Economic Survey 2017-18

Chief Economic Adviser

National Media Centre
29th January, 2018
Two Volumes
VOLUME I VOLUME II
I. State of the Economy: An Analytical Overview and I. An Overview of India’s Economic Performance in
Outlook for Policy 2017-18
II. A New, Exciting Bird’s Eye View of the Indian Economy II. Fiscal Developments
Through the GST
III. Monetary Management and Financial Intermediation
III. Investment and Saving Slowdowns and Recoveries:
Cross-Country Insights for India IV. Prices and Inflation
IV. Reconciling Fiscal Federalism and Accountability: Is there V. Climate Change, Sustainable Development and
a Low Equilibrium Trap? Energy
V. Is there a “Late Converger Stall” in Economic VI. External Sector
Development? Can India Escape it?
VII. Agriculture and Food Management
VI. Climate, Climate Change, and Agriculture
VII. Gender and Son Meta-Preference: Is Development Itself VIII. Industry and Infrastructure
an Antidote? IX. Services Sector
VIII. Transforming Science and Technology in India X. Social Infrastructure, Employment and Human
IX. Ease of Doing Business’ Next Frontier: Timely Justice Development
Overview of Presentation
 Achievements

 Analytical Review: Understanding temporary decoupling

 Outlook for 2017-18 and 2018-19 and policy agenda

 Highlights of research and analysis

 Lessons and way forward

Achievements
►Launch of transformational Goods and Service Tax (GST)
• Expeditious corrective actions

►Decisive tackling of Twin Balance Sheet (TBS) challenge:

• Of 4 Rs, resolution (IBC) and recapitalization advanced

►Validation of achievements, recognition of medium-term prospects

• Sovereign ratings upgrade and jump in Ease of Doing Business rankings
 0
1
2
3
4
5
6
8
9

7
10

Q1-2014

Q2-2014

Q3-2014
OECD-Europe

Q4-2014

Q1-2015
US
Temporary Decoupling

Q2-2015

Q3-2015
India

Q4-2015

Q1-2016

Q2-2016

Q3-2016
China (People's Republic of)

Q4-2016

Q1-2017

Q2-2017
OECD-EME

Q3-2017
Demonetization and GST: Impact on competitiveness
Growth of Manufacturing Export Value Growth of Manufacturing Import Value
(Year-on-year, 3 month moving average) (Year-on-year, 3 month moving average)
25% 30%

20% World 25% World

India
15% India
20%
China
15%
10% China Other Asian Economies
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
Aug/16

Aug/17
Jun/16

Oct/16

Apr/17
Jun/17

Oct/17
Feb/16
Apr/16

Feb/17
Dec/15

Dec/16

Dec/17

May/16

May/17
Sep/16

Jan/17

Sep/17
Feb/16

Apr/16

Oct/16
Nov/16

Feb/17

Apr/17

Oct/17
Nov/17
Jan/16

Mar/16

Mar/17
Jul/16

Jul/17
Dec/15

Jun/16

Dec/16

Jun/17

Dec/17
Aug/16

Aug/17
 -2.0
-1.0
1.0
2.0
3.0
4.0
5.0

0.0
Apr/14

Jul/14

Oct/14

Jan/15

Apr/15

Jul/15

Oct/15
India

Jan/16

Apr/16

Jul/16
USA

Oct/16

Jan/17

Apr/17

Jul/17
India’s monetary conditions became tight

Oct/17
100
104
108
112
116
120

2014-15:Q2

2014-15:Q3

2014-15:Q4

2015-16:Q1

2015-16:Q2

2015-16:Q3
High real interest rate, strong exchange rate

2015-16:Q4

2016-17:Q1

2016-17:Q2

2016-17:Q3

2016-17:Q4

2017-18:Q1

2017-18:Q2
Rupee appreciated overall by 9% since mid-2016
 Robust and broad-based revival
Services Export Growth (%)
IIP Manufacturing Growth** 18
14 Net Private Transfers (RHS)
GVA Manufacturing growth
70 16
GFCF growth (real)
12
14
10 50
12

8 10
30

6 8
10
6
4
4
2 -10
2
0
-30 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 H2

2009-10:Q2
2001-02:Q2

2002-03:Q2

2003-04:Q2

2004-05:Q2

2005-06:Q2

2006-07:Q2

2007-08:Q2

2008-09:Q2

2010-11:Q2

2011-12:Q2

2012-13:Q2

2013-14:Q2

2014-15:Q2

2015-16:Q2

2016-17:Q2

2017-18:Q2
-2 2013-14 2014-15 2015-16 2016-17 2017-18

-4

** GVA and GFCF is based on H2 data. IIP is for Q3 estimated from Oct-Nov
2017 data.
Short-term outlook
►Temporary factors receding, government providing demand

►Major driver will be exports

►Private investment depends on progress under IBC

►Consumption affected by oil prices

Growth projections

► 2017-18: Real GDP growth of 6.75 %; nominal GDP growth

of 10.5%

► 2018-19: Real GDP growth of 7-7.5%

Real GDP growth (%)
8.2
8.0
7.8
7.6
7.50
7.4
7.2
7.0 7.00
6.8
6.6 6.75
6.4
6.2
6.0
5.8
5.6
5.4
5.2
5.0
2012-13 2014-15 2015-16 2016-17 2017-18 2018-19
Upside Potential

