PIB: Economic Survey and Union Budget 2017-18

Economic Survey: The Constitutional Amendment on GST will create a common Indian market, improve tax compliance and governance and boost investment and growth. 

• The year was marked by two major domestic policy developments-the passage of the Constitutional Amendment, paving the way for implementing the transformational Goods and Services Tax (GST),
• And the action to demonetize the two highest denomination notes.
• The GST will create a common Indian market, improve tax compliance and governance, and boost investment and growth
• It is also a bold new experiment in the governance of India’s cooperative federalism.
• The Survey Report says that demonetisation has had short-term costs but holds the potential for long-term benefits.
• Follow-up actions to minimize the costs and maximize the benefits include: fast, demand-driven, remonetisation; further tax reforms, including bringing land and real estate into the GST, reducing tax rates and stamp duties; and acting to allay anxieties about over-zealous tax administration.
• These actions would allow growth to return to trend in 2017-18, possibly making it the fastest-growing major economy in the world, following a temporary dip in 2016-17.
• In the short-run, world GDP growth is expected to increase because of a fiscal stimulus in the United States but there are considerable risks.
• These include higher oil prices, and eruption of trade tensions from sharp currency movements, especially involving the Chinese yuan, and from geo-political factors.
• Another serious medium-term risk is an upsurge in protectionism that could affect India’s exports.

In addition to the GST, the Government:

• Overhauled the bankruptcy laws so that the “exit” problem that pervades the Indian economy–with deleterious consequences highlighted in last year’s Survey–can be addressed effectively and expeditiously;
• Codified the institutional arrangements on monetary policy with the Reserve Bank of India (RBI), to consolidate the gains from macroeconomic stability by ensuring that inflation control will be less susceptible to the whims of individuals and the caprice of governments; and
• Solidified the legal basis for Aadhaar, to realise the long-term gains from the JAM trifecta (Jan Dhan-Aadhaar-Mobile).
• The Government enacted a package of measures to assist the clothing sector that by virtue of being export-oriented, labour-intensive could provide a boost to employment, especially female employment.
• The National Payments Corporation of India (NPCI) successfully finalized the Unified Payments Interface (UPI) platform.
• By facilitating inter-operability, UPI has the potential to unleash the power of mobile phones in achieving digitalization of payments and financial inclusion, and making the “M” an integral part of “JAM.” Further FDI reform measures were implemented, allowing India to become one of the world’s largest recipients of foreign direct investment.
• The major short term macro-economic challenge is to re-establish private investment and exports as the major drivers of growth and reduce reliance on Government and private consumption.
• Addressing the Twin Balance Sheet problem—over-indebted corporates and bad-loan-encumbered public sector banks—a legacy of the years surrounding the Global Financial Crisis will be vital.
• Looking further ahead, societal shifts at the level of ideas and narratives will be needed to overcome three long-standing meta-challenges:
• inefficient redistribution,
• ambivalence about the private sector and property rights, and;
• improving but still-challenged state capacity.
• Doing so would lift an economy that is oozing with potential.
• The report says that India seems to be a demographic sweet spot with its working age population projected to grow by a third over the next three decades providing it a potential the growth boost from the demographic divided which is likely to peak within next five years.
• The Survey report also states that the Swachh Bharat which has the objective of ensuring safe and adequate sanitation, water security and hygiene has been a part of serious policy issue which would promote a broader fundamental right to privacy for women in the country.

Economic Survey 2016-17 suggests setting up of a centralised Public Sector Asset Rehabilition Agency 

• Country has been trying to solve its ‘Twin Balance Sheet’(TBS) problem – overleveraged companies and bad-loan-encumbered banks, a legacy of the boom years around the Global Financial Crisis.
• So far, there has been limited success.
• The problem has consequently continued to fester:
• Non-Performing Assets (NPAs) of the banking system (and especially public sector banks) keep increasing, while credit and investment keep falling.
• Now it is time to consider a different approach – a centralised Public Sector Asset Rehabilitation Agency (PARA) that could take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.
• The consequent squeeze of banks has led them to slow credit growth to crucial sectors-especially to industry and medium and small scale enterprises (MSMEs)-to levels unseen over the past two decades.

The Survey reaches to the conclusion that a PARA may be necessary because

• Public discussion of the bad loan problem has focused on bank capital. But far more problematic is finding a way to resolve the bad debts in the first place.
• Some debt repayment problems have been caused by diversion of funds. But the vast majority has been caused by unexpected changes in the economic environment after the Global Financial Crisis, which caused timetables, exchange rates, and growth rate assumptions to go seriously wrong.
• This concentration creates a challenge since large cases are difficult to resolve, but also an opportunity since TBS could be overcome by solving a relatively small number of cases.
• Restoring them to financial health will require large write-downs.
• Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests. And they find it hard –financially and politically—to grant them sizeable debt reductions, or to take them over and sell them.
• It increases the costs to the government since bad debts of the state banks keep rising, and increases the costs to the economy, by hindering credit, investment, and therefore growth.
• Since, private run Asset Reconstruction Companies (ARCs) have not been successful either in resolving bad debts, though international experience (especially that of East Asian economies) shows that a professionally runcentral agency with the government backing could overcome the coordination and political issues that have impeded progress over the past eight years.

