India’s Economic Survey to Transform India

Overview

India’s Economic Survey 2016–17, a flagship annual document of the Ministry of Finance, Government of India, reflects the trends in the country's economy, facilitating a better understanding of the resource mobilization and their allocation in the Budget.  It summarizes the performance of major development programs and highlights the policy initiatives of the government and the prospects of the economy in the short to medium term.  The Economic Survey, prepared by the Chief Economic Adviser, Arvind Subramanian, set the scene for Finance Minister Arun Jaitley's fourth annual budget on February 1, 2017. 

The lack of any “big bang” announcements following the demonetization (removal) of the country’s 500 and 1,000 rupee notes ($7.35 and $14.70, respectively) dampened industry expectations to a certain degree.  The Survey states that the adverse impact of demonetization on GDP growth will be transitional and that India’s economy is likely to grow between 6.75 and 7.5 percent in the 2017-18 fiscal year that starts on April 1.

This Insight zeroes in on the key features of India’s Economic Survey, the Budget for this financial year, and its impact on selected industry sectors.  

Highlights of India's Economic Survey

The Economic Survey highlights problems and prospects of India’s economy against which budgetary numbers are finalized.  The last three Economic Surveys have been bullish on India’s growth.  In the Economic Survey for 2014-15, the country was in a “sweet spot.” A newly-elected government and a conducive external environment provided the opportunity to propel India to double-digit growth.  The Economic Survey for 2015-16 highlighted India as a “haven of stability” amidst global disquiet.

As a precursor to Budget 2017, it was expected that two themes would determine the flow of this year’s Survey - the economic impact of demonetization and the ongoing state elections.  The Economic Survey says demonetization has hit India’s growth by 0.25 to 0.5 percent of GDP, but will yield a fiscal “windfall.” It’s not clear as to where this windfall will come from; perhaps from the Jan Dhan (public) accounts.  Mr. Jaitley has steered clear of providing funds to any particular state, but said that the government’s theme -Transform, Energize and Cleanse India - would apply to every state, including those going to the polls. 

The swift, surgical move to demonetize high denomination currency notes in November 2016 took everyone by surprise.  The main objectives were to curb corruption, use of high denomination notes to fund terrorist activities, flush out black money and counterfeit notes from circulation, and promote easier to track “cashless/less-cash” transactions.  The positive aspects: improved transparency; reduced tax burden; and fear created among tax evaders.

If the government accelerates investments in technology infrastructure and links payment mechanisms across value chains, significant progress can be made towards achieving a Digital India.  The pros and cons of the initiative continue to be debated, but the consensus appears to be that while the objectives of demonetization may have been laudable, it caused tremendous inconvenience.

Growth rates as tabled in the Survey:

• Farm sector:  4.1 percent in 2016-17 (up from 1.2 percent in 2015-16)
• Industrial sector: estimated to moderate to 5.2 percent in 2016-17 (from 7.4 percent in 2015-16)
• Service sector: estimated to grow at 8.9 percent in 2016-17

• Goods and Services Tax (GST), other structural reforms: should take the growth rate to 8-10 percent

The Survey suggests a Universal Basic Income (UBI) scheme as an alternative mechanism to reduce poverty, replacing various ongoing social welfare programs. 

Budget 2017-18

Budget 2017-18 heralds three major changes: advancement of date of presentation (previous Budgets were presented end February/early March); merger of railway budget with general budget; and abolition of Plan and non-Plan expenditure.  The Budget proposal is divided into 10 distinct themes: farmers; rural population; energizing youth; poor and underprivileged; infrastructure; financial sector; digital economy; public service; prudent fiscal management; and tax administration.  The Budget allocated more money for welfare schemes, minor tax exemptions for individuals and small firms, with a fiscal deficit of 3.2 percent of GDP.

In tax terms, the theme of Transform, Energize and Cleanse translated into measures to provide impetus to ease the cost of doing business, focus on infrastructure, and tax administrative reforms.  As expected, significant changes were not made in the current regime of indirect taxes, as these will soon be replaced by the GST.  Apparently, substantial progress has been made towards introducing GST and the GST Council has finalized its recommendations on most issues (rates, threshold limits, compensation for states, etc.).

Social Sector

India has declared its commitment to achieve the UN’s Sustainable Development Goals (SDG) by 2030.  The current Budget will continue to consolidate and build on the policy momentum in sectors like skill development, agriculture, livelihood, healthcare, sanitation, empowering women, child development services, etc.  The objective is to revive Brand India by focusing on the “5 Ts” - tradition, talent, tourism, trade, and technology.

The Budget directly or indirectly (by way of taxes) has a bearing on all financial and industrial operations.  We will analyze its impact on a few select industries in India here.

