(Current Affairs) Economy & Energy | March: 2017


Core sector grew at 5.6% in december

  • The eight core industries registered a growth of 5.6% in December 2016 on the back of healthy output recorded by refinery products and steel.
  • The growth rate of eight infrastructure sectors — coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity — was 2.9% in December 2015. It stood at 4.9% in November 2016.
  • The core sectors, which contribute 38% to the total industrial production, expanded 5% in April – December 2016 compared with 2.6% growth in the same period in the last financial year.
  • Refinery products and steel production jumped 6.4% and 14.9%, respectively, during the month under review.
  • However, crude oil, fertiliser, natural gas and cement output reported contraction. Coal output declined by 4.4% in December 2016 from 5.3% in the same month previous year.
  • Similarly, electricity generation, too, dipped by 6% as compared with 8.8% in December 2015.

The government has marginally revised GDP growth for 2015–16 to 7.9%

  • The government has marginally revised upwards the GDP growth for 2015–16 to 7.9% from the earlier estimate of 7.6% after factoring in the latest data on agriculture and industrial production.
  • “Real GDP or GDP at constant (2011–12) prices for 2015–16 and 2014–15 stands at Rs. 113.58 lakh crore and Rs. 105.23 lakh crore respectively, showing growth of 7.9% during 2015–16 and 7.2% during 2014–15,” stated CSO.
  • However, the figure for 2014–15 has remained unchanged at 7.2% in the second revision of the national accounts for the fiscal. Last year, CSO had estimated GDP growth rate for 2015–16 and 2014–15 at 7.6% and 7.2%, respectively.
  • CSO said the Gross Value Added (GVA) at constant (2011–12) basic prices grew at 7.8% in 2015–16 as against 6.9% in 2014–15.
  • Per capita net national income at current prices is estimated at Rs. 86,513 and Rs. 94,178 respectively for 2014–15 and 2015–16.
  • Per capita PFCE (private final consumption expenditure) at current prices is estimated at Rs. 57,402 and Rs. 61,571 for 2014–15 and 2015–16, respectively.

Economic survey recommends major reforms

  • 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 management itself.

  • 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 Survey.

  • 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 within India.

  • 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 reduce debt.

  • 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 FRBM Act.

  • 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 21st  century.”

  • 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 demonetisation.

  • 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 indicators.

Budget makes a paradigm shift in many ways

  • The Budget presented marks a paradigm shift in multiple ways. For one, it seeks to reconcile the consequences of international headwinds with domestic economic compulsions.
  • The international headwinds of rising protectionism, reinventing globalisation and interest rate behaviour by leading central bankers necessitate adherence to continued macroeconomic stability.
  • Mitigating the consequences of demonetisation particularly employment in the informal sector and lifting sagging investors’ sentiment would, inter alia , need fresh stimulus.
  • Stimulus both in terms of regulatory framework, ease of doing business and enhanced public outlay. Seeking synergy between agriculture and the corporate sector is an important initiative.
  • A sharp decline in corporate rate taxes for small and medium industries, which covers 97% of all corporates, would enhance their profitability and trigger investment green shoots.
  • This would be supported by enhanced agricultural credit, crop insurance, rural skill development leading to significant rise in rural demand.
  • At any rate, markets have applauded the budget package in no uncertain way. Perhaps after a long time sentiments have improved so decisively after the budget speech.
  • What does this imply? First and foremost, it is a thumbs up for adherence to the path of macroeconomic stability. This is also a coherent response to some debilitating features of adverse exogenous circumstances.
  • The centrepiece of the macro stability is adherence to the path of fiscal consolidation. However, there is a paradigm shift. Debt and not fiscal deficit, is being recognised as the principal stabilisation anchor.
  • Indeed, this was the quest during the debate in the constituent assembly to place fetters on executive discretion and borrowing.
  • In the new fiscal framework it is recognized that India in relation to other emerging markets is among the most debt ridden nations in the world, with a debt to GDP of 70%.
  • The Finance Minister mentioned the FRBM Committee’s recommendation on optimum debt to GDP ratio for India of 60%, consisting of 40% for Central Government and 20% for State Governments.
  • The fiscal deficit is only an enabling instrument for achieving this optimal debt GDP target. The Finance Minister has not resorted to the provision of ‘escape clause’ suggested by the Committee which has an upper ceiling of 0.5% of GDP in any fiscal year.
  • Markets have perceived this as government’s decisive commitment towards macroeconomic stabilization. This has spurred investor sentiment, found favour with rating agencies and augurs well for congruence of monetary and fiscal policy.
  • There are other initiatives too like, encouraging labour intensive industries, going beyond leather and textiles packages, by taking a fresh look at the regulatory framework for labour and to harmonize their conflicting regulations.
  • Similarly, public private partnership was a breeding ground for crony capitalism.
  • The recommendations of the Vijay Kelkar committee on a new act for dispute resolution as well as an ombudsman is sought to be implemented through an amendment to the Arbitration and Conciliation Act, 1997. This can rekindle innovative financing and public private partnership.

