Economic Survey Volume 1 Chapter 1 Explained (Latest)
STATE OF THE ECONOMY: AN ANALYTICAL OVERVIEW AND OUTLOOK FOR POLICY
This chapter gives an overview of the Indian economy in the last year. It covers analysis of global growth prospects and the associated risks. It also covers outlook for Indian Economy for 2017-18 and factors to boost growth in 2018-19.
Several major reforms were undertaken during the year- GST launch, actions to address Twin Balance Sheet problem(TBS), new Indian Bankruptcy Code (IBC) and a recapitalization package(about 1.2% of GDP) to strengthen the balance sheets of PSBs.
Macroeconomic developments marked by swings:
- In the first half- India’s economy “decoupled”, decelerating as the rest of the world accelerated. Although it remained the second best performer amongst major countries, with strong macroeconomic fundamentals.
Decoupling of Indian economy: until 2016, India’s growth had been accelerating when growth in other countries was decelerating. Later, the world economy embarked on a synchronous recovery but India’s GDP growth and a number of other indicators decelerated.
- Demonetization and GST: demonetization temporarily reduced demand and hampered production (especially in informal sector) and GST affected supply chains.
- Tightening of monetary conditions: it depressed consumption and investment, attracted capital flows which caused rupee to strengthen dampening net services exports and the manufacturing trade balance, (high and rising real interest rates due to tight monetary conditions)
- TBS challenge: which impaired banks’ ability to supply credit to industry.
- Oil prices: rise in prices in first three quarters of 2017-18.
In second half- robust signs of revival were witnessed. Economic growth improved as the shocks began to fade, corrective actions were taken and the synchronous global economic recovery boosted exports.
These actions resulted in improved business climate –India jumped 30 spots on the World Bank’s Ease of Doing Business rankings and Foreign Direct Investment (FDI) flows increased by 20%.
Anxieties relating to macro-economic stability: Fiscal deficit, Current Account Deficit and Inflation – all higher than expected- partially due to higher international oil prices.
Broader lessons for the Indian economy going forward:
- Promoting cooperative federalism: Through GST Council, an effective institutional mechanism has been created, which can be a critical component to tackle a wide array of difficult structural reforms such as creating a common agricultural market, integrating fragmented and inefficient electricity markets, solving interstate water disputes, implementing Direct Benefit Transfers (DBT), combating air pollution.
- Facilitating “exits” a challenge– Over the last 50 years India had gone from “socialism with limited entry to marketism without exit.” Exit has been a challenge as objectives are conflicting and politically difficult. But IBC and proposed financial resolution and Deposit Insurance Bill will address this problem in the Indian corporate sector and financial sector respectively.
- Rationalize Government resources: progress has been made in providing bank accounts, cooking gas, housing, power, and toilets (amongst others).But there is a need to convert the provision into greater actual use- toilet building into toilet use, bank accounts into financial inclusion, cooking gas connections into consistent gas offtake, and village electrification into extensive household connections.
- Two underlying macroeconomic vulnerabilities: fiscal and current accounts- both of which tend to deteriorate when oil prices rise.
- Overcoming fiscal vulnerabilities- requires breaking the inertia of the tax-GDP ratio(center’s tax-GDP ratio is no higher than it was in 1980s ,despite average economic growth of 6.5%,the most rapid in India’s history) and halting the steady conversion of contingent liabilities into actual ones (typically through the assumption of state discom debts and public sector bank recapitalization)
- Overcoming current account vulnerabilities- requires raising the trajectory of export growth. Reviving manufacturing and making the sector internationally competitive are the ways through which it can be achieved. Through Make in India program, share in manufacturing in GDP has improved slightly, however, it is not the case in international competitiveness of manufacturing.