A Road Map for Renewal: THE HINDU EDITORIAL
The Economic Survey, a statutory document tabled in Parliament, is meant to be a scorecard of the economy for the current fiscal year. But over the years, it has morphed into a sourcebook for data and policy analysis. Indeed, economists and even academicians look forward to its scholarly content, even though it may have a partisan outlook.
This year’s Survey too does not disappoint in being a veritable feast and also presenting fairly sober realities. Under the leadership of Chief Economic Adviser (CEA) Arvind Subramanian, one quirk of the Survey is its thematic catchphrases. For instance, a few years ago, the CEA, in the Survey’s preamble, said that the Indian political economy was not capable of big bang reforms. Instead, reforms would be persistent, creative and incremental. It’s a different matter that in November 2016, India got the world’s biggest bang announcement in the form of demonetisation. Last year the Survey introduced the catchphrase JAM (the Jan Dhan, Aadhaar and Mobile trinity) indicating their potent combination of enabling direct benefit transfers and using technology to deliver subsidies as well as trim leakages. In its first chapter, the latest Survey highlights 10 new facts about the Indian economy. Unfortunately some are not so new, and some are inane. For example, the fact that adverse weather affects agricultural yields and that parents in India have a preference for male children are hardly new “facts”. But others are significant, such as the finding that demonetisation and more formalisation of the economy have led to a huge jump in the number of taxpayers, for both direct and indirect taxes. Or that the formal part of the non-agricultural payroll is much bigger than believed. Unfortunately, this new “fact” is not substantiated with latest data; the Survey presents data from 2012. Surely the government is not stuck in a time warp, is it? Another interesting fact is that India’s export sector is more diversified in comparison to other peer countries; that is, the top 1% of exporting firms account for a much smaller share of total exports, compared to East Asian countries. It is heartening to note the important role of small and medium enterprises in industrial employment and exports. On the other hand, this could be due to the inability of Indian firms to achieve global scale. Are the scale aspirations being thwarted by restrictive labour laws?
A populist hint
One of the most sobering facts in the Survey has been on the rural and agricultural sector. Farm incomes have remained stagnant for the past four years, hit by a drop in crop prices, output glut, and possibly demonetisation. So what is the prospect of doubling farm incomes in the next few years? Given that the Budget will be the last one before the 2019 general election (a fact reiterated by the Survey), it is almost a foregone conclusion that there will be great emphasis on the farm sector. This also means a tilt towards populism. How then will the fiscal limits be obeyed? Here the Survey hints that some slippage from pre-announced fiscal deficit targets are to be expected in this pre-election Budget. The bond markets hate fiscal slippage and already there is sell-off of bonds. This will lead to a rise in interest rates. The biggest loser from a higher interest rate is the biggest borrower in the system, the Government of India. Even an increase of 0.5-0.6% rate over one year is an increase in the interest burden of more than ₹40,000 crore, equivalent to the full budget of the Mahatma Gandhi National Rural Employment Guarantee Act. Hence the government will have to think very carefully on how to avoid slippage and keep bond markets happy. The disinvestment target was overachieved this year which is quite impressive and could be continued next year, given the euphoria in the stock markets. The Survey does point out that India’s stock markets have a different dynamic when compared to global markets. Stock markets all over the world are at record highs and there is concern about a bubble formation. In fact, a new phrase in the international lexicon is melt-up, which is the opposite of melt-down. So whether it’s oil prices or commodity prices, and now stock markets, it’s all going up and this may be the big surge before a crash, big or small. But in India, according to the Survey, stock market valuations may not be in bubble territory. That is why the disinvestment target for next year may be higher. Also, the widening of the tax net can be positive for revenues, thus cutting the deficit.
The Survey mentions key macroeconomic headwinds from abroad. First, oil prices are going up. This would mean that the triple advantage that the government enjoyed since late-2014 for almost two years of a lower import bill, lower oil subsidy burden and lower inflation is going to go away. Every $10 increase in oil prices can reduce GDP growth by 0.2-0.3%. And oil prices have gone up by almost 60% in the last six months. The second headwindcomes from the tightening stance of the world’s most influential central bank, the U.S. Fed. As rates are being tightened in the U.S., it is likely to lead to a reversal of dollar flows, which can impact India’s domestic liquidity situation, the stock market, and perhaps the exchange rate. In addition, there are domestic challenges. The Budget priorities are clearly in these five areas: job creation; revival of private investment spending; revival of exports; focus on rural and agricultural economy; and bringing the banking sector back to a healthier condition. To this one, in the medium to longer term, add worries about increasing inequality. On the eve of the recent World Economic Forum at Davos, Oxfam released a report which said that 1% of India owns 73% of its wealth. This was reportedly mentioned by the Prime Minister in his meeting with Indian corporate leaders at Davos. One cause of inequality is the strain of indirect taxes, which tend to be regressive because they affect the poor disproportionately. The goods and services tax is an indirect tax. Excise duties on petrol and diesel are indirect taxes. In the last three years, the share of indirect taxes in total taxation has gone up steadily, which needs to be reversed. So there is an expectation that there will be action on the direct tax front to correct this trend.
