tax buoyancy stands around 1.14, which is above the historical buoyancy for indirect taxes of 0.9.