Economic Survey: Universal Basic Income (UBI) Scheme an alternative to plethora of State subsidies for poverty alleviation

• The Economic Survey 2016-17 has advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty.
• The survey juxtaposes the benefits and costs of the UBI scheme in the context of the philosophy of the Father of the Nation, Mahatma Gandhi.
• The Survey states that the Mahatma as astute political observer, would have anxieties about UBI as being just another add-on Government programme, but on balance, he may have given the go-ahead to the UBI.
• The Survey says the UBI, based on the principles of universality, unconditionality and agency, is a conceptually appealing idea but with a number of implementation challenges lying ahead.
• Especially the risk that it would become an add-on to, rather than a replacement of, current anti-poverty and social programmes, which would make it fiscally unaffordable.
• Based on a survey on misallocation of resources for the six largest Central Sector and Centrally Sponsored Sub-Schemes (except PDS and fertilizer subsidy) across districts.
• The Economic Survey points out that the districts where the needs are greatest are precisely the ones where State capacity is the weakest.
• This suggests that a more efficient way to help the poor would be to provide them resources directly, through a UBI.
• Exploring the principles and prerequisites for successful implementation of UBI, the Survey points out that the two prerequisites for a successful UBI are:

(a) functional JAM (Jan Dhan, Aadhar and Mobile) system as it ensures that the cash transfer goes directly into the account of a beneficiary and;

(b)Centre-State negotiations on cost sharing for the programme.

• The Survey says that a UBI that reduces poverty to 0.5 percent would cost between 4-5 percent of GDP, assuming that those in the top 25 percent income bracket do not participate.
• On the other hand, the existing middle class subsidies and food, petroleum and fertilizer subsidies cost about 3 percent of GDP.
• The Survey concludes that the UBI is a powerful idea whose time even if not ripe for implementation, is ripe for serious discussion.

Economic Survey suggests that it is Time for the Laws to catch up and facilitate this Internal Integration

• The Survey suggest that on the question of creating one economic India, technology, economics and politics have been surging ahead.
• Perhaps, it is time for the laws to catch up to further facilitate this surging internal integration.
• It finds high levels of internal trade between states: India’s internal trade-GDP ratio at about 54 percent is comparable to that in other large countries.
• The extent to which the Constitutional provisions facilitate the creation of one economic India is discussed in a final section.
• The first-ever estimates for inter-state trade flows indicate that cross-border exchanges between firms amount to at least 54 per cent of GDP, implying that domestic trade is significant.
• Both figures compare favourably with other jurisdictions: de facto at least, India seems well integrated internally.
• A more technical analysis confirms this, finding that trade costs reduce trade by roughly the same extent in India as in other countries.

The Survey shows that:-

• Smaller states Uttarakhand, Himachal Pradesh and Goa trade more; the net exporters are the manufacturing powerhouses of Tamil Nadu, Gujarat, and Maharashtra
• Otherwise agricultural Haryana and Uttar Pradesh are also trading powerhouses because Gurugram and NOIDA, respectively, have become part of the great Delhi urban agglomeration.
• Intra-firm trade across States is surprisingly large (about 68 per cent of inter-firm inter-state trade), and is affected by trade costs to a greater extent than inter-firm trade.

However, there is a potential dampener on the finding that trade in goods is high within India.

• The high level may be a consequence of the current system of indirect taxes which in some important cases perversely favours inter-state trade over intra-state trade.
• If true, the GST by ironing out these oddities will normalise inter-state trade in the country.
• This may reduce trade in some cases, and yet have a positive impact on tax revenue because of improvements in compliance, competitive enhancements and other channels.
• It may be noted the Indian Constitution provides the Centre and States considerable freedom to restrict trade and commerce.
• The needs of creating one economic India were actually subordinated to the imperatives of preserving sovereignty for the states.
• In practice, courts’ interpretation of these constitutional provisions have also been in favour of protecting the sovereignty of states over economic integration.

Apparel and Leather industry key to generation of formal and productive jobs

• Apparel and Leather & Footwear sectors are eminently suitable for generating jobs that are formal and productive.
• Providing bang-for-buck in terms of jobs created relative to investment and generating exports and growth.
• The Survey adds that these sectors provide immense opportunities for creation of jobs for the weaker sections, especially for women, and can become vehicles for broader social transformation in the country.
• India has an opportunity to push exports since rising wage levels in China has resulted in China stabilizing or losing market share in these products.
• India is well positioned to take advantage of China’s deteriorating competitiveness due to lower wage costs in most Indian states.

The Survey also lists a number of challenges faced by these sectors.

• It says that the space vacated by China is fast being taken over by Bangladesh and Vietnam in case of apparels and Vietnam and Indonesia in case of leather and footwear.
• While Indian companies struggle in face of a set of common challenges related to logistics, labour regulations, tax & tariff policy and disadvantages emanating from the international trading environment compared to competitor countries.
• On logistics, the Economic Survey says that costs and time involved in getting goods from factory to destinations are greater in India than those for other countries.

