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Economic Survey 2016-17Volume 2-AnalysisBy Shyam S Kaggod
Some fundamental points
• Economic Survey is an annual publication by the Economics Division (DEA, Finance Ministry)
• For the first time it was presented in FY51
• Delinked from the budget from 1964
• There is no constitutional provision but it has become a convention
The chapters that will be covered• Chapter 1 - State of the economy – an overview
• Chapter 2 - Fiscal Developments
• Chapter 3 - Monetary Management and Financial Intermediation
• Chapter 4 - Prices & Inflation
• Chapter 5 - Climate Change, Sustainable Development and Energy
• Chapter 6 - External Sector
• Chapter 7 - Agriculture and Food Management
• Chapter 8 - Industry and Infrastructure
• Chapter 9 - Services Sector
• Chapter 10 - Social Infrastructure, Employment and Human Development
Chapter 1 – State of the Economy
• Indian economy is showing anxiety as well as optimism
• Analytical review of recent developments•GST• Inflation• Farm loan waivers• Demonetization• Twin Balance Sheet Problem
•Outlook and policies for 2017-18
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GST
Ch-1
GST – Concerns
• Compliance burden
Ch-1
GST – Concerns
• Anti-Profiteering Measures• Set of rules/guidelines that prevent the companies from making excessive
profits with introduction of GST
• Were cleared by GST council on June 18, 2017
• A National Anti-Profiteering Authority will be set up
• Has a sun-set clause of two years
Ch-1
GST – Concerns
• The gold should be brought under the higher tariff
• Health and education should be brought under the ambit of GST
• Tax over GST would be counter-productive
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GST – Hidden Benefits
• Coverage of textile, clothing and real estate
• Expansion of tax base – the number of tax payers and direct tax collections
• Logistics cost
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Close Market Vs The Best Place to Produce
Reason Time taken out of the total
Transportation time 40%
Check posts 25%
Other official stoppages 35%
Inflation
• There is a deflationary trend in the making• Oil prices
• Agriculture
Ch-1
Cereals or pulses?
Ch-1
Deflation or Disinflation?
Ch-1
Deflation or Disinflation?
Ch-1
Farm Loan Waiver Scheme – Good Politics, Bad Economics
Image source – The Hindu
Ch-1
As per Agriculture Census 2011
Type Percentage of holdings Avg size of the holdings
Marginal 67.10% 0.4 hectares
Small 17.90% 1.4 hectares
Semi-medium 10.00% 2.7 hectares
Medium 04.30% 5.8 hectares
Large 00.70% 17.4 hectares
Ch-1
Agriculture Credit
Size of the land Co-op society Bank Informal Sources
Marginal 10% 27% 63%
Small 15% 48% 37%
Semi-Medium 16% 50% 34%
Medium 18% 50% 32%
Large 14% 64% 22%
Report on Medium Term Financial Inclusion – RBI
Ch-1
Previous Loan Waivers
Year Points
1990 - Announced by V P Singh Government- Total expenditure of over ₹ 10000 Cr- Covered loan waiver of up to ₹ 10000
2008 - Announced by UPA government- Applicable to small and marginal farmers- Expenditure incurred was over ₹ 70000 Cr
2012 - Announced by Samajawadi Party- Waived loans up to ₹ 50000- Expenditure incurred was around ₹ 1650 Cr
2014 - Elected governments in AP and Telangana announced loan waiver- In case of Telangana it was announced for ₹ 17000 Cr- In case of AP it was announced for loans up to ₹ 1.5 lakh
2016 - AIADMK government announced loan waiver- Small and marginal farmers owning up to 5 acres were covered- The expenditure incurred was ₹ 5700 Cr
2017 - UP government has announced a loan waiver of ₹ 36359 Cr
Ch-1
Arguments in Favour of Loan Waiver
• About 52% of the agricultural householders are in debt
• As per NCRB
• Between 1995 to 2013, there were a total of 2,96,417 farmer suicides
• Bankruptcy has accounted for 39% (approx) of farmer suicides
• Two successive droughts in FY15 and FY16
• The agricultural production has fallen from 265 mn tn (FY14) to an avg of 252 mn tn
• Why not for agriculture? (a case of false equivalence)
Ch-1
Arguments Against the Loan Waiver
• Moral Hazard Argument• Not all the farmers are covered
• Betrays the farmers who have honestly repaid
• Creates a conflict between lenders and borrowers
• The fiscal deficit of the states/central government
• It’s a temporary solution
• Domino effect
• Implementation concerns
Ch-1
Moral Hazard
Bank NPA as of March 2010 (as % of total loans)
NPA as of March 2016 (as % of total loans)
State Bank of India 3% 6%
Punjab National Bank 3.65% 6%
Bank of Baroda 3.33% 10.74%
