The Economic Survey of India, 2014-15

The Economic Survey of

India, 2014-15Madras School of Economics

April 8, 2015

“In the end, it is ideas not vested interests that are dangerous for good and evil”: Value of Economic Survey = 42 billion!!!

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Ind

ex

Po

ints

Time

Economic Survey

2014-15 Tabled

12:01 PM

CEA Press

Conference on

Economic Survey

3:10PM Budget Speech

11:00 AM

27th February 28th February

Structure

Volume 1: Analytical, forward looking, and prescriptive

Volume 2: Summary of current economic situation

Chapters

The Economic Survey should be seen as:

i. a repository of facts and data

ii. a technical analysis, and

iii. an ideas-generating document

Big Picture: India’s Sweet Spot

A moment that comes “but rarely in history”

Political mandate plus benign external environment = Possibility of

achieving sustainable double-digit growth

Fundamental objectives:

“Wipe every tear from every eye”

Create opportunities for young, middle class, and aspirational India

How can this growth be achieved?

Policies for Double-Digit Growth

Macroeconomic Stability

Fiscal Federalism and Consolidation

Targeted Subsidies: the Jan-Dhan, Aadhaar, Mobile (JAM) Solution

Private Investment?

Public Investment: Railways

Sound and Effective Banking

Skill India to complement Make in India

Creating a Single Agricultural Market

Green India

Gender Equality

Macroeconomic Outlook: Dramatic Improvement in

Macroeconomic Stability

0

2

4

6

8

10

12

14

16A

pr-

13

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

WPI and CPI Inflation (%)

WPI headline CPI NS headline CPI NS food & beverages

0

2

4

6

8

10

12

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14*

2014-15*

Quarterly GDP Growth, (percent)

50556065707580859095

01-J

an-1

3

01-M

ar-

13

01-M

ay-1

3

01-J

ul-

13

01-S

ep-1

3

01-N

ov-1

3

01-J

an-1

4

01-M

ar-

14

01-M

ay-1

4

01-J

ul-

14

01-S

ep-1

4

01-N

ov-1

4

01-J

an-1

5

Daily Stock Prices (Nifty Index), factor of 100

-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0Current Account Balance & Net Foreign Investment (% GDP)

Current Account Balance/GDP Net Foreign Investment/GDP

International Context: India is an attractive destination

-4

-3

-2

-1

0

1

2

3

4

5

2010 2011 2012 2013 2014 2015

Brazil Indonesia India (New GDP) China Russia Mean (BBB Rating) India (Old GDP) Mean (A Rating)

Rational Investor Ratings Index, Selected Emerging Market Countries

Reforms: Several Cumulating Actions, Some Game

Changers

Deregulating diesel prices, raising gas prices and taxing energy products

Replacing the cooking gas subsidy by direct transfers on a national scale

Passing an ordinance to reform the coal sector via auctions

Building political consensus on Goods and Services Tax (GST)

Financial inclusion under Pradhan Mantri Jan Dhan Yojana -- over 12.5 crore new accounts

opened

Continuing the push to extending coverage under the Aadhaar program

Increasing FDI caps in defence

Eliminating the quantitative restrictions on gold

Passing an ordinance to make land acquisition less onerous, thereby easing the cost of doing

business, while ensuring that farmers get more than fair compensation

Passing an ordinance increasing the FDI cap in insurance to 49 percent

Passing the Mines Ordinance- significant step in revival of stagnated mining sector in the country

Inflation: Structural Shift. Forecast = 5-5.5%, More Space for Monetary Easing

0

5

10

15

20

25

Nov-0

5

Nov-0

6

Nov-0

7

Nov-0

8

Nov-0

9

Nov-1

0

Nov-1

1

Nov-1

2

Nov-1

3

Nov-1

4

Rural Wage Growth, year on year (%)

50

60

70

80

90

Dec-1

4

Feb-1

5

Apr-

15

Jun-1

5

Aug-1

5

Oct-

15

Dec-1

5

Feb-1

6

Apr-

16

Jun-1

6

Aug-1

6

Oct-

16

Dec-1

6

Feb-1

7

Apr-

17

Jun-1

7

Aug-1

7

Oct-

17

Dec-1

7

Future Price of Brent Crude up to December 2017 (US$ per barrel)

Future Price as on 1 December 2014Future Price as on 1 January 2015Future Price as on 11 February 2015

