Economic Survey of India 2015-16

EconomicSurvey of India 2015-16 New Delhi February 26, 2016 Overview Description of Contents Macro-economy and Current Prospects Structural Reforms to Facilitate Exit Strengthening the State: Fiscal Relations with Poor and Rich Assessment & Conclusion Contents Volume 1: Analytical, forward looking, and prescriptive Volume 2: Summary of current economic situation i.State of the Economy: An Overview ii.Public Finance iii.Monetary Management and Financial Intermediation iv.External Sector v.Prices, AgricultureandFoodManagement vi.Industrial, Corporate, and Infrastructure Performance vii.ServicesSector viii.ClimateChangeandSustainableDevelopment ix.Social Infrastructure, Employment and Human Development Macro and current economic situation i.The Global Context ii.The Indian Context iii.Outlook iv.Real GDP Growth v.Medium-Term Fiscal Framework vi.External Outlook vii.Trade Policy Structural Reform and Exit: From socialism with restricted entry to “marketism” without exit i.The ChakravyuhaChallenge ii.Agriculture: More from Less iii.The Fertiliser Sector iv.Powering “One India” v.Preferential Trade Agreements vi.Structural Changes in India’s Labour Markets Strengthening the State: Fiscal Relations with Rich and Poor i.Fiscal Capacity for the 21st Century ii.Bounties for the Well-Off iii.Mother and Child iv.Spreading JAM across India’s Economy Volume I Macro Outlook & Policy Summary I.The world economy is becoming grim II.Recalibrate expectations about India’s performance III.Need to sustain macro-economic stability IV.Monetary and fiscal policy must purchase insurance against growth slowdown V.No longer a twin deficit but a “twin balance sheet” challenge Grim External Environment: Declining Stock Markets 70 75 80 85 90 95 100 105 70 75 80 85 90 95 100 105 USAGermanyIndiaJapanChina (RHS) Taxonomy of Financial Crises:This time might be very different Crisis Type Originating Countries Origin of problem ManifestationTrigger Exchange Rate Regime Remarks Latin American EMEs (Latin America 1982; India 1991); Small advanced country (Greece 2010 onwards) Government borrowing Current account deficit Speculative attack and exchange rate collapse Fixed rate Greece was part of euro, so trigger was sharp rise in interest rates. Asian Financial Crisis EMEs (East Asia 1997-9; Eastern Europe, 2008; Fragile Five 2013); Small advanced country (Spain 2010) Corporate borrowing Asset price bubbles; High corporate leverage "Sudden stop" of capital flows and exchange rate collapse Fixed rate Fragile Five had flexible exchange rates. Spain was part of euro. Global Financial Crisis Systemically Important (US 2008) Bank and consumer borrowing Asset price bubble in housing Correction in asset prices Flexible exchange rate US dollar appreciated. The NEXTSystemically Important Corporate borrowing Rising debt, asset price bubbles "Sudden stop" with potential for sharp exchange rate decline Managed float Crisis country's currency could depreciate substantially. 0 2 4 6 8 10 12 Correlation = 0.2Correlation = 0.42 Why RecalibrateExpectations? India “so entwined” with world India World India & World growth (Per cent) Outlook for growth and inflation Real GDP growth projection for FY2017: 7-7.75per cent •The wider range reflects the range of exogenous: from a rebound in agriculture to a full-fledged international crisis. •Uncertainty arising from the divergence between growth in nominal and real aggregates. CPI inflation projection for FY2017: 4.5 –5.0 per cent •Minimal effect of 7thPay Commission •Below-potential growth and rising excess capacity •Balance sheet stresses of private sector •Deflationary world environment Downside risks •The most serious risks are global: faltering world growth, extreme financial events, and rising oil prices. Monetary policy—Limited Interest Pass-through 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 63 bps 93 bps 125 bps Policy repo rate cut 125 bps -Base rate cut 63 basis points –Term Deposit rate cut 93 basis points * Vertical Lines in all these boxes refer to dates when repo rate changes were announced. Base Rate Term Deposit Rate Policy Repo Rate 58 60 62 64 66 68 0 0.2 0.4 0.6 