► Export growth could be greater

► Private investment boosted if IBC process progresses well

Factors warranting heightened vigilance

► Persistently high oil prices at close to current levels

► Sharp corrections to elevated stock prices

► Classic emerging market “sudden stall” in capital flows

► Macro-economic policies may then need to be tighter

Oil prices
Period US$/bbl

2014-15 over 2013-14 -10.1%

2015-16 over 2014-15 -46.2%

2016-17 over 2015-16 -11.4%

2017-18 over 2016-17 15.9%

2018-19 over 2017-18 12%

 6.1
6.5
6.9
7.3
7.7
19/May/15
19/Jun/15
19/Jul/15
19/Aug/15
19/Sep/15
19/Oct/15
19/Nov/15
19/Dec/15
19/Jan/16
19/Feb/16
19/Mar/16
19/Apr/16
19/May/16
19/Jun/16
19/Jul/16
19/Aug/16
G-sec

19/Sep/16
19/Oct/16
19/Nov/16
19/Dec/16
19/Jan/17
19/Feb/17
19/Mar/17
BSE Sensex (RHS)

19/Apr/17
19/May/17
19/Jun/17
19/Jul/17
19/Aug/17
19/Sep/17
19/Oct/17
19/Nov/17
Revival and risks: Rising stocks, rising interest rates

19/Dec/17
19/Jan/18
20,000
22,000
24,000
26,000
28,000
30,000
32,000
34,000
36,000
Policy Agenda for Year Ahead
► Support agriculture

► Stabilize GST

► Complete TBS actions with 4th R: Reforms

► Privatize Air-India

► Head off macro-economic pressures and possibility of a

“sudden stall” from rising oil prices and sharp correction in
stock prices
Important new evidence
► Post-demonetization and GST increase in new tax filers (over and above
natural increase) of about 1.8 million and some boost to individual income tax
collections (Box 2)

► GST revenues doing well: Growth of about 12 percent and buoyancy above
historical experience (Box 7)

► Textile package boosted exports of key man-made garments by about 15

percent (Box 3)

► Markets are misinterpreting borrowing by central and state governments (Box

8)

► India’s stock market boom is different from other economies but warrants
heightened vigilance (Box 9)
New Analysis and Research
New Insights from GST data
►Reforms have increased tax rolls
►50 percent increase in unique indirect taxpayers, after GST
►1.8 million additional individual income tax filers since November 2016.
►Formal sector much bigger than believed
►75 million (30 percent) more if formality defined as firms providing social security
►127 million (50 percent) more when defined as firms being in the GST net.
►Firm structure of exports highly diversified
►Top 1 percent of Indian exporters account for 38 percent of exports
►72, 68, 67, and 55 percent in Brazil, Germany, Mexico, & USA, respectively
►States are big traders
►inter-state trade is about 60 % of GDP, more than the 54% estimated in last Survey.
►States that export more internationally are more prosperous
India’s investment and saving slowdown is unusual, long and
ongoing: Re-igniting investment is more important than raising
saving
Late Convergence Stall? 4 Headwinds (“Horsemen”)

1 2

Thwarted
Globalization
X Backlash
Structural
Transformation

3 4

Climate-change
Human Capital
induced
Regression
agricultural stress
Change in weather (last decade over 1950-80): Hotter, drier, more extreme
Some Evidence of a Son “Meta-Preference”
Sex Ratio by Birth when Child is not the Last Sex Ratio by Birth when Child is the Last

1.80 India India 1.80

1.82
Ideal SRB=1.05
1.55 1.65 1.55
1.55 1.51
1.45
1.30 1.30

1.07
1.05 1.05
0.86 0.88
0.85 0.84
0.80 0.80

2nd Child
1st Child

3rd Child

4th Child

5th Child
2nd Child
1st Child

3rd Child

4th Child

5th Child
1.80 Indonesia Indonesia 1.80

1.55 Ideal SRB=1.05 1.55

1.30 1.30
1.11
1.02 1.02
1.05 1.13 1.09 1.05
1.07 1.08 1.07
1.01 1.03

0.80 0.80
3rd Child

3rd Child
1st Child

2nd Child

1st Child

2nd Child
4th Child

5th Child

4th Child

5th Child
 Science and Technology needs a Big Push
5

4.5 China India Israel Japan Korea USA

4
R&D as Percentage of GDP

3.5

2.5

1.5

0.5

0
7 8 9 10 11
Log GDP Per Capita PPP 2011 Dollars
Source: UNESCO, World Economic Outlook (WEO), National Science Foundation (NSF).
From Vertical Cooperative Federalism to Horizontal Cooperative
Separation of Powers? Ease of Doing Business
Pendency of economic cases--in the major economic tribunals, tax department, High Courts, Supreme
Court--high and rising

10 250
Telecom Electricity Green Tribunal
9
Consumer Disputes Indirect Tax (RHS) Income Tax (RHS)
8 200
7
6 150
5
4 100
3
2 50
1
0 0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017
Lessons for Future
►Key challenges: education, employment, agriculture

►From “crony socialism to stigmatized capitalism”

►GST Council shows that “cooperative federalism” is a technology for

reforms in several other areas