Highlights of the Indian Economic Survey 2014-15

This article presents a bird's eye view of the Indian Economic Survey. I have selected 10 important topics with their explanations as given in the official document.

1. The re-surging Indian economy

The Indian economy that has been sagging are showing enough signs of a revival.
Four reasons have been attributed to it:

• A stable Government and its policies like deregulating diesel prices, raising gas-prices, Direct Benefit Transfer Scheme and a set of progressive legislations (GST, land acquisition, coal bill etc.)
• Decline in oil price and inflation : Oil prices have declined on account of over production across the globe and lack of demand in economies like the US which has the shale gas alternative now. The decline in oil prices have a cascading effect on the domestic economy thus bringing down the cost of goods in the value chain. The dip in the Wholesale Price Index is a good indicator.
• Monetary easing by the RBI : This is evident in the reduction of policy rate (REPO rate). It has resulted in the circulation of more money in the economy.
• Good prospects of monsoon :  This would provide a good boost for agriculture which is still the breadwinner for the majority of Indians.

2. Incrementalism Vs "Big Bang reforms" - the way ahead

An important question is whether we require Big Bang reforms to bring in growth?
Big bang reforms occur in the aftermath of major crises. In a robust democracy like India, where multiple actors and institutions are involved, it should be an exception rather than a norm. Moreover the economy is already showing good signs of a revival.

But issues like ramping up investment and rationalizing subsidies require decisiveness from the part of the Government. Hence what is required is boldness in sectors where the policy levers can be easily pulled combined with persistent incrementalism in other areas.

3. Moderation in inflation - a positive sign.

The following are the major reasons for the lowering inflation rates in India.

• Falling crude oil prices that have a cascading effect on the economy.
• Agriculture - Decline in global agricultural prices. Increases in domestic support prices to be moderate. Decelerating rural wage growth further relaxing inflationary pressures. An efficient system that would help in better price discovery of agricultural goods is the need of the hour.
• Inflation expectations - This implies the expectation or rather apprehension of house-holds about inflation. The inflation expectations that were persistently above actual inflation, but has dropped in the latest survey. This will moderate wage setting and thus reduce inflation.

4. The macro-economic trilemma

A rather new crisis confronting the RBI and other central banks in developing economies because of their integration with the global economy. It means that a country cannot have a stable exchange rate, free movement of capital and independent monetary policy, all at the same time. In India's case, the RBI does not have complete control over the money supply because of the influence of the global economy. This is explained below:
Suppose RBI increases the interest rate to curb inflation (monetary policy). This would attract foreign investment because of better returns. The coming of foreign capital would lead to injection of domestic currency in the market. The rise in availability of money would again result in inflation. Thus the vicious cycle repeats. RBI is trying to insulate the domestic economy by building up large foreign exchange reserves.

5. The JAM number trinity solution

The anti-poverty programmes that are subsidy based are in fact hurting the poor in an indirect manner. Both the central and state governments subsidises a wide range of products with the expressed intention of making these affordable for the poor. It includes rice, wheat, pulses, sugar, kerosene, LPG, naphtha, water, electricity, fertiliser, iron ore, railways. But most of these programmes are poor in targeting or are weak in their implementation. According to the latest NSSO data, the leakages in kerosene distribution via PDS amount to 41%, while those are 15% and 54% for rice and wheat respectively.

The JAM or Jan Dhan, Aadhaar Mobile trinity presents a technological alternative to improve the economic lives of the poor. The targeted, unconditional direct transfers would plug leakages on the one hand, while avoid the negative influence of intermediaries on the other. This is being implemented not just for the PDS but also for the anti-poverty programmes like the NREGA and NSAP. The Jan Dhan Yojana resulted in opening up Aadhar-linked bank accounts in many rural households. Mobile phones that have deeply penetrated in India and almost hit the 1 billion mark are assumed serve as the best platforms for information dissemination and cash transfers. Thus the three systems - Jan Dhan, Aadhaar and mobile would play a greater role in bettering the lives of the common man.

