A day ahead of the national budget for this fiscal, the Economic Survey 2013-14 tabled in parliament by Finance Minister Arun Jaitley, also suggested a series of measures that must form the next phase of economic reforms to recapture the growth momentum and remove the problems that undermine the country’s long-term potential.
India’s economic growth fell below 5 percent in the past two consecutive years — the worst performance in almost three decades. The growth slowdown in the last two years was broad-based, affecting in particular the industry sector, the survey observed.
The report — normally authored by the chief economic advisor in the finance ministry, but with the post lying vacant, compiled this time by Finance Secretary Arvind Mayaram — called for the revival of business sentiments as that would be at the heart of restarting the investment cycle and pushing economic growth.
“There has been increasing concern about the difficulties faced by firms operating in India. In a purely economic sense, it is easy to explain the actions of a government that restricts firms in certain ways in order to address market failures,” the survey said.
“However, the Indian landscape features numerous government interventions that are not connected to market failures. Therefore, there is immediate need to simplify processes including those related to tax policy and administration.”
On inflation, it said both wholesale as well as retail inflation were likely to decline by the end of 2014. But it warned that the prices may spike if monsoon remain sub-normal. There are risks to the outlook for inflation from a possible sub-normal monsoon during 2014-15 as predicted by the India Meteorological Department on account of the El-Nino effect, possible step up in the pass-through of international crude oil prices, and exchange rate volatility.
Moderation in inflation would ease the monetary policy stance of the Reserve Bank of India (RBI) and revive the confidence of investors, and with the global economy expected to recover moderately, particularly on account of performance in some advanced economies, the Indian “economy can look forward to better growth prospects in 2014-15 and beyond”.
Downside risks to the economy remain from a poor monsoon, external environment and poor investment climate.
The survey points out that the fiscal situation of the country is worse than it appears, as the government managed to contain the fiscal deficit at 4.5 percent of GDP in the financial year 2013-14 largely by cutting plan and capital expenditure, which is unsustainable.
The annual document said fiscal consolidation remains imperative for the economy, both in the current context and the years to come with the emphasis on maintaining the quality of adjustment. It is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure to GDP ratio, in view of the large unmet development needs, the report said.
It said addressing the risk of food, fertilizer and petroleum subsidies is critical. “Another challenge lies in improving tax buoyancy, and overall shortfall in non-debt receipts could be contained with greater efforts at mobilisation and reforms.”
The survey called for putting public finances on the sustainable path through fiscal correction. It also called for a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, greater transparency and improved budgetary management. It argues that improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment.
To control food inflation, the survey suggested the need for restoring economic freedom of farmers by allowing them to be part of a competitive national market.
“Rationalisation of subsidies on inputs such as fertilizer and food is essential. Government needs to eventually move towards income support for farmers and poor households, so that market forces are able to respond to changes in consumption and technology.”
It also said direct cash transfers is the right way to subsidise soil nutrients and that fuel prices must be market driven.
In recent years, the country’s tax policy, especially after changes were made in capital gains levy with retrospective effect, have come under sharp criticism from both domestic and overseas investors. The survey highlighted the need for simple, predictable and stable tax regime, and pushed for an early implementation of the related reforms like Goods and Services Tax (GST) and Direct Taxes Code (DTC).
It suggested that the government expenditure reform should involve three elements: Shifting subsidy programmes away from price subsidies to income support, a change in the focus of government spending towards provision of public goods, and a focus on outcomes through an improvement in systems of accountability.
According to the survey report, the country will require a whopping $1 trillion investment in infrastructure over the next five years. “The real challenge is not only to identify a core set of projects that are crucial for accelerating overall economic growth but also to ensure channelisation of investment for such viable infrastructure projects.”
Services sector that contributes around 57 percent to the GDP has come under pressure in the past two years due to continued global and domestic slowdown. However, early shoots of revival are visible in 2014-15 with signs of improvement in some key areas like IT, aviation, transport logistics, and retail trading, it said.
