On 29th January 2018 Economi Survey 2017-18 has been table in the Parliament of India.The highlights of the economic survey are that the growth story of India is back on track. The Economic Survey has revised the GDP growth figures for FY 2017-18 to 6.75% up from 6.5% as estimated by the CSO. The Economic Survey has also given the projected GDP growth figure range of 7-7.75% for the Financial Year 2018-19 which is a huge band. 7-7.5% is pretty expanded band. Economic Survey band of economic growth between 7-7.75% for FY 2018-19 is on top of 6.75% estimated growth for the current year. The context in which Economic Survey presented the numbers is this: the revival with risks. The numbers without a doubt talk about revival as evidenced from the upward correction of CSO’s advanced estimates from 6.5% to 6.75% and for next year, the estimates are even better than the IMF’s projections of 7.4% for India. But at the same time, the Economic Survey also talks about the three areas of risks:
1. The rising oil prices – the oil prices are already up by 12% and IMF projections are that they are further expected to go up by another 11% next year. This takes out a large chunk of growth potential of the economy, pushes up the prices and also adversely effects the Current Account Deficit.
2. The Overpriced Stock Markets: the stock markets are at very elevated levels. Therefore it is a matter of concern for the Economic Survey.
3. Fiscal Consolidation: It is going to be a challenge because the electoral imperatives are going to effect the macro economic stability assumptions. The projections that the government of India may not stick to the fiscal deficit target of 3.2% in the current year and therefore it will be necessary to restore the fiscal stability and fiscal consolidation next year.
The above three are the three areas of concern the Economic Survey 2018-19 talks about. On the other hand it lists out positives about: 1. export number which have a huge potential. The second item on the list is the completion of the insolvency resolution process which is a huge upside. The Economic Survey 2018 has talked about 4Rs – 1. Recognition of bad assets 2. Resolution of stressed assets problem 3. Recapitalization of banks and 4. Reforms in banking sector. If we take all these together, we can realise that the acceleration in growth should take place. But whether it will be 7.75% or 7% will depend a lot on how oil prices move, how stock markets find stability at a level, how the forthcoming budget will project the fiscal consolidation map etc.
Economic Survey about Private Investments:
Private investments have been muted since long time. Private investments are very vital. But remember that private investments have not been coming and will not come immediately. With stalled projects, capacity utilisation level in India hovering around 74%, private investments will not come in a hurry. This is why the Economic Survey identifies that the resolution of stressed assets problem under IBC is a key for revival of the economic growth. It is only after the IBC, NCLTs resolution processes are completed, and stressed assets take a haircut, banks take a haircut and banks are recapitalised. Only then the banks will have the money to lend, loans growth takes place and some of the stressed companies are deleveraged so that they can go for fresh investments. So the growth scenario is influenced by all these factors.
About Recapitalisation of PSU Banks:
Government has taken up the Rs. 2.10 lakh crores Recapitalisation plan out of which 1.35 lakh crores was meant for giving fresh equity to banks. Out of which 88,000 crores have been allocated vide a special formula that has been devised by which some of the weaker banks get large share of these assets so that their asset base expands significantly, so that they can undertake new businesses. 20 banks have got this fresh capital (88,000 crores) already. These banks however have a problem because most of these banks except SBI, BOB and a couple of other banks are already under RBI’s prompt corrective action plan. This means that at the current situation, to go out for fresh lending, they all have to focus on recovery of old loans which means they cannot expand their business and grow. With this Recapitalisation Plan of 88,000 crores into these banks, what we will see is their Capital Adequacy Ration (CAR) will get better and therefore NPA situation will get better and they will be able to go out in market. Hence they can lend more loans to bankable projects, grow businesses. Thus the loans growth will take place. There are already indications that loans growth has begun picking up. If these things pick up, private investments will pick up. Aided by the Government of India’s public investments programme, hopefully we can see the growth engines revive the growth rate figures estimated by the Economic Survey 2017-18.
About Demonetisation and GST:
Demonetisation pain is by and large settled and over. The cash in the system is back even though not at the previous levels but at satisfactory levels. So the demonetization dust is settled as far as the growth rates are concerned. But when it comes to GST, it is a still a work in progress. There are still many issues like for instance introduction of e-Way bill from February 1st, 2018. This will again have a disruptive impact. There have been reductions of rates in certain items. But they are not necessarily been rationalised in the sense that even though we have seen many reductions in rates, what we have not seen is harmonisation of rates into fewer bands. The bands are to be reduced to 3. Right now we have got around 5-7 rate bands. GSTN is getting better as well. More importantly, the Economic Survey 2017-18 has come out with the data that if we analyse the first 5 months of implementation of the GST, growth rate of 12% is observed in GST collections. This 12% growth rate in GST revenue collections actually reflects the robust buoyance in the Indirect Tax Collections which are estimated by the Survey at 1.14% compared to historical rate of 0.9% buoyancy. If GST can stabilize at this healthy rate of collections, and if there has been 50% increase in the tax base as given out by the Survey, we are heading for a sustained revenue mobilization programme backed by this larger tax base. So revenue’s growth will be taken care of to some extent and the Tax to GDP ratio which is a key concern for most of the Finance Ministers will probably be better. Yes, GST has caused a lot of pain in the initial months like any other big reform which will be disruptive in the initial days. However corrective actions have been taken up without delay. Instead of introduction of e-way bills, better system would have been to use a digital Tag. Again when dates for invoice matching system is introduced (deferred till March 2018 as of now), there will be disruption again. So therefore GST is still a work in progress. But then, one has to keep in mind that GST is not a six month’s experiment it is a long-term thing. Only after at least a year and year and half the normalisation of the process will be completed. But then the good news is GST collections are showing robust growth which should be good news for the Government which is working for better Tax to GDP growth rate ratio.
Direct Tax Collections:
The formalisation of economy, the widening of the tax base are two signals that the Economic Survey 2017-18 projects very well. GST accounts for 24% of the Government of India’s total budget. Individual Income Tax accounts for 16% of the total budget right now. If this 16% goes up to 17-19%, and GST goes up to 25%-26%, Government of India’s tax worries will be taken care of. Tax base would have widened and therefore the Government’s dependence on borrowing would come down. Once borrowing comes down, fiscal deficit will be lower. So fiscal consolidation plan will be on course.If this happens, it will not be impacting the market rate of Government bonds therefore the interest rates can soften. So on the whole there will be a virtual cycle that will be built instead of vicious cycle that is often created when the Government’s borrowing gets bigger and larger.
About Stock Markets:
It is reasonable to say that the stock markets have risen at a healthy pace. The valuations, stock prices have become quite expensive. It is possible that the rise in the small and mid cap stocks has been much faster than the large cap stocks. Therefore the bubble if at all is in the making could be there in small and mid cap section. So therefore it will be good for the Government and Economic Survey to raise it as an area of concern so that the retail investors are alerted and they don’t lose out the money and the new found faith in the capital markets.
About Jobs:
The Economic Survey 2017-18 says that the job situation is not as bad as it was thought to be. The EPFO based numbers show that the formal employment to be 31% of non-farm labour force. But if we take the tax base as an indicator, the total share of the formal employment in total non-farm labour force comes to 54%. That is an indication of the formalisation of the economy. It does not necessarily mean that the jobs have grown but it means that formal workforce as a percentage of total non-form labour workforce is quite substantial. This is a very good data brought out by the Economic Survey 2018. But efforts must be taken to update this data regularly and periodically. Only then the analysts and experts can analyse what is happening in the job sector so that people can take necessary policy steps, the government can intervene and take corrective steps.