5/19/2016

EconomicSurvey201516:AmidstGloomyInternationalEconomicLandscape,IndiaStandsasahavenofStability

PressInformationBureau
GovernmentofIndia
MinistryofFinance
26February201612:08IST

EconomicSurvey201516:AmidstGloomyInternationalEconomicLandscape,IndiaStandsasahavenofStability
ExpectsGDPGrowthRatefor201617intherangeof7%to7.75%
IncreaseinWagesandBenetsRecommendedbythe7thPayCommissionarenotlikelytoDestabilizePricesandwill
havelileimpactonInaon;
4R:Recognion,Recapitalizaon,Resoluon,andreformrequiredtoComprehensivelyresolvethetwinbalancesheet
challengeofPublicSectorBanks(PSBs)andsomeCorporateHouses.
The Economic Survey 201516 tabled in Parliament today by the Union Finance Minister Shri Arun Jaitley presents an
optimistic picture of Indian economy stating that amidst the gloomy landscape of unusual volatility in the international
economic environment, India stands as a haven of stability and an outpost of opportunity. It says the countrys macroeconomy
is stable, founded on the governments commitment to fiscal consolidation and low inflation. The Survey underlines that
Indias economic growth is amongst the highest in the world, helped by a reorientation of government spending toward needed
public infrastructure. Describing these achievements as remarkable, the Survey emphasizes that the task is now to sustain them
in an even more difficult global environment.
The Survey further states that the countrys performance reflects the implementation of number of meaningful reforms. There
is palpable and pervasive sense that corruption at the centre has been meaningfully addressed which has been reflected in
transparent auctions of public assets. FDI has been liberalized across the board and vigorous efforts have been undertaken to
ease the cost of doing business. Stability and predictability has been restored in tax decisions reflected in the settlement of the
Minimum Alternate Tax (MAT) imposed on foreign companies. Major public investment has been undertaken to strengthen
the countrys infrastructure. In the farm sector, a major crop insurance programme has been instituted. The Survey has
highlighted creation of bank accounts for over 200 million people under Pradhan Mantri Jan Dhan Yojan (PMJDY), the
worlds largest direct benefit transfer programme in case of LPG with about 151 million beneficiaries receiving Rs. 29,000
crore in their bank accounts and the infrastructure being created for extending the JAM (Jan Dhan Aadhar Mobile) agenda to
other Government programmes and subsidies.

However, the Survey has expressed concern over approval of GST Bill being elusive so far, the disinvestment programme
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falling short of targets and the next stage of subsidy rationalization being a workinprogress. It adds that corporate and bank
balance sheets remain stressed affecting the prospects for reviving private investments. It further says that perhaps the
underlying anxiety is that the Indian economy is not realizing its full potential.
The Survey states that the countrys long run potential growth rate is still around 810% and realizing this potential requires a
push on at least three fronts. First, India has moved away from being reflexivity antimarkets and uncritically prostate to being
proentrepreneurship and skeptical about the state. But being proindustry must evolve into being genuinely procompetition.
Similarly, skepticism about the state must translate into making it leaner. It emphasizes that the key to creating a more captive
environment will be to address the exit problem which affects the Indian economy. Second, the Survey calls for major
investments in health and education of people to exploit Indias demographic dividend to optimal extent. Third, it says that
India cannot afford to neglect its agriculture.
The Survey pointsout that the upcoming budget and economic policy will have to contend with an unusually challenging and
weak external environment. It suggests that one tail risk scenario that India must plan for is a major currency readjustment in
Asia in the wake of a similar adjustment in China. Another tail risk scenario could unfold as a consequence of policy actions,
to say, capital controls taken to respond to curb outflows from large emerging market countries, which would further moderate
the growth. The Survey says that in either case, foreign demand is likely to be weak which requires to find and activate
domestic sources of demand to prevent the growth momentum from weakening.
The Survey highlights that India stands out internationally as an investment proposition and the Rational Investor Ratings
Index (RIRI) shows that India compares favourably with peer countries in the BBB investment grade and almost matches the
performance of Agrade countries.

