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Extremely important for IAS aspirants 2015 attempt: Summary of Economic Survey 2014-15 By HIRISH Sir, IAS
Dear friends please go through the Economic Survey
2014-15 which was released few days back. Every year, just before the
budget, the Economic Survey for the last year is released which gives a
snapshot of all that is good and bad with the economy. It is an extremely
important document, and all the aspirants should definitely read the crux
of the report. It is vital for both PT as well as Mains.
(1) Inflation has declined by over 6 percentage points
since late 2013 and the current account deficit has declined from a
peak of 6.7 percent of GDP (2012-13) to an estimated 1.0 percent in the coming
fiscal year. This is an extremely important positive turn for the economy.
Moreover the foreign portfolio flows have stabilized the rupee,
exerting downward pressure on long-term interest rates, reflected in yields on
10-year government securities, and contributed to the surge in equity prices.
(2) After a nearly 12-quarter phase of deceleration, real GDP
has been growing at 7.2 percent on average since 2013-14, based on the new
growth estimates of the Central Statistics Office. Notwithstanding the new
estimates, the balance of evidence suggests that India is a recovering,
but not yet a surging, economy.
(3) From a cross-country perspective, a Rational
Investor Ratings Index (RIRI)which combines indicators of
macro-stability with growth, illustrates that India ranks amongst the most
attractive investment destinations.
(4) Several reforms have been undertaken and more are on
the anvil. The introduction of the GST and expanding direct benefit
transfers can be game-changers.
(5) In the short run, growth will receive a boost from the
cumulative impact of reforms, lower oil prices, likely monetary policy easing
facilitated by lower inflation and improved inflationary expectations, and
forecasts of a normal monsoon in 2015-16. Using the new estimate for
2014-15 as the base, GDP growth at constant market prices is expected to
accelerate to between 8.1 and 8.5 percent in 2015-16.
(6) Medium-term prospects will be conditioned by the “balance
sheet syndrome with Indian characteristics” (this phrase has been used
because Indian companies are suffering from a classic case of “debt overhang”
after an investment bubble funded by borrowings and the failure to commission
such large investments) that has the potential to hold back rapid increases
in private sector investment. Private investment must be the engine of long-run
growth. However, there is a case for reviving targeted public
investment as an engine of growth in the short run to complement and crowd-in
(7) India can balance the short-term imperative of boosting
public investment to revitalize growth with the need to maintain fiscal discipline.Expenditure
control, and expenditure switching from consumption to investment,will be key.
(8) The outlook is favourable for the current account deficit
and its financing. A likely surfeit, rather than scarcity, of foreign
capital will complicate exchange rate management. Reconciling the
benefits of these flows with their impact on exports and the current account
remains an important challenge going forward.
(9) India faces an export challenge, reflected in
the fact that the share of manufacturing and services exports in GDP
has stagnated in the last five years. The external trading environment
is less benign in two ways: partner country growth and their
absorption of Indian exports has slowed, and mega-regional trade agreements
being negotiated by the major trading nations in Asia and Europe threaten to
exclude India and place its exports at a competitive disadvantage.
(10) India is increasingly young, middle-class, and
aspirational but remains stubbornly male. Several indicators suggest that
gender inequality is persistent and high. In the short run, the renewed
emphasis on family planning targets,backed by misaligned incentives, is
undermining the health and reproductive autonomy of women.
(1) India must adhere to the medium-term fiscal deficit
target of 3 percent of GDP. This will provide the fiscal space to insure
against future shocks and also to move closer to the fiscal performance of its
emerging market peers.
(2) India must also reverse the trajectory of recent years
and move toward the golden rule of eliminating revenue deficits and ensuring
that, over the cycle, borrowing is only for capital formation.
(3) Expenditure control combined with recovering growth and
the introduction of the GST will ensure that medium term targets are
(4) To ensure fiscal credibility and consistency with
medium-term goals, the process of expenditure control to reduce the
fiscal deficit should be initiated. At the same time, the quality of
expenditure needs to be shifted from consumption, by reducing subsidies,
(5) Implementing the Fourteenth Finance Commission’s
recommendations will lead to states accounting for a large share of total tax
revenue. This has the important implication that, going forward,India’s
public finances must be viewed at the consolidated level and not just at the
level of the central government. If recent trends in state-level fiscal
management continue, the fiscal position at the consolidated level will be on a
(1) The JAM Number Trinity – Jan
Dhan Yojana, Aadhaar, Mobile – can enable
the State to transfer financial resources to the poor in a progressive manner
without leakages and with minimal distorting effects.