4

6

8

10

12

14

16

18

Sep

-08

Dec

-08

Mar

-09

Jun-0

9

Sep

-09

Dec

-09

Mar

-10

Jun-1

0

Sep

-10

Dec

-10

Mar

-11

Jun-1

1

Sep

-11

Dec

-11

Mar

-12

Jun-1

2

Sep

-12

Dec

-12

Mar

-13

Jun

-13

Sep

-13

Dec

-13

Mar

-14

Jun-1

4

Sep

-14

Dec

-14

Media

n Infl

ati

on R

ate

(%

)

Household Inflation Expectations, Sep 2008 to Dec 2014 (%)

Current perception Three-month ahead One-year ahead

Growth Forecast: 8.1-8.5 % for 2015-16. Balance of

evidence shows India is recovering robustly not surging

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2012-13 2013-14 2012-13 2013-14 2012-13 2013-14

Growth new series- Growth old series Deflator new series-Deflator old series Nominal growth new series -Nominalgrowth old series

Difference between New & Old Estimates of Growth, 2012-13 and 2013-14 (%)

Agriculture & allied Industry Manufacturing Services Total

External Sector: Improved Current Account Deficit. Surfeit

not Scarcity of Inflows may be Challenge?

67

69

71

73

75

77

100102104106108110112114116

41456

41487

41518

41548

41579

41609

41640

41671

Mar-

14

Apr-

14

May-1

4

June-1

4

July

-14

Aug-1

4

Sep-1

4

Oct-

14

Nov-1

4

Dec-1

4

Jan-1

5

Nominal and Real Effective Exchange Rates-Export-Based Indices

REER - Export Based Weight NEER - Export Based Weight (RHS)

250

260

270

280

290

300

310

320

330

340

Jan-1

3

Mar-

13

May-1

3

Jul-

13

Sep-1

3

Nov-1

3

Jan-1

4

Mar-

14

May-1

4

Jul-

14

Sep-1

4

Nov-1

4

Jan-1

5

Foreign Exchange Reserves (US$ billion)

Reserves Reserves adjusted for outstanding forward position

The Trade Challenge: Stagnating Exports, Deteriorating

External Trade Environment

2

3

4

5

6

7

8

9

10

11

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2040-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0

2010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5*

Exports of Manufactured Goods & Services (% GDP)

Services exports as a proportion of GDP

Manufacturing exports as a proportion of GDP

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5*

Export Buoyancy of Indian Exports Relativeto Foreign Growth

Ratio of service export growth to World GDP growth

Ratio of mfg export growth to World GDP growth

The Fourteenth Finance Commission: Watershed for

Federalism and Public Finances

APBIH

CHH

GUJ

HR

JHA

KAR

KER

MP

MAH

ORI

PUN

RAJ

TN

UPWB

7.7

7.9

8.1

8.3

8.5

8.7

8.9

10.00 10.50 11.00 11.50 12.00

Log F

FC

tra

msf

er

per

capit

a

Log NSDP per capita

FFC transfers per capita and NSDP per capita

Transfers: Tax, Non-Plan and Plan (as % of divisible pool)

Average

(last 3

years)

2014-15

RE

2015-16

BE

States share from FC 37.6 38.1 49.2

Tax Devolution 32 32 42

Non-Plan grants 5.6 6.1 7.2

FC transfers + CAS (Plan transfers) 63.9 62.3 64.0

Cont…

Fiscal Indicators of General Government (% of GDP)

2014-15 RE 2015-16 BE

Capital Expenditure 4.62 5.10

Revenue Deficit 2.86 2.43

Fiscal Deficit 6.86 6.48

RE= Revised Estimates; BE= Budget Estimates;

50

52

54

56

58

60

62

64

2014-15 RE 2015-16 BE

States' Share in National Taxes (%)

Fiscal History Lessons: Control Expenditure,

Improve its Quality

40

45

50

55

60

65

70

0

2

4

6

8

10

12

14

16

Recent Fiscal History, 2002-03 to 2014-15 (Percent of GDP)

Total outstanding liabilities (RHS) Fiscal deficit Revenue expenditure Non-defence capital

Growth drives fiscal

improvement

Loss of fiscal control due to

counter-cyclical tax policy and

high expenditures

Gradual stabilization

The Fiscal Consolidation Path: Growth and Fiscal discipline

are compatible

Medium term

Objective for Fiscal Deficit is 3%

Move towards the golden rule

Expenditure control and shift from revenue to capital expenditure

Growth + GST will ensure medium-term targets are met

Short-term

Pressure for accelerated fiscal consolidation has lessened

Ability conditioned by FFC recommendations

Nonetheless, lessons of expenditure control and switch remain valid

Broader implications

In light of FFC, public finances must be assessed at consolidated (centre + states) level

Are Subsidies Helping the Poor? the JAM Number Trinity Solution

Product Fiscal cost (Cr) Cost (% of GDP) What share of benefits accrue to the poor?