Canara Bank 1.84% 3.24%
From Farmer Side From Banking Side
1) Hurts credit discipline 1) Hurts the lending programs (especially of co-operatives)
2) Betrays the farmers who have repaid the loans
2) Banks may start diverting the loans
3) Future expectations 3) Puts undue pressure on the bankingsystem
Ch-1
Fiscal Deficit Problem
FY % of GSDP
FY13 2.64%
FY14 2.77%
FY15 3.40%
FY16 5.85%
FY17 4.45%
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ADWDRS 2008
• Was announced by the GoI in February 2008
• Covered the loans that were given between 1997 and 2007
• From both commercial and co-operative banks
• The eligibility depended on the landholding size of the borrower• Lesser than 2 hectares – 100% debt relief• More than 2 hectares – 25% conditional relief
• CAG Report 2013• Problem with the design of the scheme• 13.5% of the audited accounts did not get the benefits even though
they were eligible• 8.5% of the audited accounts were not eligible • The banks were supposed to issue certificates and obtain
acknowledgement• All the beneficiaries did not get access to fresh loans
Ch-1
Impact of the loan waiver
• Impact on the banking sector
• Household debt will come down hence lead to more investment in agriculture
• The finances of the state government will come under stress
• Will reduce the corporate spending
• The overall Impact is said to be reduction in the consumption of 0.7% of GDP
Ch-1
Way out
• Put a moratorium on repayment for a period of a year
• Phased waiver
• Implementation of structural reforms• PMFBY
• PMKSY• e-NAM
• Institutional Lending
• Promote Private sector Investment
• M S Swaminathan Committee Recommendations
Ch-1
Way Out – Swaminathan Committee Recommendations
• Agriculture should be in the concurrent list
• Prevent diversion of agricultural and forest land to the companies for non-agricultural purposes
• MSP should be at-least 50% more than weighted average of CoP
• Million Wells Recharge Programme should be launched
• Increase in the irrigation investment
• National network of advanced soil testing labs
• Increase formal credit outreach
• Reduce the rate of interest on crop loans
• Expand crop insurance coverage
Ch-1
Demonetization
• Was done • To prevent usage of the cash
• To promote digital modes of payment
Ch-1
Demonetization – historical trends in money supply
Ch-1
Demonetization
Promoting digital payments• Excluded section
• Less affluent
• Affluent
Ch-1
Demonetization
Ch-1
Demonetization
Ch-1
Demonetization – Cash is king?
Ch-1
Demonetization – Income Tax Compliance
Ch-1
Demonetization – Impact
• GDP
• Informal sector
Ch-1
Twin Balance Sheet Problem
• Power Sector - the worry factors• Renewable energy prices are declining
• PLF (Plant Load Factor) is hovering around 60%
• The ratio of stressed companies (share of debt owed by the companies with an IC<1) has reached 70%
• The Discoms may force renegotiations of PPAs
Ch-1
Twin Balance Sheet Problem• Telecommunications – concerns
• The bottom-line has been affected
• The ARPU (Average Revenue Per User) has come down
Ch-1
Twin Balance Sheet Problem - Solutions (will be covered in chapter 3)
• 4R Solution
• Banking Regulation Act
• Prompt Corrective Action (PCA)
• Insolvency and Bankruptcy Code
Ch-1
Questions
• GST represents economic federalism-explain
• Under GST profit is allowed but not profiteering-evaluate
• The exploitation of shale oil and gas though sophisticated new technologies has rendered India less susceptible to the vicissitudes of geo-economics and geo-politics of OPEC and Middle East respectively-elaborate
• The implementation of GST has led to economic integration of India-elaborate
• Contrary to the expectations of a higher inflation, various factors indicate Indian economy is about to experience deflation-elaborate
• Critically evaluate the loan waiver scheme?
• Is loan waiver scheme a sub-optimal policy?
• The problems of agriculture are structural and cannot be resolved by the loan waiver scheme-discuss
Ch-1
Chapter 2 – Fiscal Developments
Ch-2
Chapter 2 – Fiscal Developments - Receipts
Ch-2
Tax Revenues
Ch-2
Receipts - Disinvestment
Ch-2
Chapter 2 – Fiscal Developments - Expenditure
Ch-2
Revenue Expenditure
Ch-2
Aggregate Budgetary Expenditure
Ch-2
Deficits
Ch-2
FRBM Act 2003
Ch-2
R K Singh Committee
Ch-2
R K Singh Committee
Ch-2
Questions
• The drop in bid prices for solar power plants will accelerate the TBS problem-discuss
• Write a note on FRBM
• Does India need a new Fiscal Framework? Write a note
• Discuss the recommendations of N K Singh Committee
Ch-2