• On labour costs, India’s source of comparative advantage in this sector, also seem not to work in its favour due to problems like regulations on minimum overtime pay, onerous mandatory contributions that become de facto taxes for low-paid workers in small firms.
• It results in a 45 per cent lower disposable salary, lack of flexibility in part-time work and high minimum wages in some cases.
• According to the Survey, in both apparel and footwear sectors, tax and tariff policies create distortions that impede India gaining export competitiveness.
• India imposes a 10 percent tariff on man-made fibers vis- a-vis 6 percent on cotton fibres.
• On the other hand, domestic taxes also favor cotton-based production rather than production based on man-made fibers, and leather footwear rather than non leather footwear.
• The global demand for apparel is moving from cotton fibre products to manmade fibre and similarly footwear of non leather, it adds.
• India’s competitors enjoy better market access by way of zero or at least lower tariffs in the two major importing markets, namely, the United States of America (USA) and European Community (EU), the Survey says.
• Another problem faced by the leather sector highlighted by the Survey is that despite having a large cattle population, India’s share of cattle leather exports is low and declining due to limited availability of cattle for slaughter in India.
• The Survey suggests several measures to make these sectors globally competitive and unlock its potential for creating new jobs and generating growth.
• It recommends that there is a need to undertake rationalization of domestic policies which are inconsistent with global demand patterns.
• Several measures have been initiated that form part of the package approved by the Government for textiles and apparels in June 2016.
• Accordingly, textile and apparel firms will be provided a subsidy for increasing employment, but these need to be complemented by further actions such as the following:

• An FTA with EU and UK in the case of apparel will offset an existing disadvantage by India’s competitors- Bangladesh, Vietnam and Ethiopia. In the case of leather and footwear, the FTA might give India an advantage relative to competitors. In both cases, the incremental impact would be positive.
• The introduction of the GST offers an excellent opportunity to rationalize domestic indirect taxes so that they do not discriminate in the case of apparels against the production of clothing that uses man-made fibers; and in the case of footwear against the production of non-leather based footwear.
• Third, a number of labor law reforms would encourage employment creation in these two sectors.

Union Budget 2017-18 provides renewed impetus to manufacturing and Make in India

• The Union Budget 2017-18 provides renewed impetus to manufacturing and Make in India, export infrastructure and Government e-marketplace.
• Several measures have been announced in the Budget 2017-18 to provide impetus to commerce and industry . The key initiatives include:
  1. A Special Scheme for creating employment in leather and footwear industries is proposed to be implemented, on the lines of the scheme in textile and apparel sector.
  2. The long standing demand of startups has been accepted and the profit (linked deduction) exemption available to them for 3 years out of 5 years is changed to 3 years out of 7 years. For the purpose of carry forward of losses in respect of start-ups, the condition of continuous holding of 51% of voting rights has been relaxed subject to the condition that the holding of the original promoter/promoters continues.
  3. Further liberalisation of FDI policy is under consideration and the Foreign Investment Promotion Board (FIPB) to be abolished in 2017-18.
  4. In order to make MSME companies more viable, income tax for companies with annual turnover uptoRs. 50 crore is reduced to 25%. About 96% of companies will get this benefit of lower taxation. This will make our MSME sector more competitive as compared to large companies.
  5. MAT credit is allowed to be carried forward up to a period of 15 years instead of 10 years at present.
  6. For creating an eco-system to make India a global hub for electronics manufacturing a provision of Rs. 745 crores in 2017-18 in incentive schemes like M-SIPS and EDF. The incentives and allocation has been exponentially increased following the increase in number of investment proposals.
  7. Inverted duty has been rectified in several products in the chemicals & petrochemicals, textiles, metals, renewable energy sectors. Duty changes to improve domestic manufacturing of medical devices, those used for digital transactions and capital goods have also been announced.
  8. Infrastructure – a key pillar under the Make in India programme has been strengthened with a large budgetary allocation. The total allocation for infrastructure development in 2017-18 stands at
     3,96,135crores. A specific programme for development of multi-modal logistics parks, together with multi modal transport facilities, to be drawn up and implemented.
  9. Tourism is a big employment generator and has a multiplier impact on the economy. Incredible India 2.0 is proposed to be launched to promote tourism and employment. Five Special Tourism Zone, anchored on SPVs in partnership with the States would be set up.
  10. Modernisation and upgradation of identified corridor, railway lines of 3,500 kms will be commissioned, 25 stations are expected to be awarded for station redevelopment and 500 stations will be made differently abled friendly by providing lifts and escalatorsduring 2017-18. These provide large opportunities under the Make in India initiative
  11. Initiatives in Skill Development provide essential support for the Make in India sectors to thrive. Launch of SANKALP scheme to provide market relevant training to 3.5 crore youth and STRIVE scheme to improve the quality and market relevance of vocational training.
  12. A new and restructured Central scheme with a focus on export infrastructure, namely, Trade Infrastructure for Export Scheme (TIES) will be launched in 2017-18.
  13. The Government e-market place which is now functional for procurement of goods and services, has been selected as one of the winners of the South Asia Procurement Innovation Awards of the World Bank.