It’s not so rosy anymore: Economic Survey paints a sobering picture

The lead author of Economic Survey 2017-18 and India’s chief economic adviser, Arvind Subramanian, presented a sobering prognosis of how Indian economy could perform in the short term, claiming it will grow at between 7% and 7.5% in next financial year.

This is in strong contrast to the rosy picture Subramanian painted in his first economic survey, for 2014-’15, when he had said that double-digit growth for India’s Gross Domestic Product was within reach.

Asked by a journalist why India had slipped from this sweet spot, he was candid. “Stuff happens,” he said.

Subramanian went on to describe why the ebullience had slipped out of his reports – and the economy. The bad stuff, he said, was the result of the “temporary” impacts of the government’s decision in November 2016 to demonetise high value currency notes and the introduction in in April 2017 of Goods and Services Tax. But these effects, he said, were now fading. . He could not have predicted demonetisation and had advised that a better GST system to be put in place. Subramanian did admit, though, that he had underestimated the impact of one factor he had foreseen – the bad loans with which Indian banks are saddled and the unhealthy balance sheets of Indian companies. The unexpected high interest rates of borrowing money made investment difficult and the rise in global oil prices have hemmed in the economy, he added.

The survey did take a dig at the cost demonetisation imposed on the economy by diverting focus away from reviving investments. “Mobilising savings, through attempts to unearth black money or encouraging a shift away from gold investments, is important but perhaps not as urgent,” the Survey said.

Niti Ayog’s chairperson Rajiv Kumar was quick to take issue with this. He said he expected a better growth rate next year than the “conservative” 7%-7.5% predicted by the Survey.

But the gravity reflected in the Survey goes beyond quibbling over the topline numbers.

Reality check

In previous surveys, the authors had enthusiastically laid out the economic promise held in the government’s policy initiatives, such as Jan Dhan bank accounts for the poor, the Aadhar identity project and integrated farm produce markets. They had suggested that the economy would take a leap after the implemention of GST and investments in the railways were increased. On the social sector front, the authors had last year said it was time for the government to ensure a “Universal Basic Income” for all citizens.

This year, the authors suggested that instead of adding to its agenda, the government should finish what it has already set out to do. This would include selling off the debt-crippled Air India, quickly easing the load off debt-riddled balance sheets of companies through the Insolvency and Bankruptcy Code, and consolidating and privatising nationalised banks.

The resurgence of exports after a long dive, the Survey hinted, would be the short-term saviour of the sluggish economy. But reviving investment by domestic industry would require more effort, and would involve smoothing out problems related to taxation-related litigation.

But even if the government stuck to the tasks suggested in the Survey, Subramanian warned of two fresh challenges that could impede the speed of recovery. There was a chance that investments could be dampered by if oil prices stay high and the partially-irrational high prices of Indian stocks undergo a correction.

Many experts believe the survey has provided sage advice in a year before the country goes into general elections. It remains to be seen, however, if the government would be able to stick to this advice in the budget on February 1. Some believe, though, that it will be tempted to make yet more ambitious promises to voters as the Opposition tries to keep the focus on the farming crisis and unemployment.

Agrarian distress

The one area where the Survey had little advice to offer even as it presented a rather bleak prognosis was agriculture.

The chapter summing up the state of economy noted that real wages for farm as well as non-farm work had fallen, that a production glut had led to a crash in the prices of crops such as potato and soyabean, that the real incomes of farmers had slumped and that sowing for both farming seasons for 2017-’18 had fallen by an estimated 6.1% for kharif and 0.5% for rabi, which was leading to lower demand for labour on the farms.

Instead of addressing these short-term concerns, the authors instead included a chapter on how climate change would impact agriculture in the medium and long run – by mid-century to the end of it. The chapter reproduced results that are mostly well known to the Indian and global climate change scientific community, such as, that irrigated areas would suffer the impacts of climate change less than non-irrigated areas.

The Survey asked for more research and suggested that subsidies for cereals be replaced with direct cash transfers, though pilot projects have failed. The Survey made an oblique reference to bringing agriculture-related issues under the joint control of the Centre and the states instead of letting it be a state subject alone. The authors of the Survey referred to it as deploying the “cooperative federalism technology” of the GST Council, where the Centre holds a veto over decision making though all sit together to decide upon the indirect tax system.

The Survey also suggested that funds transferred from the Centre to panchayats and urban local bodies could be made conditional and linked to how well they perform in collecting land revenue. This, the authors suggested, was because, “the bigger problem is that they (the local level rural and urban bodies of governance) are not fully utilizing the taxation powers they already possess”. This upends the conventional wisdom that local bodies, particularly at the rural level, have not been given enough powers of taxation by the states and the Centre.

If accepted, this suggestion could provide the rationale for the recent downward revision the central government has sought in the share of annual revenues it gives state government. In 2015-’16, it had celebrated “cooperative federalism” when agreeing to give a greater share of unconditional funds to states.