The government plans to divest Rs. 11,000 crore worth of stake in PSUs

  • The government plans to divest Rs. 11,000 crore worth of stake in PSU general insurance companies to meet the steep disinvestment target of Rs. 72,500 crore next fiscal.
  • Of the total target, Rs. 46,500 crore will be mobilised through minority stake sale and Rs. 15,000 crore from strategic disinvestment.
  • The goal of Rs. 72,500 crore is higher than Rs. 45,500 crore the government has estimated to raise in the current fiscal. A sum of Rs. 11,000 crore is budgeted from the listing exercise.

RBI asks people to remain vigilant while using virtual currecny

  • The Reserve Bank of India (RBI) has cautioned the users, holders and traders of virtual currencies (VCs), including Bitcoins, about the potential financial, legal and security risks.
  • “RBI advises that it has not given any licence/authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency.
  • As such, any user, holder, investor, trader, etc. dealing with virtual currencies will be doing so at their own risk,”it said.

Budget 2017-18, coming at a time of global uncertainty, is a pragmatic

  • Budget 2017-18, is a pragmatic, growth-oriented and smart policy statement, taking forward the reform agenda in a convincing and progressive manner. Its stand-out features are many and innovative.
  • Adhering to the path of fiscal prudence is a key message reiterating the Government’s commitment to sound macroeconomic management even when the situation calls for enhanced public spending.
  • The high emphasis on infrastructure through big increase in government expenditure, particularly transport facilities and affordable housing, is very welcome as it would kick-start a new cycle of investment in downstream sectors.
  • Reduction of corporate tax for companies with less than Rs. 50 crore turnover is another pertinent measure that can greatly boost their competitiveness and encourage more job creation.
  • Consumer demand can be expected to receive a fillip with the higher allocation for rural and agricultural sectors, as also halving of tax rates at the lower end.
  • Budget has taken a step towards public asset monetisation with airport land in tier 2 cities, where the proceeds can be used for upgradation of airports. This is an innovative move, and will gain pace in other sectors in time to come.
  • Institutional reform is evident in the abolition of FIPB and listing of PSEs. The FIPB was rendered redundant after continued liberalisation of FDI regime, and the FM has promised further opening up to foreign investments.
  • The listing of PSEs is evidence of government’s effort to add efficiency to their operations, besides promising to raise resources.
  • Demonetisation goes a step further with the stress on digitalisation and formalisation of the economy, which will have benefits for tax revenue and a better investment climate over the longer term.
  • The Budget has also come out with an innovative electoral bond to clean up political funding, adding to the overall campaign against black money.
  • Further, the National Innovation Fund was announced earlier for boosting R&D.
  • We would like to see a shift in R&D spending towards higher education institutes to bring it on par with the global average expenditure by universities, currently about 0.4% of GDP as compared to India’s average of 0.04%.
  • This would also help to incentivise private sector outlay on R&D to make India a source of global innovation at a time when Industry 4.0 is rapidly converging on us.
  • There is one item in the Budget of introduction of 10% surcharge on the incomes between Rs. 50 lakh and Rs. 1 crore which we feel is not in the spirit of rewarding the honest taxpayer.
  • The data on taxpayers mentioned in the Budget speech was eye-opening and it is important to expand the tax base.
  • Employment creation has been a central idea of the Budget, and the inclusion of leather and footwear for promotional attention at par with the apparel sector is laudable.
  • The need of the hour is to revitalise the critical drivers of growth of private consumption and investment, boost employment generation, create new infrastructure and stabilise the economy at a time of global turmoil.

Cabinet approved appointment of Sanjeev Sanyal as the Principal Economic Adviser

  • The Cabinet approved the appointment of Sanjeev Sanyal, a former managing director at Deutsche Bank, as the Principal Economic Adviser in the Department of Economic Affairs for three years.
  • Mr. Sanyal was the chief economist and director of Global Markets Research at Deutsche Bank in Singapore until 2008 and is currently an Adjunct Fellow at the Institute of Policy Studies in Singapore.
  • He is a Visiting Fellow at Oxford University, chief adviser to the John Templeton Foundation, director of the Green Accounting for Indian States Project, and Member of the Governing Council of the Economic Society of Singapore.
  • Mr. Sanyal has authored four books, including ‘The Incredible History of India's Geography.’

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