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Mainstream, VOL LVI No 8 New Delhi February 10, 2018

Review of Economic Survey 2017-18

Tuesday 13 February 2018

by Sunil Ashra

One of the important features one notices about the new Economic Survey 2017-18 is that it has been restructured almost entirely. Most of the chapterisation of the earlier Economic Survey has been done away with. So a comparative picture from the previous Surveys is difficult to make.

The Survey this year starts with ‘Ten New Facts’ and the first one is the huge increase in the number of individuals and firms who have been filing returns compared to last year. This seems to be a healthy trend if it persists but the flip side is that the tax collections have not kept pace with it. So, more taxpayers but no significant jump in the tax collections. The second point is that the formal sector employment has been much higher than what was previously believed as the new data has been brought in by the Economic Survey team. This is basically the EPFO and ESIC database which is not there in the public domain and needs to be scrutinised better for improved understanding. Will the government and the Survey team agree or will this be made private information? Then it will mean the researchers are discussing the data which is not really comparable. The third point is about trade and growth which, as expected, has been positively associated although this has nothing to do with any government, but is more of an empirical observation. There are a few more points which are more generic in nature and they do not relate to the economy’s or government’s performance as such in recent months.

However, two other points are important. One relates to the climate change aspect and its likely adverse impact on agriculture. This asks for adequate and measured policy response which addresses these issues. The second issue relates to the direct taxes and responsiveness of the government to the citizens’ concerns and as we know the state and municipal level of government collects mostly indirect taxes whereas the Centre does collect the direct taxes and it has been higher than the indirect tax collections since 2007. But the way tax dodging is being observed across countries as well as India through DTAA and other methods, this is going to be a serious challenge. With increased financial globalisation the tax dodging has reached alarming proportions and it is also getting partly reflected in the rising levels of inequality in India and the globe. This is not just leading to a fall in potential growth but also rising unemployment.

The data in the Survey quite clearly shows the fragility of industrial growth which partly has been the result of high real interest rates. The investment rate (it is at a 13-year low) as well as the bank credit growth has been falling. This is not surprising considering the obsession of the RBI and the mandate that has been thrust upon it of ‘inflation targeting’. So the moment inflation inches up a bit the Central bank gets extra cautious and lets interest rates rise. Rising oil prices may aggravate the situation in the coming days.

The other fallout of this has been high real interest rates has made the rupee appreciate by about 20 per cent which has attracted the volatile foreign investment in the Indian debt and equity market. But this has made domestic investment suffer, especially in the SME and farm sectors (the main contributors to employ-ment and output). Demonetisation and GST also added to their woes.

The other fallout of the appreciating rupee has been that the exports are dis-incentivised and current account has worsened. (Figures 11 and 12 in the Survey show the impact of rising REER on the services as well as manufacturing trade balance over the last 12 quarters. Many, including the Deputy Chairman of Niti Aayog, and others have written about it that the rupee is overvalued (Rajiv Kumar, 2016, Bhagwati and Barua, 2016) but somehow the message does not ring the bell. The Survey summarises the different stakeholders and their preference for the strong rupee and it shows that except for the foreign investors and laypersons hardly anyone else wants it. It seems the strong rupee that we have adopted is intended to respond to the ‘foreign investors’ preferences. We know most of the foreign investment in India comes from the tax heavens with Mauritius and Singapore at the top of the list. P-notes and other forms of investments are the main tool to avoid taxes and get high returns from the Indian economy compromising our national interest.

A disturbing fact highlighted in the Survey is that there has been no increase in the farm sector income in the last four years. (Figure 7) This is partly due to demonetisation and partly due to the knee-jerk reaction to the agricultural crisis. Farmers growing potatoes, tomatoes and many other crops are facing near zero prices due to good crops and the producers of pulses are going to be facing a similar situation soon. We were made to believe that the farm sector income will double in five years but only a miracle will make that happen.

The first graph on the Macroeconomy chapter of the Survey shows the booming and bubbling stock market with rising yields on the govern-ment securities indicating a potential looming crisis. The Survey is candid on it and that should be appreciated. The twin balance-sheet problem has been the reason argued by the Survey for the high NPAs. Using this as an excuse it seems the privatisation of banks might be initiated. The story has been similar for the telecom and airlines: when the public sector starts to do well their wings are clipped and they are made sick and the sector becomes open to the private (foreign) players. Crony global capitalism using Indian state machinery. Air India, which is turning around, is up for grabs and is likely to be used to reduce the fiscal deficit and meet the target as also the privatisation of oil companies.

Another serious concern raised by the Survey is the quality of education. Here the comparison with China expreses our weaknesses. In India, not even a quarter of the population has the required quality whereas China has reached the 90 per cent level. So, in growth terms we may have crossed China but in terms of level and potential we have miles to go before we sleep.

The author is a Professor of Economics, Management Development Institute (MDI), Gurgaon.

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