0.8 1 1.2 1.4 Policy cut passed through Policy cut not passed through Spread between 91-day T-bill and repo rate (%; LHS) Rs/$ ExchangeRate (RHS) Liquidity has tightened after October rate cut Fiscal: To consolidate aggressively or gradually ? Fiscalpolicymustbalancemaintainingstability(throughsteadily decliningdebtanddeficit)withpurchasinginsuranceagainstgrowth slowdown Pros i.Government keeps commitment, reinforcing credibility ii.Debt and deficit on declining path iii.Robust growth right time to consolidate Cons i.Feasibility when large Pay Commission and infrastructure obligations loom ii.Could weaken economy when growth outlook uncertain From twin deficits challenge to Twin Balance Sheet challenge -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 020406080 Return on Assets (%) Total Employment (in 1000s) - 2.0 4.0 6.0 8.0 10.0 12.0 (0.5) - 0.5 1.0 1.5 2.0 2.5 3.0 Debt/Equity Interest cover Large and rising stressed assets in banks Profitability and indebtedness of corporates worsening Public Sector BanksLarge Corporate Houses Addressing India’s ‘Twin Balance Sheets’ Resolving the TBS challenge comprehensively would require 4 R’s: Recognition, Recapitalization, Resolution, andReform Can resources for recapitalization come from public sector –including RBI –balance sheet ? -20 -10 0 10 20 30 40 50Total Equity as Percent of Balance Sheet of Major Central Banks StructuralReformsviewed through lens of Exit The Chakravyuhaor Exit Challenge: From socialism with limited entry to “marketism” without exit Impeded Exit is pervasive, costly but fixable.. SectorInefficiency Measure/Cost PUBLIC SECTOR Fertilizers (Inefficient firms)Total subsidy based on economic cost Rs. 23,013 crore. Public Sector Banks (a few banks)Capital infusion between 2009-10 and 2015-16 (H1): Rs. 1.02 lakh crore. Discoms(major loss-making states)Accumulated losses over 2008-09 and 2013-14-15 about Rs. 2.3 lakh crores. Central Public Sector EnterprisesAccumulated losses of sick units as of 2013-14: Rs1.04 lakh crore. Administrative Schemes Number of central sector and centrally sponsored schemes increased from 908 in 2006-07 to 1086 in 2014-15. PRIVATE SECTOR SteelCost of production 50-75% higher for few inefficient firms in comparison to global norms. Infrastructure (few large groups)As of FY15 the average interest cover is about 0.3. Small SavingsImplicit subsidy to well-off: Rs11,900 crore. ECONOMY WIDE Trade Liberalisation Nearly highest restrictions on imports; gains from liberalisation of goods and services estimated at 1% of GDP Labour Not enough big firms and too many small and inefficient firms (Hsieh & Klenow, 2014; Bloom and van Reenen(2010) Why is Exit Difficult? Interests: Diffused beneficiaries, concentrated losers Institutions—weak and strong Weak: Wilful defaulters Strong: Bureaucratic paralysis created by referee institutions Ideas/Ideology Protecting vulnerable in a poor economy “Sanctification of the small” Agriculture:Diversify to pulses and greater market integration Average Yield of Pulses From cereal-centric, regionally-concentrated, and input-intensive policies to… …..pulses & oilseeds, regionally-spread, “more for less from inputs,” and “better price for farmers” Trade Policy and FTAs : How should India respond to mega- regional agreements TTP coverage 30% of world GDP 33% of world trade Per cent of small farmers paying black market price and Average price paid higher than MRP Fertiliser (Urea): The black market and leakages Policies lead to black-market and hurt the small farmer 80 per cent of small farmers buy urea at prices greater than MRP They pay 50% greater than the administered price Of total urea subsidy (Rs50,300 Cr) i.24% goes to inefficient firms (Rs12000 Cr) ii.of the remaining 41% get diverted (Rs15,700 Cr) iii.of the remaining 24 % goes to large farmer (Rs5400 Cr) iv.only 35% goes to small farmers (Rs17100 Cr) Time is ripe for liberalizing imports of urea and for implementing JAM….. Small Famer 0 10 20 30 40 50 60 70 80 90 % of farmerprice paid higher than MRP (%) Power: Complex tariff schedules; One price for petroleum but 100 prices for powerCons umer Category Energy Charge (Rs /Unit) Cons umer Category