The Indian Finance Minister, Mr. Arun Jaitley tabled the Economic Survey 2015-16 in the Parliament on 26th February, ahead of the Union Budget. It was principally themed on the macroeconomic policy and outlook, eagerly awaited structural reforms, and poverty. Terming the external environment as a challenging one, the survey’s projection anchors the growth rate at 7.6% for the fiscal year 2015-16. The survey projected a 7-7.75% growth rate for the fiscal year 2016-17 along with a long term projection of 8-10% per annum.
Domestic Economic Advancements and Challenges
The agricultural sector, which employs the highest proportion of the workforce, is witnessing a declining growth rate. The survey states that the agricultural sector needs a transformation to ensure livelihoods for farmers and food security for the population. Bringing excluded areas under irrigation is the foremost agenda to begin with.
The industrial sector grew at 5.9% in 2014-15 and is expected to grow by 7.3% in 2015-16. The manufacturing sector is estimated to grow at 9.5%. While the economy has grown noticeably and is expected to continue to do so, the survey stated that protectionist measures have been constricting the domestic industry. It suggests that India should opt for procedures that are World Trade Organization compliant.
The services sector remains India's primary growth engine constituting 66% of the value added to India's GDP growth in 2015-16. Estimates show a 9.2% growth in this sector in the present year.
Highlights from the power sector include highest increase in power generation capacity, reduced peak electricity deficit, and low tariffs on solar power projects. Challenges in the power sector include complex power tariff schedules, substantial continued use of diesel generators, and increased external electricity procurement by firms.
In regards to financial health of the economy, the Survey indicates that fiscal discipline remains a challenge. The Fiscal Deficit (excess of government’s expenditure over revenue, excluding borrowings) target at 3.9% of GDP remains achievable in this fiscal year. The challenge is to maintain it at 3.5% level in accordance with the Fiscal Responsibility and Budget Management Act, 2003.
Burden on subsidies was controlled due to low oil prices globally. However, the upcoming Seventh Pay Commission (an overhaul of the salaries and pensions of 10 million Central Government employees and pensioners whose payments are approximately worth 0.5% of the GDP) could lead to the fiscal imbalance. To monitor the fiscal burden arising from the proposed recapitalization of banks and the Seventh pay commission expenditure, the survey suggested the government to review its medium term fiscal strategy.
According to the Survey, impaired financial positions of the public sector banks (due to rising Non Performing Assets or the outstanding loans) and some corporate houses are major impediments to private investment and full fledged economic recovery. It suggested a 4R solution (Recognition, Recapitalization, Resolution and Reform) to tackle this problem.
In regards to taxations, the Survey found that only 5.5% of the earning population paid taxes, which translates to 4% of the voting population. The Survey recommends taking this level to 23% by bringing people into the tax net via some form of direct taxation. Specific to corporate taxation, the survey recalls the promise to bring it down from the present 30% to 25%, while phasing out tax exemption related to the corporate sector in an orderly manner.
Turning to the issues in the social sector which include human development and health care, the survey indicated that there needs to be an increase in ‘efficient expenditure’. The survey highlighted that low cost maternal and early life health and nutrition programs offer very high returns on investments. To strengthen the existing public health services and infrastructure the Economic Survey recommends leveraging public and private investments.
Global Economic Advancements and Challenges
The Survey revealed some advancements in the global front. The government’s commitment to ease the business environment to attract overseas is working and Foreign Direct Investments (FDI) have increased tremendously. Additionally FDI shot up by 40% after the Government launched the Make in India initiative in 2014.
Turmoil in global economy has posed challenges for India. Exports have been falling continuously for 14 months leading to a decline in the trade deficit. Declining export demand and a turbulent stock market due to capital outflow has resulted in a weakening Indian Rupee. Currently the Rupee is nearing ₹70 for $1. However, due to lower oil prices, inflation is expected to decline to a range of 4.5-5% in fiscal year 2016-17, thereby within Reserve Bank of India’s target.
There are some major reforms that are still pending that were highlighted by the Survey. For instance, the Survey expressed its concern over deferment of the Goods and Services Tax (GST) Bill, which aims to harmonize the tax structure throughout the nation. The survey cautioned that India is facing consequences due to the lack of an exit policy that makes it tough for international businesses to pull out from their loss making ventures.
Overall, the survey presented each and every aspect of the economy's health in detail along with future projections which could prepare the policy makers to prepare for the unexpected circumstances.
Edited by Sanjana Hariprasad
Photo Credit : Mayur Patel