Railways ₹ 51,000 0.57% Poorest 80% constitute 28.1% of total passenger throughfare

LPG ₹ 23,746 0.26% Poorest 50% consume 25% of LPG

Kerosene ₹ 20,415 0.23%41% of PDS kerosene allocation lost as leakage, BPL households

consume 46% of remainder

Fertiliser ₹ 73,790 0.82% Urea and P&K manufacturers derive most economic benefit

Rice (paddy)

₹ 129,000 1.14%

15% of PDS rice lost as leakage, poorest 30% consume 53% of

remainder

54% of PDS wheat lost as leakage, poorest 30% consume 56% of

remainderWheat

Electricity ₹ 32,300 0.36%Poorest 20% consume 45 kWh/month, richest 20% consume 121

kWh/mth

Water ₹ 14,208 0.50%Most water subsidies allocated to private taps, but most poor

households get water from public taps

Sugar ₹ 33,000 0.37%48% of PDS sugar lost as leakage. Poorest 30% consume 44% of

remainder

Total ₹ 377,616 4.24%

The Investment Challenge: Balance Sheet Syndrome with Indian Characteristics Holds Back Private Investment

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Sin

gapore

South

Afr

ica

Russ

ia

Kore

a

Mala

ysi

a

Bra

zil

Chin

a

USA

Japan

India

Germ

any

UK

Debt/Equity of Non-financial corporatesStalled Projects (by value) as a fraction of GDP

Year Government Private Total

2011-12 2.0% 5.7% 7.7%

2012-13 1.9% 6.1% 8.9%

2013-14 1.8% 6.5% 8.3%

2014-15 (till Q3) 1.4% 5.5% 6.9%

0%

10%

20%

30%

40%

Q3 Q4 2Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014

Companies with ICR<1

Companies with ICR <1

Chronic cases (not covering interest in at least 4 quarters)

0

2

4

6

8

10

12

14

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Sep-1

4

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Sep-1

4

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Sep-1

4

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Sep-1

4

Public.Sector Bank Private Sector Bank Foreign Bank All SCBs

Gross NPAs + Restructured (% of Total Advances)

Restructured Standadrd Advavces to Total Advances

GNPA to Total Advances

Banking: Double Financial Repression and not so

Imprudent Lending

Assets

Liabilities

Equity

NPAs

SLR

PSL

-ve rate of

return on

deposits

0

50

100

150

200

250

0 5 10 15 20 25 30 35 40 45 50

Cre

dit

as

a %

of

GD

P

Time from take off

Domestic Credit to GDP Since Takeoff (Percent)

Brazil China India Japan Korea

Banking: Stagnant (because impeded?) Private Banking and

Heterogenous Public Sector Banks

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Total Advances (Fraction)

Public Sector Banks Private Banks Foreign Banks

0

5

10

15

20

25

2002 Q

1

2003 Q

1

2004 Q

1

2005 Q

1

2006 Q

1

2007 Q

1

2008 Q

1

2009 Q

1

2010 Q

1

2011 Q

1

2012 Q

1

2013 Q

1

2014 Q

1

2014 Q

3

NPAs+Restructured Assets (% Total Adv)

Public Sector Banks Private Sector Banks

upper PSB lower PSB

4D’s policy options:

Deregulate (financial repression)

Differentiate (between PSBs)

Diversify (within banking and outside)

Disinter (better exit procedures)

Public Investment: Railways for NDA-II Like Roads for NDA-I?

55

60

65

70

75

80

85

90

95

1990 1995 2000 2005 2010

Capacity Addition (RKM’000)

China

India

44

66

51

65

44

33

0 20 40 60 80

Australia

Canada

China

Russia

US

India*

Modal Share in Freight (%)

Passenger and Freight Yields in some Major Economies

Country

Passenger Service Yield

US Cents/Passenger-km adjusted

for PPP (India=1)

Freight Yield US Cents/Total

Tonne-km adjusted

for PPP (India=1)

India 1.0 1.00

China 2.7 0.58

Russia 6.7 0.75

Skill India to complement Make in India

FeatureRegistered

Manufacturing

Trade,

Hotels, &

Restaurants

Transport,

Storage &

Communications

Financial

Services and

Insurance

Real Estate and

Business

Services, etc.