Energy Charge (Rs /Unit) Cons umer Category Energy Charge (Rs /Unit) LT-I:DOMES TIC (Teles copic)LT-V:AGRICULTURE **S EAS ONAL INDUS TRIES (off s eas on Tariff) LT I(A):Upto 50 Units /Month1.45LT-V(A):AGRICULTURE WITH DS M MEAS URES 11 kV7.25 LT I(B):>50 and upto 100 Units /MonthCorporate Farmers & IT As s es s es2.5033 kV6.59 Firs t 50 Units1.45W et Land Farmers (Holdings >2.5 acre)0.50132 kV & Above6.33 51-100 Units2.60Dry Land Farmers (Connections > 3 nos .)0.50TIME OF DAY TARIFFS (6 PM to 10 PM) LT I(C):>100 and upto 200 Units /MonthW et Land Farmers (Holdings ≤ 2.5 acre)0.0011 kV7.07 Firs t 502.60Dry Land Farmers (Connections ≤ 3 nos .)0.0033 kV6.62 51-1002.60LT-V(B):AGRICULTURE WITHOUT DS M MEAS URES 132 kV & Above6.20 101-1503.60Corporate Farmers & IT As s es s es3.50HT-I(B):FERRO ALLOY UNITS 151-2003.60W et Land Farmers (Holdings >2.5 acre)1.0011 kV5.68 LT I(D):Above 20 0 Units /MonthDry Land Farmers (Connections > 3 nos .)1.0033 kV5.23 Firs t 502.60W et Land Farmers (Holdings ≤ 2.5 acre)0.50132 kV & Above4.81 51-1003.25Dry Land Farmers (Connections ≤ 3 nos .)0.50HT-II:OTHERS 101-1504.88LT-V(C):OTHERS11 kV7.25 151-2005.63Salt farming units upto 15HP3.7033 kV6.59 201-2506.70Rural Horticulture Nurs eries upto 15HP3.70132 kV & Above6.33 251-3007.22LT-VI:S TREET LIGHTING AND PWSTIME OF DAY TARIFFS (6 PM to 10 PM) 301-4007.75LT-VI(A):S TREET LIGHTING11 kV8.30 401-5008.27Panchayats5.6433 kV7.64 Above 5008.80Municipalities6.16132 kV & Above7.38 LT-II:NON DOMES TIC/COMMERCIALMunicipal Corporations6.69HT-III:AIRPORTS ,BUS S TATIONS AND RAILWAY S TATIONSLT II(A):Upto 50 Units /Month5.40LT-VI(B):PWS S CHEMES11 kV6.91 LT II(B):Above 50 Units /MonthPanchayats4.5933 kV6.31 Firs t 506.63Municipalities5.64132 kV & Above6.01 51-1007.38Municipal Corporations6.16TIME OF DAY TARIFFS (6 PM to 10 PM) 101-3008.54LT-VI(C):NTR S ujala Padhak am4.0011 kV7.96 301-5009.06LT-VII:GENERAL33 kV7.36 Above 5009.59LT-VII(A):GENERAL PURPOS E6.86132 kV & Above7.06 LT II(C):ADVERTIS EMENT HOARDINGS11.58LT-VII(B):RELIGIOUS PLACES (CL ≤ 2 KW )4.70HT-IV: Govt., LIFT IRRIGATION, AGRICULTURE AND CPWSLT-III:INDUS TRYLT-VIII: TEMPORARY S UPPLY9.90Govt. Lift Irrigation & Agriculture5.64 Indus try (General)6.38HT-I:INDUS TRYCompos ite W ater Supply Schemes4.61 Seas onal Indus tries (off s eas on)7.09HT-I(A): INDUS TRY GENERALHT-V:RAILWAY TRACTION6.68 Pis ciculture/Prawn culture4.6311 kV6.02HT-VI:TOWNS HIPS AND RES IDENTIAL COLONIES5.96 Sugarcane crus hing4.6333 kV5.57HT-VII:GREEN POWER11.32 Poultry farms5.63132 kV & Above5.15HT-VIII:TEMPORARY Mus hroom & Rabbit Farms5.63INDUS TRIAL COLONIESRURAL ELECTRIC CO-OPERATIVES Floriculture in Green Hous e5.6311 kV5.96Kuppam0.24 LT-IV:COTTAGE INDUS TRIES & OTHERS33 kV5.96Anakapally1.38 a) Cottage Indus tries upto 10 HP3.75132 kV & Above5.96Chipurupally0.22 b) Agro Bas ed Activity upto 10 HP3.75 0 0.5 1 1.5 2 2.5 3 3.5 TNAPWBHRMPDLGJTLMHORKAPBCHBRUTJHUPHPRJKLJK Rs/kWh Power: Tariff and non-price regulations impeding one market for Indian power Cross Subsidy Surcharge imposed by states for purchasing electricity from power exchange, 2015-16 Structural Changes in LabourMarkets •Challenge is to create “good”—safe, productive, well-paying, dignified— jobs •These tend to be in formal sector •Three developments •Contractualisationof labour •Competitive federalism •Relocation of labour-intensivemanufacturing to second tier cities and towns •Mandatory deductions from employees’ salaries higher for poor than rich workers (15% versus 0.5%) Strengthening the State: Fiscal Relations with Rich and Poor Share as per cent of GDP CountryTotal Tax Total Expenditur e Expenditur e in human capex* Income tax Individual Income tax Property tax Indirect Tax China19.429.77.25.3--2.012.7 India16.626.65.15.62.10.810.1 Brazil35.640.211.07.32.32.015.7 Korea24.320.08.47.13.72.57.5 Vietnam22.228.08.88.4------ South Africa28.832.010.715.0--1.410.2 Turkey29.337.37.25.94.11.413.5 Russia23.038.77.27.2--1.17.1 UK32.941.413.411.79.14.010.8 US25.435.713.312.09.82.94.4 EMEs Avg21.430.97.57.42.21.010.8 OECD Avg34.242.811.611.59.51.911.0 Does India Under-tax and Under-spend ? Yes, …..Actually No Yes, in a simple comparison 0 5 10 15 20 25 30 35 