Economic Survey 2018: Moving forward from the last Budget year, the Economic Survey 2017-18 tabled in Parliament pegs the real GDP growth rate for the current fiscal at 6.75% (against 6.75-7.5%, Economic survey 2016-17) and predicts the economy to grow at 7-7.5% of GDP in FY19. This is in sync with numbers forecast by various multilateral agencies and think tanks. There were some major reform initiatives undertaken by the government in FY17, which were, in some instances, path-breaking. Introduction of GST, new bankruptcy code, further liberalisation in FDI, capitalisation of public sector banks (PSBs), etc, are steps in the right direction to revive and strengthen the economy. The Economic Survey mentions these key interventions and their role in bringing the economy back on the growth path. Clearing the air on effectiveness of GST in enhancing the tax base, the new data reports a 50% increase in the number of indirect taxpayers. Relieving most of the big producing states from the fear of revenue loss, the distribution of GST base turns out to be directly proportional to their size measured in terms of gross state domestic product (GSDP). As a result, majority share of tax revenue accrues to the large producing states. This will help in addressing some of the fiscal issues at the state level. It is expected that there will be less burden on the Centre for the compensation to states. It would also free up the compensation kitty that has been built up through the additional cess on certain goods and thus possibly provide further cushion to the deficit.
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The Survey highlights that demonetisation resulted in widening of the tax base and rise in household savings. The new system has turned out to be quite successful in eliciting voluntary compliance by witnessing close to 1.7 million registrations among those lying below the threshold limits. While the tax base has increased, the increase in tax filers below the threshold does not immediately accrue revenue to the government. However, it has the potential to contribute revenues in the future with enhanced incomes and better scrutiny.
The Survey also draws on cross-country experiences to study and analyse the pattern of investments and savings slowdown in the economy post the early peaks achieved in 2000. With a sample of about 55 countries and 2,200 observation points, it concludes a slow and shallow recovery whenever there is an intense slowdown in economic activity. Further extrapolating the data, it has been found that growth in savings does not have a direct correlation with economic growth, rather investment affects the growth strongly. This may have clues for the finance minister to enhance the capital investment outlays in the Budget to revive growth, as otherwise normal recovery is expected to be slow.
There has been highest ever Budget allocation under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) during 2017-18. About 4.6 crore households were provided employment, totalling 177.8 crore person days during 2017-18 as on January 14, 2018. Of this, 54% were generated by women, 22% by scheduled castes and 17% by scheduled tribes. This year, too, we expect higher allocation of the Budget to this scheme, given that this is a pre-election Budget.
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The Economic Survey highlights the primary areas of concern lying around the prevailing high oil prices, adverse impacts of climate change, skewed sex ratio with an approximate figure of close to 63 million missing women, children and maternal malnutrition, inadequate investment in infrastructure and others. As highlighted in the Survey, there is a lot to be done in the educational sector in terms of student classroom ratio (SCR) and pupil teachers ratio (PTR). Climate change, which stands a potential threat to agricultural yield and thus farmers’ income, has also been highlighted among the issues needing immediate attention. The Survey suggests the need for dramatic improvement in irrigation, use of technologies, and better targeting of power and fertiliser subsidies.
Given these pointers, it, possibly, is hinting at a greater outlay in education, health, irrigation and other farm sector infrastructure, as well as better subsidy targeting for farmers through direct benefits transfer. There are hints of limitations on the fiscal consolidation measures in a pre-election year, but pins hopes on a private sector-led growth in the next fiscal. An optimistic inflation estimate of 3.75%, which is within the comfort zone of the central bank, and an assumption that this will not be a very populist Budget, provide further clues.
We now await to see what will be the level of deficit targeted in the Budget by the finance minister given these economic headwinds and the insights from the Economic Survey.
(The author is partner & leader, public finance & economics, PwC India)