Economic Survey of India 2014-15: Highlights

Union Finance Minister Arun Jaitely on 27 February 2015 presented Economic Survey of India 2014-15 in the Parliament.
The Economic Survey reviews the developments in the Indian economy over the previous 12 months, summarises the performance on major development programmes and highlights the policy initiatives of the government and the prospects of the economy in the short to medium term.

Three pronged strategy suggested in Economic Survey 2014-15

• To improve the investment climate and reduce the backlog of stalled projects, Economic Survey 2014-15 suggested a three-pronged strategy, namely
• Revival of public investment in short term, to act as an engine of growth in infrastructure sector. It argues that public investment cannot be a substitute for private investment; but is required as a complement and to crowd it in.
• Need of creative solutions to strengthen institutions relating to bankruptcy. This will ensure that exit options are available. This will also ameliorate over-indebtedness that lowers the capacity to generate new investments. Towards this end, it contemplates setting up of a high-powered Independent Renegotiation Committee.
• Economic Survey highlights the need for reorientation and restructuring of the PPP model. This is expected to make them more viable in future.

Main Highlights of the Economic Survey 2014-15

General Highlights

• Using the new estimate for 2014-15 as the base, GDP growth at constant market prices is expected to accelerate to between 8.1 and 8.5 percent in 2015-16.
• Inflation declined by over 6 percentage points since late 2013 which is likely to remain in the 5-5.5 percent range in 2015-16, creating space for easing of monetary conditions.
• The current account deficit declined from a peak of 6.7 percent of GDP in Quarter 3 of 2012-13 to an estimated 1.0 percent in the fiscal year 2015-16.
• After a nearly 12-quarter phase of deceleration, real GDP has been growing at 7.2 percent on average since 2013-14, based on the new growth estimates of the Central Statistics Office.
• Foodgrains production for 2014-15 is estimated at 257.07 million tonnes, which will exceed average food grain production of last five years by 8.5 million tones
• Foreign portfolio flows have stabilized the rupee, exerting downward pressure on long-term interest rates which is reflected in yields on 10-year government securities and surge in equity prices.
• From a cross-country perspective, a Rational Investor Ratings Index (RIRI) which combines indicators of macro-stability with growth illustrates that India ranks amongst the most attractive investment destinations.
• It ranks well above the mean for its investment grade category (BBB), and also above the mean for the investment category above it (on the basis of the new growth estimates).
• In the short run, growth will receive a boost from the cumulative impact of reforms, lower oil prices, likely monetary policy easing facilitated by lower inflation and improved inflationary expectations, and forecasts of a normal monsoon in 2015-16.
• Growth in medium-term prospects will be conditioned the “balance sheet syndrome with Indian characteristics” that has the potential to hold back rapid increases in private sector investment.
• In the long-run, private investments will be the engine of growth. However, there is a case for reviving targeted public investment as an engine of growth in the short run to complement and crowd-in private investment.
• Expenditure control and expenditure switching from consumption to investment will be the key to growth in the short-run
• It calls for complementing Make in India initiative with Skill India initiative to enable a larger section of the population to benefit from the structural transformation that such sectors will facilitate.
• The Survey emphasizes on creation of a National Market for Agricultural Commodities in place of thousands of agricultural markets
• The Model APMC Act, 2003 should be amended along the lines of the Karnataka Model that has successfully introduced an integrated single licensing system.

Fiscal Framework

• The Survey calls for adhering to the medium-term fiscal deficit target of 3 percent of GDP. This will provide the fiscal space to insure against future shocks and also to move closer to the fiscal performance of its emerging market peers.
• It also calls for moving toward the golden rule of eliminating revenue deficits and ensuring that, over the cycle, borrowing is only for capital formation.
• Expenditure control combined with recovering growth and the introduction of the GST will ensure that medium term targets are comfortably met.
• In the short run, the need for accelerated fiscal consolidation will be conditioned by the recommendations of the Fourteenth Finance Commission (FFC).
• The quality of expenditure needs to be shifted from consumption, by reducing subsidies, towards investment.

Subsidies and the JAM Number Trinity Solution

• Food Subsidy Bill stands at 107823.75 crore rupees during 2014-15 (up to January 2015) which means an increase of 20 percent over previous year
• The direct fiscal cost of select subsidies is roughly 378,000 crore rupees or 4.2 percent of GDP in 2011-12.  
• 41 percent of subsidy given for the PDS kerosene is lost as leakage and only 46 percent of the remaining 59 percent is consumed by households that are poor.
• The JAM Number Trinity – Jan Dhan Yojana, Aadhaar, Mobile – can enable the State to transfer financial resources to the poor in a progressive manner without leakages and with minimal distorting effects.

Indian Railways and Public Investment

• The Indian Railways over the years has been plagued by host of issues. Some of them include underinvestment resulting in lack of capacity addition and network congestion; neglect of commercial objectives; poor service provision; and consequent financial weakness.  These have cumulated to below-potential contribution to economic growth.
• As a result, the competitiveness of Indian industry has been undermined. Calculations reveal that China carries thrice as much coal freight per hour compared to India. Coal is transported in India at more than twice the cost vis-à-vis China, and it takes 1.3 times longer to do so.
• The railways public investment multiplier (the effect of a 1 rupee increase in public investment in the railways on overall output) is around 5.
• In the long run, the railways must be commercially viable and public support must be linked to railway reforms. These include adoption of commercial practices, tariff rationalization, and technology overhaul.