(1) The stock of stalled projects stands at about 7 percent of
GDP, accounted for mostly by the private sector. Manufacturing and
infrastructure account for most of the stalled projects. Changed market
conditions and impeded regulatory clearances are the prominent reasons for
stalling in private and public sectors, respectively.
(2) This has weakened the balance sheets of the corporate
sector and public sector banks, which in turn is constraining future private
investment,completing a vicious circle.
(3) Despite high rates of stalling, and weak balance
sheets, the stock market valuations of companies with stalled projects are
quite robust,which is a puzzle.
(1) The Indian banking balance sheet is suffering from ‘double
financial repression’. On the liabilities side, high inflation
lowered real rates of return on deposits. On the assets side, statutory
liquidity ratio (SLR) and priority sector lending (PSL) requirements have
depressed returns to bank assets.
(2) Private sector banks did not partake in the biggest
private-sector-fuelled growth episode in Indian history during 2005-2012.
This is reflected in the near-constant share of private sector banks in
deposits and advances in those years.
(3) There is substantial variation in the performance of
the public sector banks, so that they should not be perceived as a homogenous
block while formulating policy.
(1) The Indian Railways over the years have been on a ‘route
to nowhere’ characterized by under-investment resulting in lack of capacity
addition and network congestion; neglect of commercial objectives; poor service
provision; and consequent financial weakness. These have cumulated to
below-potential contribution to economic growth.
(2) Very modest hikes in passenger tariffs and
cross-subsidisation of passenger services from freight operations over the
years have meant that Indian (PPP-adjusted) freight rates remain among
the highest in the world, with the railways ceding significant share in
freight traffic to roads (that is typically more costly and energy
(3) As a result, the competitiveness of Indian industry has
been undermined. Calculations reveal that China carries about thrice as much
coal freight per hour vis-à-vis India. Coal is transported in India at more
than twice the cost vis-à-vis China, and it takes 1.3 times longer to do so.
(4) Econometric evidence suggests that the railways public
investment multiplier (the effect of a Rs. 1 increase in public investment in
the railways on overall output) is around 5. In the long run, the
railways must be commercially viable and public support must be linked to
railway reforms: adoption of commercial practices; tariff rationalization; and
(1) What should we ‘Make in India’? Sectors that are
capable of facilitating structural transformation in an emerging economy
(a) have a high level of productivity,
(b) show convergence to the technological frontier over
(c) draw in resources from the rest of the economy to spread the
fruits of growth,
(d) be aligned with the economy’s comparative advantage;
(e) be tradeable.
(2) Registered manufacturing, construction and several service
sectors — particularly business services — perform well on the above mentioned
characteristics. A key concern with these sectors however is that they
are rather skill-intensive and do not match the skill profile of the Indian
(3) India could bolster the Make in India’’initiative, which
requires improving infrastructure and reforming labor and land laws by
complementing it with the ‘Skilling India’ initiative. This
would enable a larger section of the population to benefit from the structural
transformation that such sectors will facilitate.
(1) Markets in agricultural products are regulated under the
Agricultural Produce Market Committee (APMC) Act enacted by State Governments.India
has not one, not 29, but thousands of agricultural markets. APMCs levy
multiple fees of substantial magnitude, that are non-transparent, and hence a
source of political power.
(2) The Model APMC Act, 2003 could benefit from drawing upon the
‘Karnataka Model’ that has successfully introduced an integrated single
licensing system. The key here is to remove the barriers that militate
against the creation of choice for farmers and against the creation of
marketing infrastructure by the private sector.
(1) India has cut subsidies and increased taxes on fossil fuels
(petrol and diesel along with a coal cess) turning a carbon subsidy regime into
one of carbon taxation. The implicit carbon tax is US$ 140 for petrol and US$64
(2) In light of the recent falling global coal prices and
the large health costs associated with coal, there may be room for further
rationalization of coal pricing. The impact of any such changes on affordable
energy for the poor must be taken into account.
(3) On the whole, the move to substantial carbon taxation
combined with India’s ambitious solar power program suggests that India can
make substantial contributions to the forthcoming Paris negotiations on climate
(1) The FFC marks a watershed in the history of Indian
federalism. Unprecedented increases in tax devolution will confer more fiscal
autonomy on the states. This will be enhanced by the FFC-induced imperative of
having to reduce the scale of other central transfers to the states. In other
words, states will now have greater autonomy both on the revenue and
expenditure fronts. All states stand to gain from extra resources although
there will be some variation between the states.
(2) FFC transfers are highly progressive; that is, states
with lower per capita Net State Domestic Product (NSDP) receive on average much
larger transfers per capita. In contrast, plan transfers were much less
progressive. The concern that more transfers will undermine fiscal
discipline is not warranted because states as a whole have been more
prudent than the centre in recent years.