Wish list for the economy: The government today released the economicsurvey report for FY17. It needs to be noted that this survey is a flagshipannual document of the Ministry of Finance and reviews the economicdevelopments over the past 12 months and highlights the prospects of theeconomy in the short to medium term.
What is in the detail?
Demonetisation: The survey indicated that demonetisation will have bothshort-term costs and long-term benefits. The costs include a contraction incash money supply and subsequent, albeit temporary, slowdown in GDPgrowth; and benefits include increased digitalization, greater tax complianceand a reduction in real estate prices, which could increase long-run taxrevenue collections and GDP growth. The follow-up actions to minimize thecosts and maximize the benefits include remonetisation, further tax reformsincluding bringing land and real estate into the GST framework, reducing taxrates and stamp duties, etc (see Fig 1 on page 3).
Downside of 25-50bps seen to FY17 GDP growth estimate of 7% ondemonetisation: The survey highlighted that the cash squeeze will havesignificant implications for GDP, reducing FY17 growth by 25-50bpscompared to the baseline of 7%. It also mentioned that recorded GDP willunderstate impact on informal sector because, for example, informalmanufacturing is estimated using formal sector indicators (IIP data).
GDP growth to bounce back in FY18: The government expects the adverseimpact of demonetisation on GDP growth to be transitional. The surveyexpects the growth to return to normal, between 6.75-7.5% in FY18, as thenew currency notes in required quantities come back into circulation (likely byend Mar-2017) and as follow-up actions to demonetisation are taken.
Universal basic income (UBI): The survey advocated the concept of UBI asan alternative to the various social welfare schemes in an effort to reducepoverty. The survey pointed out that the 2 prerequisites for a successful UBIare: (a) functional JAM (Jan Dhan, Aadhar and Mobile) system as it ensuresthat the cash transfer goes directly into the account of a beneficiary; and(b) centre-state negotiations on cost-sharing for the programme. This will helpreduce poverty to 0.5% and would cost between 4-5% of GDP, assuming thatthose in the top 25% income bracket do not participate. This compares withthe existing subsidy bill (including food, petroleum and fertilizer subsidies) ofabout 3% of GDP.
Fiscal prudence: The survey highlighted the need for fiscal prudence both bythe centre as well as the states in order to maintain overall fiscal health of theeconomy. However, it mentioned that as the fiscal challenges mount for thestates because of the Pay Commission recommendations, and mountingpayments from the UDAY bonds, there is a need to review how fiscalperformance can be kept on track. Going forward, greater reliance will need tobe placed on incentivizing good fiscal performance by the states.
Addressing the twin balance sheet problem—over-indebted corporateand bad-loan-encumbered public sector banks: The survey suggestedsetting up of a centralised Public Sector Asset Rehabilitation Agency (PARA)that could take charge of the largest, most difficult cases, and make politicallytough decisions to reduce debt.
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