Economic survey highlights
* Economy likely to grow 5.4-5.9 percent in 2014-15, overcoming the sub-5 percent growth of the last two years
* Wholesale Price Index inflation fell to three-year low of 5.98 percent during 2013-14
* Consumer Price Inflation also showed signs of moderation
* Both Wholesale and Consumer Price Inflation expected to go downward
* Balance-of-payments position improved dramatically in 2013-14 with the current account deficit (CAD) at $32.4 billion (1.7 percent of GDP) as against $88.2 billion (4.7 percent of GDP) in 2012-13
* Annual average exchange rate of the rupee went up from 47.92 per dollar in 2011-12 to Rs.54.41 per dollar in 2012-13 and further to Rs.60.50 per dollar in 2013-14
* Due to higher procurement, foodgrain stocks in the Central Pool stood at 69.84 million tonnes as on June 1, 2014; India in anomalous situation with large stocks of foodgrain with high food inflation
* Foreign exchange reserves increased from $292 billion at end-March 2013 to $304.2 billion at end-March, 2014
* Fiscal deficit for 2013-14 contained at Rs.508,149 crore (provisional), 4.5 percent of the GDP; corresponding figure for 2012-13 was 4.9 percent.
* Primary deficit for fiscal 2014-14 estimated at 1.2 percent of the GDP; revenue deficit pegged at 3.2 percent
* Revenue receipts in 2013-14 at Rs.1,015,279 crore, 8.9 percent of the GDP.
*Gross tax revenue in 2013-14 provisionally estimated at Rs.1,133,832 crore – 10 percent of the GDP – a decline of 0.2 percent over the previous year, mainly due to poor performance of indirect taxes
* Indirect tax collection for 2013-14 at Rs.496.231 crore – 4.4 percent of the GDP – against Rs.473,792 crore in 2012-13, below the 18 percent target, mainly on account of the general economic slowdown
* Direct tax collection for 2013-14 at Rs.633,473 crore, 5.6 percent of the GDP
* Non-tax revenue during 2013-14 at Rs.199,233 crore, a significant increase of about 45 percent
* Non-debt capital receipts which include recoveries of loans, disinvestment receipts and miscellaneous receipts decreased to Rs.36,644 crore in 2013-14
* Disinvestment programme had limited success due to subdued market conditions and yielded Rs.27,555 crore
* Sharp fall in trade deficit by 27.8 to $ 137.5 billion; in FY 2014-15, first quarter trade deficit declined by another 42.4 percent
* Exports grew 4.1 percent over negative growth of 1.8 percent in 2012-13
* Exports logged double digit growth in May, 2014 after a gap of 6 months
* Imports dropped by 8.3 percent after steep slowdown during FY 2012-13; trend continues in April-May, 2014 as imports fell by 13.2 percent
* Following government intervention, gold and silver imports fell by 40.1 percent to $33.4 billion in 2013-14
* Industry grew by just 1 per cent in 2012-13 and slowed further in 2013-14, posting a modest increase of 0.4 per cent
* During 2013-14, FDI inflow (including equity inflows, reinvested earnings and other capital) was $36.4 billion. Net FDI inflows had been $21.6 billion during 2013-14
* Overall gross bank credit flow to industry increased by 14.9 percent in 2013-14, lower than the 20.9 percent in 2011-12 and 17.8 percent in 2012-13
* Policy focus now needs to target key growth drivers in the short term. Crucial drivers can be revival of private corporate sector investment, pushing ahead with critical reforms and removing infrastructure bottlenecks
* Near-term industrial outlook is conditional on continued improvements in the policy environment and quick return to peak investment rate
* With improvement in overall macroeconomic environment, industry is expected to revive and growth can accelerate gradually over the next two years
* Agricultural exports grew by 5.1 percent in 2013-14 over 2012-13 to $37,292 million; exports of marine products alone increased by 44.8 percent in the same period
* Since opening of rice exports in 2011, there has been a surge from $2,575 million in 2010-11 to $7,742 million in 2013-14.
