Economic Survey 2015-16 _ Amidst Gloomy International Economic Landscape, India Stands as a Haven of Stability; PIB

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26-February-2016 12:08 I

Press Information Bureau

Government of India

Ministry of Finance

Economic Survey 2015-16 : Amidst Gloomy International Economic Landscape, India Stands as a haven of Stability

Expects GDP Growth Rate for 2016-17 in the range of 7 % to 7.75 % ;

Increase in Wages and Benefits Recommended by the 7th Pay Commission are not likely to Destabilize Prices and will

have liĥle impact on Inflaĕon;

4 R : Recogniĕon, Recapitalizaĕon, Resoluĕon, and reform required to Comprehensively resolve the twin balance shee

challenge of Public Sector Banks (PSBs) and some Corporate Houses.

The Economic Survey 2015-16 tabled in Parliament today by the Union Finance Minister Shri Arun Jaitley presents aoptimistic picture of Indian economy stating that amidst the gloomy landscape of unusual volatility in the internationeconomic environment, India stands as a haven of stability and an outpost of opportunity. It says the country’s macro-economis stable, founded on the government’s commitment to fiscal consolidation and low inflation. The Survey underlines thIndia’s economic growth is amongst the highest in the world, helped by a reorientation of government spending toward need

public infrastructure. Describing these achievements as remarkable, the Survey emphasizes that the task is now to sustain thein an even more difficult global environment.

The Survey further states that the country’s performance reflects the implementation of number of meaningful reforms. Theis palpable and pervasive sense that corruption at the centre has been meaningfully addressed which has been reflected transparent auctions of public assets. FDI has been liberalized across the board and vigorous efforts have been undertaken ease the cost of doing business. Stability and predictability has been restored in tax decisions reflected in the settlement of thMinimum Alternate Tax (MAT) imposed on foreign companies. Major public investment has been undertaken to strengththe country’s infrastructure. In the farm sector, a major crop insurance programme has been instituted. The Survey hhighlighted creation of bank accounts for over 200 million people under Pradhan Mantri Jan Dhan Yojan (PMJDY), t

world’s largest direct benefit transfer programme in case of LPG with about 151 million beneficiaries receiving Rs. 29,0crore in their bank accounts and the infrastructure being created for extending the JAM (Jan Dhan Aadhar Mobile) agenda other Government programmes and subsidies.

However, the Survey has expressed concern over approval of GST Bill being elusive so far, the disinvestment programm


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falling short of targets and the next stage of subsidy rationalization being a work-in-progress. It adds that corporate and banbalance sheets remain stressed affecting the prospects for reviving private investments. It further says that perhaps thunderlying anxiety is that the Indian economy is not realizing its full potential.

The Survey states that the country’s long run potential growth rate is still around 8-10% and realizing this potential requirespush on at least three fronts. First, India has moved away from being reflexivity anti-markets and uncritically pro-state to beipro-entrepreneurship and skeptical about the state. But being pro-industry must evolve into being genuinely pro-competitioSimilarly, skepticism about the state must translate into making it leaner. It emphasizes that the key to creating a more captivenvironment will be to address the exit problem which affects the Indian economy. Second, the Survey calls for majinvestments in health and education of people to exploit India’s demographic dividend to optimal extent. Third, it says th

India cannot afford to neglect its agriculture.

The Survey points-out that the upcoming budget and economic policy will have to contend with an unusually challenging an weak external environment. It suggests that one tail risk scenario that India must plan for is a major currency re-adjustment Asia in the wake of a similar adjustment in China. Another tail risk scenario could unfold as a consequence of policy actionto say, capital controls taken to respond to curb outflows from large emerging market countries, which would further moderathe growth. The Survey says that in either case, foreign demand is likely to be weak which requires to find and activadomestic sources of demand to prevent the growth momentum from weakening.

The Survey highlights that India stands out internationally as an investment proposition and the Rational Investor RatinIndex (RIRI) shows that India compares favourably with peer countries in the BBB investment grade and almost matches thperformance of A-grade countries.

