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

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GST – Concerns

• Compliance burden

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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

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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

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Cereals or pulses?

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Deflation or Disinflation?

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Deflation or Disinflation?

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Farm Loan Waiver Scheme – Good Politics, Bad Economics

Image source – The Hindu

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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

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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

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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

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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)

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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

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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

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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

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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

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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

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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

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Demonetization

• Was done • To prevent usage of the cash

• To promote digital modes of payment

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Demonetization – historical trends in money supply

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Demonetization

Promoting digital payments• Excluded section

• Less affluent

• Affluent

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Demonetization

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Demonetization

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Demonetization – Cash is king?

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Demonetization – Income Tax Compliance

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Demonetization – Impact

• GDP

• Informal sector

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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

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Twin Balance Sheet Problem• Telecommunications – concerns

• The bottom-line has been affected

• The ARPU (Average Revenue Per User) has come down

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Twin Balance Sheet Problem - Solutions (will be covered in chapter 3)

• 4R Solution

• Banking Regulation Act

• Prompt Corrective Action (PCA)

• Insolvency and Bankruptcy Code

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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

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Chapter 2 – Fiscal Developments

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Chapter 2 – Fiscal Developments - Receipts

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Tax Revenues

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Receipts - Disinvestment

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Chapter 2 – Fiscal Developments - Expenditure

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Revenue Expenditure

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Aggregate Budgetary Expenditure

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Deficits

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FRBM Act 2003

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R K Singh Committee

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R K Singh Committee

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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

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