Construction

High productivity Yes No Not really Yes Yes No

Dynamism in

Productivity within

country

Yes Yes Yes Yes Yes Yes

Dynamism in

Productivity across

countries

Yes, but not for

IndiaNo No Yes Yes Yes

Dynamic sector

absorbs resourcesNo Somewhat Somewhat No Somewhat Yes

Skill profile matches

underlying

endowments

Not really Somewhat Somewhat No No Yes

Tradable Yes No Somewhat Yes Somewhat No

Agriculture: Not 1, not 29, but Thousands of MarketsTaxes/levies/Interest Charges etc.

(% of MSP) in KMS 2013-14

Price after tax over MSP

(Rs.1310/qtl.)

1 Andhra Pradesh* 19.5 1565.45

2 Bihar 6.5 1395.15

3 Chhattisgarh** 9.7 1437.07

4 Gujarat 3.5 1355.85

5 Haryana 11.5 1460.65

6 Jharkhand 3.5 1355.85

7 Karnataka 4 1362.4

8 Madhya Pradesh 4.7 1371.57

9 Maharashtra 3.55 1356.51

10 Odisha*** 15.5 1513.05

11 Punjab 14.5 1499.95

12 Rajasthan 3.6 1357.16

13 Uttar Pradesh 9 1427.9

14 Uttarakhand 9 1427.9

15 West Bengal 3 1349.3

Climate Change: Towards Green India

63.76

139.9

-50.00

-30.00

-10.00

10.00

30.00

50.00

70.00

90.00

110.00

130.00

150.00

May-1

4

Jun-1

4

Jul-

14

Aug-1

4

Sep-1

4

Oct-

14

Nov-1

4

Dec-1

4

Jan 2

- 2

015

Jan 6

- 2

015

Implicit Carbon Tax From Increasing Excise duty on Petrol (US$/tCO2)

Unbranded Diesel Branded Diesel Unbranded Petrol Branded Petrol

Naari Shakti: A stubbornly male India undermining

reproductive autonomy of women

100

105

110

115

120

125

1990 1995 2000 2005 2010

Boys per 100 Girls,1990-2010

China Bangladesh India

Sri Lanka World

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1980-81 1990-91 2000-01 2010-11 2012-13 2013-14

Num

ber

(in '000)

Number of Vasectomies and Tubectomies

Vasectomy Tubectomy

Annual Status of Education Report: Sobering Reading

20

25

30

35

40

45

50

55

60

65

70

2006 2007 2008 2009 2010 2011 2012 2013 2014

Reading & arithmetic abilities of children in Std V ASER 2007-2014: All India rural

% Children in Std V who can read Std II level text

% Children in Std V who can do division

Main Findings of the survey:

48% of Class V student can read Class II

Decline in arithmetic skills.

22% schools have libraries.

Better provision of girls’ toilets.

Rising private school enrolment.

Decline in teacher-student ratio.

Slight decline in actual attendance.

A crisis of learning in primary education in India.

What are Big Bang Reforms?

Post-war cross country evidence suggests that Big Bang reforms

occur during or in the aftermath of a major crisis

Big Bang reforms in robust democracies with multiple actors &

institutions with the power to do, undo & block are exceptions

rather than rule

With a bold policy shift in areas under government control, plus

“a persistent, encompassing, and creative incrementalism” in

other areas can cumulate to a Bang

Thank You!

Paraphrasing Herbert Simon: In a world full of information the

greatest scarcity is the scarcity of attention. Sorry for

aggravating this problem but seek your indulgence and

attention.

Look forward to your comments and suggestions.

Chapters

Volume 1

1. Economic Outlook

2. Fiscal Framework

3. Subsidies and JAM

4. Investment Climate

5. Banking and Credit

6. Public Investment

7. Make in India

8. Market for Agriculture

9. Climate Change

10. FFC

Volume 2

1. State of the Economy

2. Public Finance

3. Monetary Management & Intermediation

4. External Sector

5. Prices, Agriculture & Food Management

6. Industrial, Corporate and Infra

7. Services Sector

8. Climate Change & Sustainable Dev.

9. Social Infra, Employment & Human Dev.

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