*Exports of total dairy, poultry, meat, and marine products doubled their share in agricultural exports between 2008-09 and 2013-14
* During the five years ending 2012-13, food processing sector grew faster than the agriculture sector at an average annual rate of around 8.4 percent
Agricultural credit flow achievement was Rs.730,765 crore against the target of Rs.700,000 crore in 2013-14.
* Public expenditure – public investments and input subsidies – ceding its share in total Gross Capital Formation of the agricultural sector to the private sector and was 14.7 percent in 2012-13. As a percentage of agricultural GDP also private investment has been rising and was 18.1 percent in 2012-13
* Balance of Payments (BoP) position improved dramatically in 2013-14, particularly in the last three quarters; sustaining this in the medium term a challenge
* India has second fastest growing services sector with Compound Annual Growth Rate of 9 percent, just below China’s 10.9 percent during 2001-2012
* India ranked 12th in terms of services GDP in 2012 among the world’s top 15 countries in terms of GDP. While services share in world GDP was 65.9 percent and in employment was only 44 percent in 2012, in India, it was 56.9 percent and 28.1 percent
* Services constitute a 57 percent share in GDP at factor cost (at current prices) in 2013-14, an increase of 6 percent over 2000-01.
* In 2013-14, FDI inflows to the services sector (top five sectors including construction) declined sharply by 37.6 percent to $6.4 billion compared to an overall growth in FDI inflows at 6.1 percent
* Exports: India’s increase in share in world services exports from 0.6 percent in 1990 to 3.3 percent in 2013 was faster than in merchandise exports. Exports of software services accounted for 46 percent of India’s total services exports, decelerated to 5.4 per cent in 2013-14; travel, accounting for a nearly 12 percent share, witnessed negative growth of 0.4 per cent.
* Passage of PFRDA Act, shift of commodity futures trading into the finance ministry and the presentation of the FSLRC report were the three major milestones of 2013-14
* FSLRC, in its report, has given wide-ranging recommendations, broadly in the nature of governance enhancing principles for enhanced consumer protection, greater transparency in the functioning of financial sector regulators in terms of their reporting system, greater clarity on their interface with the regulated entities and greater transparency in the regulation making process by means of mandatory public consultations and incorporation of cost benefit analysis, among others
* Gross NPAs of banks registered a sharp increase. Overall NPAs of the banking sector increased from 2.36 percent of credit advanced in March 2011 to 4.40 percent of credit advanced in December 2013.
* RBI has identified infrastructure, iron and steel, textiles, aviation and mining as stressed sectors
* New Pension System (NPS), now National Pension System, represents a major reform of Indian pension arrangements, and lays the foundation for a sustainable solution to ageing in India by shifting to an individual account, defined-contribution system.
* Till May 7, 2014 67.11 lakh members have been enrolled under the NPS with a corpus of Rs. 51,147 crore
* Swavalamban Scheme for workers in the unorganized sector launched in 2010, extended to five years for the beneficiaries enrolled in 2010-11, 2011-12, and 2012-13; benefits of co-contribution would be available till 2016-17.
* Long-term external debt accounts for 78.2 percent of total external debt at end-December 2013 against 76.1 percent at end-March 2013. Long-term debt at end-December 2013 increased by $25.1 billion (8.1 percent) over the level at end-March 2013 while short-term debt declined by $4 billion (4.1 percent), reflecting a fall in imports
* Fiscal consolidation remains imperative for the economy
* Fiscal consolidation recommended through higher tax-GDP ratio then merely reducing the expenditure-GDP ratio
* Proactive policy action helped government remain in fiscal consolidation mode in 2013-14
* Total outstanding liabilities of the central and state governments decline as a proportion of GDP (IANS)
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