Finally, the Survey points out that India’s rank in ease of doing business has jumped significantly, but an area which remains a cause for concern is the settlement of disputes or litigation. A telling statistic is the large amount stuck in tax litigation. By definition, one party to the litigation is the tax department, and quite often the other party is also a government company. The total amount estimated to be locked up in tax disputes is more than ₹8.2 lakh crore. And this happens despite the lower authorities or tribunals ruling in favour of the tax-payer; it is automatically escalated to the higher level till it goes to the courts. There is an incentive problem because tax officers are not incentivised to settle claims for fear of being accused of collusion or corruption. The Economic Survey points out that such a high rate of pendency and the huge amounts stuck in litigation are hurting India’s ease of doing business. Another telling statistic is the pendency in settling or granting of patents. These are “property rights” arising out of innovations. More than two lakh applications are pending, and isn’t this a bad sign for innovators? The Survey is overall an excellent document which doesn’t shy away from painting a realistic picture whether it is about jobs, investments, growth outlook or burdensome litigation. Now all eyes are focussed on the Union Budget. Will it address concerns raised in the Survey or will it go its own way?
LEARN VOCABULARY FROM THE HINDU EDITORIAL
Meaning: Statutory declarations are commonly used to allow a person to declare something to be true for the purposes of satisfying some legal requirement or regulation when no other evidence is available.
Meaning: Undergo or cause to undergo a gradual process of transformation.
Example: “The cute moppet has morphed into the moody moll of the indie world”
Meaning: A strong supporter of a party, cause, or person.
Example: “Partisans of the exiled Stuarts”
Synonyms: Supporter, Follower
Meaning: Used for emphasis, often to qualify a metaphor.
Example: “The early 1970s witnessed a veritable price explosion”
Meaning: A collection of something to be enjoyed:
Example: “The team contains a veritable feast of international talent”
Meaning: Serious, sensible, and solemn.
Example: “A sober view of life”
Synonyms: Serious, Sensible
Antonyms: Light-hearted, Frivolous
Meaning: A peculiar aspect of a person’s character or behaviour.
Example: “They accepted her attitude as one of her little quirks”
Synonyms: Idiosyncrasy, Peculiarity
Meaning: A well-known sentence or phrase, especially one that is associated with a particular famous person.
Example: “The movie gave the world the catchphrase ‘I’m gonna make him an offer he can’t refuse’”
Synonyms: Saying, Quotation
Meaning: A preliminary or preparatory statement; an introduction.
Example: “He could tell that what she said was by way of a preamble”
Meaning: Having great power, influence, or effect.
Example: “Thrones were potent symbols of authority”
Synonyms: Powerful, Strong
Antonyms: Weak, Impotent
Meaning: To reduce the amount or size of something:
Example: “They’re trying to trim their costs, so staff who leave are not being replaced”
Meaning: Lacking sense or meaning; silly.
Example: “Don’t badger people with inane questions”
Synonyms: Silly, Foolish
Antonyms: Intelligent, Sensible
Meaning: A hope or ambition of achieving something.
Example: “The needs and aspirations of the people”
Synonyms: Desire, Hope
Meaning: Oppose (a plan, attempt, or ambition) successfully.
Example: “The government had been able to thwart all attempts by opposition leaders to form new parties”
Synonyms: Foil, Frustrate
Antonyms: Assist, Facilitate
Meaning: Showing no activity; dull and sluggish.
Example: “A stagnant economy”
Synonyms: Inactive, Sluggish
Antonyms: Active, Vibrant
Meaning: Say something again or a number of times, typically for emphasis or clarity.
Example: “She reiterated that the government would remain steadfast in its support”
Synonyms: Repeat, Restate
Example: “poets dream of lives foregone in worlds fantastical”
Synonyms: Past, Former
Meaning: The action or process of slipping or subsiding.
Example: “£16 million has been spent on cracks and slippage”
Meaning: A sale of shares, bonds, or commodities, especially one that causes a fall in price.
Example: “The stock market was shaken earlier this week by sell-offs in defence issues”
Meaning: A feeling or state of intense excitement and happiness.
Example: “In his euphoria, he had become convinced he could defeat them”
Synonyms: Elation, Happiness
Antonyms: Misery, Depression
Meaning: Used to refer to a good or fortunate situation that is isolated from reality or unlikely to last.
Example: “We both lived in a bubble, the kind provided by occupying a privileged pied-à-terre in Greenwich Village”
Synonyms: Illusion, Delusion
Meaning: The vocabulary of a person, language, or branch of knowledge.
Example: “The size of the English lexicon”
Meaning: A wind blowing in the opposite direction to the one you are moving in:
Example: “The runners had to battle against a stiff/strong headwind”
Meaning: The attitude of a person or organization towards something; a standpoint.
Example: “The party is changing its stance on Europe”
Synonyms: Attitude, Stand
Meaning: An improvement in the condition, strength, or fortunes of someone or something.
Example: “A revival in the fortunes of the party”
Synonyms: Improvement, Rallying
Meaning: The period or day before an important event:
Example: “Mrs Clayton was speaking to Arab journalists in Paris on the eve of her visit to Egypt”