tt+10t+20t+30t+40t+50t+60 Path of tax ratios-India and US (2 periods) US (1870-1910)US (1930-1990)India (1951-2011) PostGreat Depression America Independent India Post civil-war America Actually, No because India is a young democracy which did not experience upheavals (war) Fiscal capacity: But number of taxpayers unusually low Theratiooftaxpayerstovotersis~4percentwhileitshouldbe~23per centforacountryatitslevelofeconomicandpoliticaldevelopment Solutions:Notincreasingexemptionlimits Buildinglegitimacyinstate:Deliveringpublicgoodsforall;reducingbounties forwell-off;andtaxingwell-offregardlessofsourceofincome 0 10 20 30 40 50 60 70 80 90 100 NorwaySwedenCanada Netherlands AustraliaPortugalBelgiumPolandEstoniaFranceMaltaAustriaSlovenia NZ Lithuania US HungaryGreeceItaly Luxembourg SpainFinlandGermanySingaporeLithuaniaTaiwanJapan ThailandTajikistanCzech RepVietnamBulgariaPhillipines Brazil UK Latvia Colombia IrelandKoreaCyprusIsrael S.AfricaMalaysia ChileRussiaIndia RomaniaMexicoArgentinaIndonesiaTurkey Number of taxpayers to voting age population (Per cent) 0 50 100 150 200 250 1949-501955-561960-611970-711971-721972-731973-741975-761980-811985-861990-911991-921995-961997-981998-991999-002000-012001-022002-032003-042004-052005-062006-072007-082008-092009-102010-112011-122012-132013-142014-152015-16 Thousands Exemption limit and per-capita income (Rs, current prices) Exemption limitPer capita income Piketty in India: Growing concentration of incomes at the top (till 2013) 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 Share of 1%Share of 0.5%Share of 0.1% Table: Top Personal Income Distribution Share of top 1 percent Share of top 0.5 percent Share of top 0.1 percent 199820121998201219982012 USA15.218.911.614.76.28.4 UK12.512.79.19.24.44.6 India9.012.67.09.63.65.1 Bounties for the Well-off 7 areas where the “Well-off ” are subsidised: Kerosene (Rs. 5,501 crore) Railways (Rs. 3,670 crore) Electricity (Rs. 37,170 crore) LPG (Rs. 40,151 crore) Gold, (Rs. 4,093 crore) Aviation turbine fuel (Rs. 762 crore) Small Savings (Rs. 11,900 crore) TOTAL: ~Rs. 1 lakh crore Who Benefits from Tax Benefits? Not Middle Class, not Rich but the Mega Rich 10%tax bracket starts at top 5.8percentile of the income distribution 20%tax bracket starts at top 1.6percentile of the income distribution 30%tax bracket starts at top 0.5percentile of the income distribution Large returns on early life investments in Mother & Child Tomorrow’s worker is today’s child or foetus: Maternal and early-life health investments have very high long-run (growth) returns Effective interventions include Providing nutrition to pregnant mothers Reducing open defecation (Swachh Bharat) mission key to reducing malnutrition Increasing effectiveness of interventions requires changing social norms and behaviour Spreading JAM across India’s economy •JAM (Jan Dhan-Aadhaar-Mobile) has spread over the past year Jan Dhan& Aadhaarrespectively created 3 lakh & 5 lakh accounts per day in 2015 750 800 850 900 950 1,000 140 150 160 170 180 190 200 210 AadhaarJan Dhan The thickening of JAM --Jan Dhan& Aadhaarcoverage over time AadhaarJan Dhan•DBT in LPG has been a big success 24% fiscal savings Limited exclusion of the poor Where Next to JAM? •Way Forward for JAM? •Improve financial connectivity in rural areas by developing BCs and mobile banking •Meanwhile move forward on important sectors which centercontrols: Fertiliser Government programs (eg. MGNREGA) How prepared are states to JAM? See JAM preparedness indices UrbanRural Conclusion Last year’s Survey: Robust, decentralized democracies outside of crises will undertake “incremental” reforms Achievements: A number of individually incremental but collectively meaningful reforms have been enacted Pending agenda •GST •Strategic disinvestments •Twin Balance Sheet •Subsidy rationalization (rich and poor) The promise of India •Accelerated structural reforms at the center •Competitive federalism at the states •Good economics becoming good politics all over India For now, But not indefinitely, The Sweet Spot Created by a Strong Political Mandate, But Recalibrated to account for a Weaker External Environment, Is Still Beckoningly There.