Bold Survey, sombre message NEW DELHI DIARY

Last year, the pre-Budget Economic Survey broke new ground. In addition to the main chapter outlining the chief economic advisor’s outlook for the Indian economy, its prospects and challenges, the Survey contained as many as 10 new chapters that focused on new ideas, issues and challenges that needed to be analysed so that the government could frame appropriate policy responses to them. That document was hailed as a bold attempt at raising the level of the government’s internal debate on economic policy issues and taking it beyond the confines of what is usually understood by conservatism and political correctness.

The reform of the Economic Survey last year, however, was restricted to only the first volume, which contained those 11 chapters. There was a second volume that contained all the sector-wise chapters along with a section on data. No significant improvement was noticed in the presentation of data or in the narration of key developments in those sectors like trade, investment, agriculture, industry, infrastructure and social sectors. Consequently, much of the discussion on last year’s Economic Survey was focused on the first volume and the second volume was largely ignored and even forgotten.

This year, the chief economic advisor has taken a bigger and bolder step. He has presented a single-volume Survey containing 14 chapters that (apart from the one on the economic outlook, prospects and challenges) focuses on 13 core issues encompassing a wide range of areas such as the trajectory of growth, fiscal consolidation, demonetisation and its impact on the economy, corporate and banking stress with particular reference to growing non-performing assets, universal basic income, migration of labour and integration of the Indian market. In terms of the quality of analysis and the coverage of factors having a bearing on the Indian economy, this year’s Survey has surpassed the one presented last year.

Buttherearetwocrucialdifferences.Theabsenceofthe second volume has meant that the government’s detailed analysis of a host of sectors such as agriculture, poverty, climate change and some of the infrastructure areas is missing from the Survey. Also missing are the latest data on many segments of the Indian economy, particularly the infrastructure sector. The good news, however, is that the chief economic advisor has promised to bring out another volume later in the year reviewi ng th epe rformanc eoftheeco nomyduring 2016-17. That will be a standalone document and hopefully will also contain more updated data on the Indian economy. The challenge for him would be to make that document also as interesting and rich with analysis and numbers as the Survey that has been produced now.

The second difference pertains to the tonal quality of the Survey. Last year, the Survey was virtually noncommittal on the need for fiscal consolidation. It had explained the pros and cons of both adhering to the laiddown path of fiscal consolidation as well as of deviating from it. After that detailed analysis, the chief economic advisor had opined that the Budget would “carefully assess these options”, even though his heart wasbelievedtobeinfavourofsomefiscalrelaxationtoprovide the government elbow room to raise investments in key infrastructure sectors. Eventually, the finance minister had favoured the path of fiscal consolidation and had promised a reduction in fiscal deficit to 3.5 per cent of gross domestic product (GDP) for 2016-17, marginally down from 3.9 per cent in the previous year.

The Survey for the current year is clearly more categorical as far as the options the government has with regardtofiscalconsolidation.Ithasexpressedconcernover a strategy that has not paid adequate attention to the need forreducingdebt,asaresultofwhichthedebt-to-GDPratio has not been kept under check. However, it has also expressed concern over the challenges of fiscal consolidation by the states, whose combined Budget size today is larger than that of the Centre. The impact of the Pay Commission recommendations will soon be felt by the states’ finances. The Survey, therefore, recommends that states must be brought under some market-based discipline to rein in their deficits. More importantly, the Survey recommends that the “Centre must take the lead not only in incentivising fiscal prudence by states but also by acting as a model through its own fiscal management”. It remains to be seen whether Finance Minister Arun Jaitley’s Budget on Wednesday pays heed to this advice.

Similar candour and forthrightness are evident in the chapter on demonetisation and its impact on the Indian economy. Remember that the chief economic advisor was never heard commenting on demonetisation ever since it was ordered on November 8. The Survey this year is his reaction to demonetisation. It concedes that the act of annulling the legal validity of 86 per cent of the total currency in circulation is a “radical, unprecedented step with short-term costs and long-term benefits”. It also notes that the liquidity squeeze has been less severe than suggested earlier. That is where, perhaps, the official line ends. The Survey’s recommendations are farreaching by their implications: “Fast, demand-driven remonetisation, further tax reforms, including bringing land and estate into the goods and services tax (GST), reducing tax rates and stamp duties; and acting to allay anxieties about over-zealous tax administration.”

The Survey’s post-demonetisation action plan also shows that it would take a year at least before economic growth can resume its earlier momentum. The impact of demonetisation on growth has been estimated at 0.25-0.5 per cent of GDP, thus bringing economic growth in 2016-17 to around 6.5 to 6.75 per cent, almost the same level as the International Monetary Fund has projected. This will also mean a deceleration in the economy’s growth rate from 7.6 per cent recorded in 2015-16. The Survey’s message to the government is clear: If it wants growth to return to the projected rate of 6.75-7.5 per cent in 2017-18, the government should work on the action plan outlined in the Survey.