While reviewing the major developments, the Survey states that according to CSO the growth rate of GDP at constant market
prices is projected to increase to 7.6% in 201516 from 7.2% in 201415. Although agriculture is likely to register low growth
for the second year in a row on account of weak monsoons, it has performed better than last year. Industry has shown
significant improvement on account of acceleration in manufacturing while services continue to expand rapidly. The Survey
points out that even as real growth has been accelerating, nominal growth has been falling.

Among other indicators, the Survey states that low inflation has taken hold and confidence in price stability has improved. The
Current Account Deficit has declined and foreign exchange reserves have risen to US$ 351.5 billion in early February, 2016.
The fiscal sector registered these striking successes; ongoing fiscal consolidation, improved indirect tax collection efficiency and
an improvement in the quality of spending at all levels of government. The Government Tax Revenues are expected to be
higher than budgeted levels. Direct taxes grew by 10.7% in the first 9 months of 201516 while indirect taxes were also buoyant.

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The Survey states that the aggregate capital expenditure by the government increased by 0.6% in 201516. This occurred both
in the centre and states, with the former contributing 54% and the latter 46%.
In the economic outlook, real GDP growth for 201617 is expected to be in the 7% to 7.75% range. However, it cautions that if
the world economy remains weak, Indias growth will face considerable headwinds. On the domestic side, two factors can
boost consumption, increased spending from higher wages and allowances of government workers if the seventh pay
commission is implemented and return of normal monsoon. At the same time, the Survey enumerates three down side risks
turmoil in global economy could worsen the outlook of exports, contrary to expectations oil prices rise would increase the drag
from consumption and the most serious risk is combination of the above two factors.
The Survey cautions that one of the most critical short term challenges confronting the Indian economy is the twin balance
sheet problem the impaired financial positions of the Public Sector Banks (PSBs) and some corporate houses. The twin
balance sheet challenge is the major impediment to private investment and a fullfledged economic recovery. Comprehensively
resolving this challenge would require 4 Rs : Recognition, Recapitalization, Resolution, and Reform. Banks must value their
assets as far as possible close to true value (recognition) as the RBI has been emphasizing; once they do so, their capital
position must be safeguarded via infusions of equity (recapitalisation)as the banks have been demanding; the underlying
stressed assets in the corporate sector must be sold or rehabilitated (resolution) as the government has been desiring; and
future incentives for the Private Sector and corporates must be setright (reform) to avoid a repetition of the problem, as
everyone has been clamouring.

According to the Survey, the time is right for a review of medium term fiscal frame work. It adds that there are new
developments in, and approaches to, medium term fiscal frameworks around the world from which India can usefully learn.
About inflation, the Survey says that increase in wages and benefits recommended by the 7th pay Commission are not likely to
destabilize prices and will have little impact on inflation.

On the external outlook, the Survey says that overall exports declined by about 18% in the first three quarters. It pointsout that
in the last two years Indian services exports have been more affected than Indian manufacturing exports and also world service
exports. Realizing Indias medium term growth potential of 810 percent will require rapid growth of export. To achieve
trajectory similar to China, Indias competitiveness will have to improve so that its services exports, currently about 3 percent of
world exports, capture nearly 15% of world market share.
On the issue of trade policy, the Survey says that introspection is overdue on five issues which are providing support to
farmers in light of WHO rules, mitigating the impact of erratic trade policy on farmers incentives, reconciling the big but
poor dilemma that confronts India in trade negotiations, dealing with outgoing stresses brought on by the external
environment, and engaging more broadly with the world on trade. The Survey underlines that Indias position in agriculture
has changed, it has become more competitive and relies relatively more on domestic support. It suggests Indias WTO
obligations could predominantly be based on this domestic shift away from border protection to domestic support. It further
suggests that India could consider offering reduction in its very high tariff bindings and instead seek more freedom to provide
higher levels of domestic support.
Stating that the trade policy is under stress also for reasons related to the ongoing turmoil in the international environment and
the global demand is weak, the Survey suggests that India should resist calls to seek recourse in the protectionist measures,
especially in relation to items that could undermine the competitiveness of downstream firms and industries. It also suggests
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that India should strengthen procedures that allow WTOconsistent and hence legitimate actions against dumping (anti
dumping), subsidization (countervailing duties), and surges in imports (safeguard measures) to be taken expeditiously and
effectively.
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