Economic Survey Volume 1 Chapter 1 Explained (Latest)







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. 

Short term  

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. 

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Middle Term 

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)Text Box
    • 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. 


  • Attacking corruption while managing challenges: Policies attacking corruption and weak governance bring social and economic benefits but costs must be minimized wherever possible. Greater reliance on carrots and incentives rather than on sticks; greater focus on addressing the flow problem than the stock problem and more recourse to calibrated rather than blunt instruments. 

Text Box 

Initiative   Objective   Challenge  
GST and demonetization   Attack corruption   Impacted informal cash-intensive sectors 
Banning promoters of firms with non-performing loans in auctions under IBC   Minimize moral hazard  Fewer bidders and lower prices in the auctions of insolvent firms. 
Spectrum( coal and renewables)  Create transparency and avoid rent seeking   Winners’ curse (firms overbid for assets) 



  • Clarity on role of Markets and States: All over the world there is a reassessment of the respective roles of the two with a clear tilt toward greater state involvement. But India is in a grey zone of uncertainty on the role of state and markets.  
Potential of state capacity   Limitation of state capacity 

Introduction of 

technology and the JAM (Jan Dhan—Aadhaar— Mobile) architecture, now enhanced by the Unified 

Payments Interface (UPI) 

Delivery of essential services such as health and education. 


  • Meta challenges: Last year’s survey identified three meta-challenges: addressing inefficient redistribution; accelerating the limited progress in delivery of essential public services, especially health and education; and correcting the ambivalence toward property rights, the private sector, and price incentives. This year’s survey has reemphasized one issue –education and identified two new issues- agriculture and employment. 



  • According to the International Monetary Fund (IMF), the global economy is experiencing a near-synchronous recovery, most broad based since 2010. The latest World Economic Outlook (WEO) of the IMF shows global GDP growth accelerated to around 3.6 percent in 2017 from 3.2 percent in 2016, and the forecast for 2018 has been upgraded by 0.2 percentage points to 3.9 percent. 
  • The recovery has been due to improvement in world trade of goods and services, commodity producers benefitting from upswing in demand, accommodative monetary policies in advanced economies. 
  • However, there are certain geopolitical and geo economic risks: war in the Korean peninsula; political upheaval in the Middle East; aggressive output cuts by Saudi Arabia (and Russia) which could force oil prices even higher; China’s unprecedented credit surge in the form of capital controls, slowdown in growth and trade tensions.  
  • But main risks lie on the macro-finance front in advanced economies. These originate from 3 inter related sources: 


Inter related sources   Tendency  
Asset valuation( price-equity ratio)  Tend to rise to their mean, the faster they rise, the greater risk of sharp corrections. 
Valuation of bond and equity  Tend to be briefly lived (future earnings can justify equity prices but interest rates cannot be forever so low) ** 
Interest rates rising   Both bond and equity prices could correct sharply. *** 
  • Consequences of asset price correction: decline in wealth – cut on spending-curtail investments. Thus monetary and fiscal policies will not be effective since interest rates are already low and government debts are high. But the impact would be far smaller than it was in 2007-09. 
  • In sum, assessing future risks hinges on two calls: interest rate policies and asset valuations. 


** with higher outputs, profits and employment, inflation will increase resulting in higher interest rates. Thus low bond valuation. 




**”Lower Bond Valuation” is not connected with “Increase in Production”. The cycle stops at “Lower Bond Valuation” 



***“Increase in Wages can eat up valuation of Companies, lowering equity prices” 




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OUTLOOK FOR 2017-18 


Economic Activity 

  • Robust Recovery is taking hold as reflected in a variety of indicators, including overall GVA, manufacturing GVA, the IIP, gross capital formation and exports. Real non-food credit growth has rebounded while the squeeze on real credit to industry is abating.  
  • Flow of non-bank resources to the corporate sector, such as bond market borrowing and lending by NBFCs, has increased. The re-acceleration of export growth and deceleration of import growth suggest that the demonetization and GST effects are receding. Services export and private remittances are also rebounding. 
  • While the direction of the indicators is positive, their level remains below potential. Moreover, even though the cost of equity has fallen to low levels, corporates have not raised commensurate amounts of capital, suggesting that their investment plans remain modest. The twin engines that propelled the economy’s take-off in the mid-2000s – exports and investment – are continuing to run below take-off speed. 



Macroeconomic indicators 

  • Headline inflation for the first time crossed the RBI’s 4 percent target in November The current account deficit has also widened in 2017-18 and is expected to average about 1.5-2 percent of GDP for the year as a whole. 
  • Despite these developments, the overall external position remains solid. The current account deficit is well below the 3 percent of GDP threshold beyond which vulnerability emerges. Meanwhile, foreign exchange reserves have reached a record level of about $432 billion. 




Fiscal developments  

  • Bond yields have increased sharply since August 2017, reflecting a variety of factors, including concerns that the fiscal deficit might be greater-than-budgeted, expectations of higher inflation, a rebound in activity that would narrow the output gap, and expectations of rate increases in the US. As a result, the yield curve has become unusually steep. 
  • The fiscal deficit for the first eight months of 2017-18 reached 112 percent of the total for the year, far above the 89 percent norm (average of last 5 years)- due to shortfall in non-tax revenue, reflecting reduced dividends from government agencies and enterprises. Expenditure also progressed at a fast pace, as  advancing of the budget cycle by a month gave considerable leeway to the spending agencies to plan in advance and start implementation early in the financial year. 


  • GST revenue collections are surprisingly robust given that these are early days of such a disruptive change. 


  • Government measures to curb black money and encourage tax formalization, including demonetization and the GST, have increased personal income tax collections substantially (excluding the securities transactions tax). From about 2 percent of GDP between 2013-14 and 2015-16, they are likely to rise to 2.3 percent of GDP in 2017-18, a historic high. 




OUTLOOK FOR 2018-19 

If macro-economic stability is kept under control, the ongoing reforms are stabilized, and the world economy remains buoyant as today, growth could start recovering towards its medium term economic potential of at least 8 percent. 

Components of demand that will influence growth outlook: 

  • The acceleration of global growth should in principle provide a solid boost to export demand (in the mid-2000s the booming global economy allowed India to increase its exports by more than 26 percent per annum). 
  • Private investment is expected to rebound depending on the resolution and recapitalization process. If this process moves ahead expeditiously, stressed firms will be put in the hands of stronger ownership, allowing them to resume spending. But if resolution is delayed, so too will the return of the private capex cycle. 
  • Consumption demand – 2 different situations: 

Positive – reduction in real interest rates in 2018-19  

Negative- average oil prices to be 12% higher in 2018-19 


Putting all these factors together, a pick-up in growth to between 7 and 7.5 percent in 2018-19 can be forecasted, re-instating India as the world’s fastest growing major economy. This forecast is subject to upside potential and downside risks. 


Fiscal path for the coming year: a moderate consolidation that credibly signals a return to the path of gradual but steady fiscal deficit reductions. 


Way Forward for Indian economy 

Over the coming year, the government needs to 

  • Focus on the 4 R’s of the TBS—recognition, resolution, recapitalization, and reforms. It needs to ensure that the process of resolving the major indebted cases and recapitalizing the PSBs is carried to a successful conclusion.
  • stabilize GST implementationto remove uncertainty for exporters, facilitate easier compliance, and expand the tax base; 
  • privatize Air- India; and
  • stave off any nascent threats tomacroeconomic stability, notably from persistently high oil prices, and sharp, disruptive corrections to elevated asset prices.