If wishes were horses, the Economic Survey would win the Derby. Year after year, the survey comes up with a list of pious hopes about how the economy needs to be reformed, which have about as much effect as the list of New Year’s resolutions that many of us make.
Nevertheless, the Economic Survey also contains more immediate forecasts that are of relevance in the context of the Union Budget. These include, for instance, the projection of growth and its assessment of the fiscal situation.
For starters, the Economic Survey 2017 pegs India’s GDP growth for the current fiscal year at 6.5-6.75%, since it says the impact of demonetisation will be “a ¼ percentage point to ½ percentage point reduction in real GDP growth relative to the baseline estimate of about 7 percent”. But this is an over-estimate, because it goes on to say, ‘Recorded GDP growth in the second half of FY2017 will understate the overall impact because the most affected parts of the economy—informal and cash-based— are either not captured in the national income accounts or to the extent they are, their measurement is based on formal sector indicators”.
But what is important for budget-making is the projection of GDP growth for FY18. The Economic Survey puts this at 6.75%-7.5%. What will propel this growth? The Economic Survey is clear that there won’t be a revival of investment demand within the next fiscal year. It says, “Since no clear progress is yet visible in tackling the twin balance sheet problem, private investment is unlikely to recover significantly from the levels of FY2017”. It is far more optimistic on exports, believing that a global recovery will result in exports contributing to higher growth in FY18 by as much as 1 percentage point.
On consumption, the Economic Survey is pessimistic, in view of higher oil prices “which would create a drag of about 0.5 percentage points”. On the other hand, a catch-up in consumption after the demonetisation-induced curbs and lower borrowing costs will support consumption.
The Economic Survey lists the risks to its baseline outlook: negative risks from the lingering impact of demonetisation, higher oil prices and trade tensions—a polite way of saying that Trumponomics is a major uncertainty. On the other hand, higher than anticipated global growth could be a pleasant surprise.
What does it translate into in terms of fiscal receipts? First, the Economic Survey says “the increase in the tax to GDP ratio of about 0.5 percentage points in each of the last two years owing to the oil windfall will disappear. In fact, excise-related taxes will decline by about 0.1 percentage point of GDP, a swing of about 0.6 percentage points relative to FY2017”. Second, while there will be windfall gains from demonetisation and the black money disclosure schemes, the Economic Survey says these are one-off and should be used for debt reduction, or for the GST compensation fund for states or for setting up a public sector asset reconstruction company to take care of the pernicious bad debt problem of banks. And thirdly, it urges the government to be cautious about any boost to revenues from the GST, at least in the short term. In other words, the outlook for revenue collections in FY18 is not rosy.
On expenditure, the Economic Survey discusses the fashionable topic of a Universal Basic Income, but also calls for “a standstill on new government programs” and a rigorous scrutiny whether existing ones are meeting their goals.
Where does that leave the fiscal deficit target? The Economic Survey says “An economy recovering from demonetisation will need policy support” and fiscal policy is a potential source of policy support. It goes on to say “Unlike last year, there is more cyclical weakness on account of demonetisation. Moreover, the government has acquired more credibility because of posting steady and consistent improvements in the fiscal situation for three consecutive years”. The implication is clear: the government can afford to loosen its fiscal strings a bit, although the Economic Survey does make its ritual obeisance to “balance the cyclical imperatives with medium term issues relating to prudence and credibility”.
And last but not least, there is the obligatory discussion of boosting growth through structural reforms such as strategic disinvestment, tax reform and subsidy rationalization.