The Economic Survey recommended the Centre to incentivise
good fiscal work by States to keep the overall fiscal performance on track.
Greater reliance will need to be placed on incentivising
good fiscal performance, not least because States are gradually repaying
their obligations to the Centre, removing its ability to impose a hard
budget constraint on them.
It, however, added that incentivising good performance by
the States will require the Centre to be an exemplar of sound fiscal
The average revenue deficit has been eliminated, while
the average fiscal deficit was curbed to less than 3% of GSDP. The average
debt to GSDP ratio has also fallen,” it said.
Survey noted that much of the improvement in financial
positions was possible because of exogenous factors, most notably assistance
from the Centre in the form of increased revenue transfers, the assumption
of state debt, and the introduction of centrally sponsored schemes.
The Survey also highlighted that Pay Commission
recommendations, and mounting payments from the UDAY bonds will lead to
increase in fiscal challenges for the States.
Further, the Survey has further suggested that
Redistributive Resource Transfers should be significantly linked to fiscal
and governance efforts on the part of the States.
Redistributive Resource Transfer or RRT to a state (from
the Centre) is defined as gross devolution to the state adjusted for the
respective state’s share in aggregate GDP.
The top 10 recipients are: Sikkim, Arunachal Pradesh,
Mizoram, Nagaland, Manipur, Meghalaya, Tripura, Jammu and Kashmir, Himachal
Pradesh and Assam.
It also recommended using a part of the RRTs or
redistribute the gains from resource use, as a Universal Basic Income
directly to households in relevant states which receive large RRT flows and
are more reliant on natural resource revenues.
Smaller States such as Uttarakhand, Himachal Pradesh and
Goa trade more, while the net exporters are the manufacturing powerhouses of
Tamil Nadu, Gujarat, and Maharashtra, according to the Economic Survey.
One other finding on internal trade between States, of
the first-ever estimates for interstate trade flows, is that cross-border
exchanges between and within firms amount to at least 54% of GDP (in 2015).
Implying that India’s interstate trade is 1.7 times
larger than its international trade of 32% of GDP.
Belying their status as agricultural and/or less
developed, Haryana and Uttar Pradesh appear to be manufacturing powerhouses
because of their proximity to the national capital region, according to the
India’s aggregate interstate trade (54% of GDP) is not as
high as that of the U.S. (78% of GDP) or China (74% of GDP), but
substantially greater than provincial trade within Canada and greater than
trade between Europe Union countries.
The costs of moving (within India) are about twice as
great for people as they are for goods, the Survey said. However, it said
there is a potential dampener on the finding that trade in goods is high
Devoting considerable attention to India’s twin-balance
sheet problem, the Survey said that the agency could take charge of the
largest, most difficult cases, and make politically tough decisions to
India’s NPA ratio at its current level of 9.1% of the
gross loans is higher than any other major emerging market (with the
exception of Russia), higher even than the peak levels seen in Korea during
the East Asian financial crisis.
Advocating PARA to resolve the problem of twin-balance
sheets (corporates and banks) to be funded by the windfall gain to the
government (from the unreturned old demonetised notes).
Economic Survey said, so far, public discussion of the
bad loan problem had focused on bank capital, under the assumption that the
main obstacle to resolving the twin balance sheet (TBS) concern was finding
the funds needed by the public sector banks.
India has “changed utterly” over the last 13 years since
the Fiscal Responsibility and Budget Management (FRBM) was enshrined in law
for prudent fiscal management and therefore.
FRBM operational framework designed in 2003 “needs to be
modified to reflect the India of today and even more importantly, the India
of tomorrow,” according to the Economic Survey.
This suggestion assumes significance in the backdrop of
the N.K. Singh panel recently submitting its report on revising the FRBM Act
to finance minister Arun Jaitley.
Noting that India’s economic experience shows that the
fiscal activism embraced by advanced economies giving a greater role to
counter-cyclical policies and attaching less weight to curbing debt was not
relevant for India.
The Survey said India’s fiscal experience has underscored
the fundamental validity of the fiscal policy principles enshrined in the
However, India’s experience has reaffirmed the need for
rules to contain fiscal deficits because of the proclivity to spend during
booms and undertake stimulus during downturns, it observed.
Even as these FRBM’s basic tenets — or the fundamental
validity of the fiscal policy principles — remain valid, “… the task of the
FRBM Review Committee (will be) to set out a new vision, an FRBM for the
The government has set a target for fiscal deficit of
3.5% of GDP for FY’17, a lower target than the 3.9% set for 2015-16 which
was achieved. In value terms, the 3.5% is Rs. 5.33 lakh crore.
According to data released, fiscal deficit in the
April-December (2016-17) period was 93.9% of the Budget target against 87.9%
for the same period a year ago. The April-December fiscal deficit in value
terms was Rs. 5.01 lakh crore.
Economic Survey acknowledged the adverse impact of
demonetisation in the short term as it projected that GDP growth this year
would be slowed by 0.25-0.5 percentage point as a result of the withdrawal
of high-value currency notes.
“The question is: how much? The short answer is between
one-quarter and half-a-percentage point relative to the baseline of about
7%,” it said.
The Reserve Bank of India had in December trimmed its
projection for Gross Value Added growth for the current financial year to
7.1% from 7.6% after considering the short-term disruptions caused by
The survey acknowledged that GDP growth in the second
half of the current fiscal would understate the overall impact because the
most affected parts of the economy, informal and cash based,were either not
captured in national income accounts or measured based on formal sector