While reviewing the major developments, the Survey states that according to CSO the growth rate of GDP at constant markprices is projected to increase to 7.6% in 2015-16 from 7.2% in 2014-15. Although agriculture is likely to register low growfor the second year in a row on account of weak monsoons, it has performed better than last year. Industry has showsignificant improvement on account of acceleration in manufacturing while services continue to expand rapidly. The Survpoints out that even as real growth has been accelerating, nominal growth has been falling.

Among other indicators, the Survey states that low inflation has taken hold and confidence in price stability has improved. TCurrent Account Deficit has declined and foreign exchange reserves have risen to US$ 351.5 billion in early February, 201The fiscal sector registered these striking successes; ongoing fiscal consolidation, improved indirect tax collection efficiency anan improvement in the quality of spending at all levels of government. The Government Tax Revenues are expected to bhigher than budgeted levels. Direct taxes grew by 10.7% in the first 9 months of 2015-16 while indirect taxes were also buoyan


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The Survey states that the aggregate capital expenditure by the government increased by 0.6% in 2015-16. This occurred boin the centre and states, with the former contributing 54% and the latter 46%.

In the economic outlook, real GDP growth for 2016-17 is expected to be in the 7% to 7.75% range. However, it cautions thatthe world economy remains weak, India’s growth will face considerable headwinds. On the domestic side, two factors caboost consumption, increased spending from higher wages and allowances of government workers if the seventh p

commission is implemented and return of normal monsoon. At the same time, the Survey enumerates three down side risksturmoil in global economy could worsen the outlook of exports, contrary to expectations oil prices rise would increase the drfrom consumption and the most serious risk is combination of the above two factors.

The Survey cautions that one of the most critical short term challenges confronting the Indian economy is the twin balansheet problem – the impaired financial positions of the Public Sector Banks (PSBs) and some corporate houses. The twbalance sheet challenge is the major impediment to private investment and a full-fledged economic recovery. Comprehensiveresolving this challenge would require 4 R s : Recognition, Recapitalization, Resolution, and Reform. Banks must value theassets as far as possible close to true value (recognition) as the RBI has been emphasizing; once they do so, their capiposition must be safeguarded via infusions of equity (re-capitalisation)as the banks have been demanding; the underlyistressed assets in the corporate sector must be sold or rehabilitated (resolution) as the government has been desiring; anfuture incentives for the Private Sector and corporates must be set-right (reform) to avoid a repetition of the problem, everyone has been clamouring.

According to the Survey, the time is right for a review of medium term fiscal frame work. It adds that there are nedevelopments in, and approaches to, medium term fiscal frameworks around the world from which India can usefully learn.

About inflation, the Survey says that increase in wages and benefits recommended by the 7th pay Commission are not likelydestabilize prices and will have little impact on inflation. On the external outlook, the Survey says that overall exports declined by about 18% in the first three quarters. It points-out thin the last two years Indian services exports have been more affected than Indian manufacturing exports and also world serviexports. Realizing India’s medium term growth potential of 8-10 percent will require rapid growth of export. To achietrajectory similar to China, India’s competitiveness will have to improve so that its services exports, currently about 3 percent

world exports, capture nearly 15% of world market share.

On the issue of trade policy, the Survey says that introspection is overdue on five issues which are – providing support farmers in light of WHO rules, mitigating the impact of erratic trade policy on farmers incentives, reconciling the “big bpoor” dilemma that confronts India in trade negotiations, dealing with outgoing stresses brought on by the externenvironment, and engaging more broadly with the world on trade. The Survey underlines that India’s position in agricultuhas changed, it has become more competitive and relies relatively more on domestic support. It suggests India’s WTobligations could predominantly be based on this domestic shift away from border protection to domestic support. It furthsuggests that India could consider offering reduction in its very high tariff bindings and instead seek more freedom to providhigher levels of domestic support.

Stating that the trade policy is under stress also for reasons related to the ongoing turmoil in the international environment anthe global demand is weak, the Survey suggests that India should resist calls to seek recourse in the protectionist measureespecially in relation to items that could undermine the competitiveness of downstream firms and industries. It also sugge


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that India should strengthen procedures that allow WTO-consistent and hence legitimate actions against dumping (andumping), subsidization (countervailing duties), and surges in imports (safeguard measures) to be taken expeditiously aneffectively.

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Economic Survey 2015-16 _ Amidst Gloomy International Economic Landscape, India Stands as a Haven of Stability; PIB