Infrastructure

Planning for the new integrated infrastructure comprises roads, railways, waterways, and civil aviation, Mr. Jaitley said an effective multi-modal transportation system was important for a competitive economy.  He stressed the need for “synergic investments.” This is the first time that a combined budget has been presented after the merger of the railway budget with the annual Budget.  A railway safety fund will be set up, with seed capital provided by the finance ministry.  The railways will increase throughput by 10 percent by upgrading dedicated, high-volume corridors.  Also, the railways will lay 2,175 miles of tracks in 2017-18 as compared to 1,740 miles in 2016-17.

India has a road network of 2.05 million miles, the second largest globally.  In 2017-18, 1,243 miles of coastal connectivity roads will be constructed.  Budget has been allocated for the Pradhan Mantri Gram Sadak Yojana (Prime Minister's Rural Roads Scheme) to connect remote places.  The finance minister also announced a proposed amendment in the Airports Authority of India Act to monetize surplus land to develop airports.

Power

The power sector views the Budget as a mixed bag.  The government has retained its focus on rural electrification and renewable energy; but made no major provisions for thermal power, wind, hydro, and nuclear energy.  The industry had expected some relief in terms of corporate tax and minimum alternate tax (MAT) for the power sector.  Thermal power producers had also expected some relief in terms of the clean energy tax that was imposed last year.  The wind power sector had also hoped for a revision of the generation-based incentive (GBI) for wind generators that expires at the end of March.  But these expectations were unmet.

Laudable Goals

• Full electrification of 18,452 villages identified in 2015 will be achieved by  March 1, 2018

• Setting up of 20 GW of solar power capacity and feeding 7,000 railway stations with solar power

Pharmaceuticals and Healthcare

The Drugs & Cosmetics Rules will be amended to ensure availability of drugs at reasonable prices.  New rules will also be introduced for medical devices, bringing down the cost.  “These rules will be internationally harmonized and attract investment into this (medical devices) sector,” said Mr. Jaitley.  In a recent move, the government brought coronary stents under price control and asked the National Pharmaceutical Pricing Authority to fix its ceiling price.

The Budget increased its allocation for the Ministry of Health and Family Welfare by 27 percent, in part to help transform sub-centers to health and wellness centers; and for maternity and child care etc.  The government also aims to eliminate diseases such as Kala-azar or Leishmaniasis and filaria by 2017; leprosy by 2018; measles by 2020; and tuberculosis by 2025. 

Other Highlights

• Reforms in the medical education sector
• Steps to transform the structure of the regulatory framework for medical education and practice in India

• Two new AIIMS (All India Institute of Medical Sciences) proposed in Jharkhand and Gujarat states

Automotive

The Budget included no major announcements that affect the auto sector from the viewpoints of auto manufacturers and car buyers.  There were expectations of an announcement on the GST rollout that would standardize many aspects of the auto industry; but this (apparently) will happen at a later date.  Reactions from the auto industry have been subdued, with most manufacturers welcoming the Budget, but adding that more needs to be done to boost the sector.  The latest budget allocates 42 percent more funds for producing electric and hybrid cars than did the previous budget.  This helps underscore the government’s intent to improve air quality.

The Society for Indian Automobile Manufacturers (SIAM) says that the Budget has a lot of positives for the automotive industry.  SIAM expects growth in auto industry to rebound through revival of the rural market and increased expenditures on infrastructure, two important factors for the growth of this industry.

Oil & Gas

The government plans to merge state-run oil and gas entities to create a consolidated firm having the strength to compete with international and domestic private oil and gas majors.  The merger will provide the entity “capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders.” The move will require a lot of groundwork to initiate the proposed consolidation before the plan can be executed.

Highlights

• Basic custom duty on liquefied natural gas (LNG) has been cut to 2.5 percent from 5 percent.  This is expected to encourage the use of natural gas, a relatively clean fossil fuel
• Decision to set up strategic crude oil reserves in Chandikhole in Odisha and Bikaner in Rajasthan will increase the strategic oil reserve capacity to 15.33 million tons
• Increased allocation for oil reserves would improve energy security
• Thrust for new LPG connections to poor families

Conclusion

Expectations and anticipation preceded the Budget announcement.  When announced, the reactions were mixed: some were disappointed, some say it could have been better, and a few say that it’s a balanced budget.  Overall, this Budget provides some policy direction and emphasizes the intent to address some of the critical issues in different sectors; but these must be supported with appropriate action.  This growth-oriented Budget will make the economy more competitive and transparent.  Prime Minister Modi said that the Budget “will carry forward the development agenda of the government, generate a new climate of confidence and help the nation to scale new heights."

The intent and the roadmap are in place; it is up to the nation to build a better India.

 

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Keywords: Economic Survey, Budget, Infrastructure, Power, Pharmaceuticals and Healthcare, Automotive, Oil & Gas, ARC Advisory Group.