6. The balance sheet syndrome with Indian characteristics

Though the Government has accorded the private sector a crucial role in the economic growth and formulated the policies in this regard, private investment is yet to pick up due to many reasons.

The Indian corporate sector is weighed down by over-indebtedness and weak profitability. This is seen in the very low interest cover ratio (implies the cash flows are not even sufficient to pay back interest) and the high debt to equity ratio of many firms. There is no easy resolution of over-indebtedness due to the weak bankruptcy institutions. Further an unviable Public-Private-Partnership model and a deteriorating banking system adds to the woes of the private sector.

On top of all these, there is a typical Indian mentality of risk aversion which leads to absence of bold decisions during a crisis (known as inertial decision making). This is very evident in the case of Public Sector Banks which are reluctant to lend in a situation of rising NPAs, due to their greater accountability and Governmental oversight.

Hence for the short and medium term the public sector has a greater role to play since they can absorb shocks better. Public investment should happen not just in social and rural sectors but also in basic infrastructure like railways.

7. "The difficulty of exit" challenge

It is important that we are not just prudent enough to run a firm, but are also prepared in its clean-up if such an unexpected situation arises. There should be efficient mechanism to handle firms that are over-indebted. The weak institutions related to bankruptcy have resulted in delayed restructuring of projects. The stalled projects persist for years and constitute around 7-8 percent of GDP.
The Asset Reconstruction Companies which are partly owned by banks themselves and the Debt Recovery Tribunals are either over-burdened or inefficient. The SARFAESI Act for asset reconstruction and recovery, though seems to be strong in principle, but is weakly enforced in practice, While the big-defaulters walk scot-free, it is the small borrowers and the SMEs who face the heat under this legislation.

8. The double financial repression of the banks

The Indian banking system is affected by financial repression both on the asset side and the liability side, and hence the name double financial repression.

• Asset side : Financial repression on the asset side of the balance sheet is created by the statutory liquidity ratio (SLR) requirement that forces banks to hold government securities, and priority sector lending (PSL) that forces resource deployment in less than-fully efficient ways. Banks require deregulation(from SLR) and diversification of their assets (relaxing PSL) to tackle this challenge.
• Liability side : Financial repression on the liability side has arisen from high inflation since 2007, leading to negative real interest rates. This implies that interest rates charged by banks are in fact cancelled out by the rising inflation and this results in negative real interest rates. Another issue is the sharp reduction in financial savings of the households mainly due to the presence of alternate saving instruments like land and gold.

9. Manufacturing sector and  the "Make in India" challenge

Three major policy changes have been suggested:

• Improving the business environment by making regulations and taxes less onerous, building infrastructure, reforming labour laws, and enabling connectivity
• Industrial policy - providing subsidies, lowering the cost of capital, and creating special economic zones (SEZs)
• Protectionist policy for ensuring tradability of manufacturing - shielding domestic manufacturing from foreign competition via tariffs and local content requirements; and provide export-related incentives. This might invite the wrath of global institutions like the WTO. Another idea to eliminate negative protectionism, seen in the exemption of Countervailing duty(CVD) to imported goods that make them cheaper than the domestic goods.

10. The weakening of Indian exports

This is attributed to a few internal and external factors:

• A slowdown in global growth that has resulted in reduced demand. The sluggish growth in China and the Eurozone crisis are two major reasons.
• The rise of mega-regional trade agreements - Trade is gradually getting regionalised with the global institutions like WTO being replaced by powerful trade blocks. The Trans-Pacific Partnership (TPP) and the Trans Atlantic Trade and Investment Partnership (TTIP) are the major organisations formed under the leadership of the US, while China is pushing ahead the Regional Comprehensive Economic Partnership (RCEP) that mainly includes the Asian countries. For India, maintaining the status-quo, runs the risk of being excluded from from these large integrated potential markets. On the other hand, joining them would result in greater liberalisation obligations than any of the present Free Trade Agreements which India has signed with other nations.
• Domestic factors affecting the manufacturing and services sector. While the manufacturing is affected by weak infrastructure and challenging labour laws, the rising wages and the lack of skilled labour are the major worries in the service sector.