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Unfinished Tasks: A Peek Into Economic Survey & The Budget Implications

The Government recently released the FY1617 Economic survey. Done under the Ministry of Finance, it was primarily led by its Chief Economic Adviser Mr. Arvind Subramanian. But our focus here is the FY1516 survey, released by the same set of people/ department. The FY1516 is much more detailed on the different aspects of our economy and the areas of lacunae. The FY1617 survey reads more like an addendum on the last year survey and a few additional aspects (Demonetization review, UBI), which we will be covered separately (Keep watching our Latest Commentary)(3rd Feb: We have now updated the below with relevant snippets from FY1617 survey)

Our intent here is to highlight a few key areas from the report (mostly as-is quoted) to give an overall snapshot and also connect the recent budget announcement at relevant points, to arrive at an understanding of where we are lacking, where the Government focus is and what may still need further focusing.

Objectives/ Vision

  1. “Wiping every tear from every eye” of the poor and vulnerable touted as the major objective
  2. “Affording the opportunities for increasingly young, middle-class, and aspirational India to realize its limitless potential”
  3. Balancing between ‘Inclusive’ & ‘Selective’

The Good News

  1. Lower inflationary pressures: Drop in oil prices, monetary policy easing, good monsoon will have a soothing effect and will clear the path for RBI for further easing of monetary policing. That may have consequent impact on supporting growth
  2. Plugging leakage in Government doles: Aadhar linked Direct Benefit Transfer (DBT) has been able to plug leakages in administration of Government payments to households. As per the study, the fiscal savings from leakage was 8 times the cost of implementation
  3. MGNREGA seems to be reasonably well targeted program for the rural folks. 2017 Budget impact: MNERGA fund increased Rs 48,000 crore from Rs 38,500 crore
  4. JAM Trinity for faster funds to poor: The trinity of J(Jan Dhan accounts, 125.5 M), A (Aadhar, 757 M) and M (Mobile, 904 M) is expected to improve the lives of poor due to faster transfer of funds to target population
  5. Foodgrain production (201314): Estimated at 265.6 M (8.5 M higher than previous year)
  6. Service sector largest driver of GDP growth: Accounting for 57% of GDP is the largest driver of GDP growth (74%, more than 10.6% growth). Services share in employment at 28.5 per cent in 2011-12 is higher than in industry at 24.4 per cent
  7. India’s share in global exports of commercial services increased to 3.2 per cent in 2013 from 1.2 per cent in 2000 (6th leading in 2013)
  8. Marked improvement in female literacy:  Female literacy (64.6%) has increased by 10.9 (Census 2011) compared to 5.6% for Males (80.9% literate)
  9. Life expectancy has doubled and infant mortality and crude death rates have reduced sharply. India’s total fertility rate (TFR) has been steadily declining and was 2.3 (rural 2.5 &  urban 1.8) during 2014 (FY1617 Survey)

But Challenges Are Plenty

Employment:

  1. Employment growth is lagging behind growth in the labour force: For example, according to the Census, between 2001 and 2011, labor force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent
  2. Self-employment continues to dominate, with a 52.2 per cent share in total employment. What is critical is the significant share of workers engaged in low-income generating activities. There is a clear shift in employment to secondary and tertiary sectors from the primary sector (FY1617 Survey)

 Agriculture:

  1. Productivity (India’s best) is still significantly lower than the best of the world when compared with our major crops e.g. wheat, paddy, maze etc.
  2. An inverse relationship is noticed between increase in yield over time and the average cost of production of various crops in real terms. For example, for rabi crops a 10 per cent increase in yield resulted in a 2.1 per cent to 8.1 per cent decline in the average cost of production of various  crops in real terms
  3. 59 per cent of farmers do not get much technical assistance and know-how from government-funded farm research institutes or extension services. 2017 Budget impact: Issuance of soil health cards, mini lab in krishi vigyan kendras
  4. Still heavily rainfall dependent with just 35 per cent of total arable area being irrigated, and distribution of irrigation across states is highly skewed. 2017 Budget impact: A dedicated micro-irrigation fund with an initial corpus of Rs 5,000 crore.
  5. 40 per cent of the finances of farmers still come from informal sources. Usurious moneylenders account for a 26 per cent share of total agricultural credit. 2017 Budget impact: Agriculture credit for 17-18 – Rs 10 lakh crore, with focus on under served areas
  6. Crop loans are not reaching intended beneficiaries and there are no systems and procedures in place at several bank branches to monitor the end-use of funds.
  7. The current level of farm mechanization, which varies across states, averages around 40 per cent as against more than 90 per cent in developed countries. Reasons are: highly diverse agriculture with different soil and climatic zones, requiring customized farm machinery and equipment and, second, largely small landholdings with limited resources. 2017 Budget impact: Modern law on contract farming will encourage corporate farming

Managing Rural Economy:

  1.  Decelerating rural wage growth: Wage growth has declined to about 3.6 percent from over 20 percent
  2. Significant in-efficiencies in current subsidy mechanism: Plagued by huge leakage, 41% of PDS kerosene allocation is lost, 15% for rice and 54% for wheat. Only a small fraction reaches poor and sometimes distorts the incentives which end up in creating more problems for the poor. Consider this: Subsidies in Rice, wheat, pulses, sugar, kerosene, LPG, naphtha, water, electricity, fertiliser, iron ore, railways estimates direct fiscal cost of INR 378,000 crore or 4.2% of GDP(India defense budget is around 3-3.5%
  3. Welfare spending in India suffers from misallocation: The districts with the most poor are the ones that suffer from the greatest shortfall of funds in social programs. The districts accounting for the poorest 40% receive 29% of the total funding (FY1617 Survey)

 Education / Literacy/ Skilling:

  1. Only 73% literate across the country: Census 2011
  2. ASER (Annual Status of Education Report) findings have been reporting low levels of learning amongst the 5 to 16 age group in rural India since 2005.
  3. Overall standard of education is well below global standards: that PISA (Programme for International Student Assessment) 2009+ results ranked Tamil Nadu and Himachal Pradesh 72 and 73 out of 74 participants, higher only than Kyrgyzstan
  4. All-India level only around 8 per cent persons aged 15 years and above are reported to have received/ be receiving vocational training
  5. As per the Labour Bureau Report 2014, the current size of India’s formally skilled workforce is small, approximately 2 per cent. This number contrasts poorly with smaller countries like South Korea and Japan that report figures of 96 and 80 per cent respectively. 2017 Budget impact: Focus of government continues to be on skill training
  6. The poor skill levels among India’s workforce are attributed to dearth of a formal vocational education framework, with wide variation in quality, high school dropout rates, inadequate skills training capacity, negative perception towards skilling, and lack of ‘industry ready’ skills even in professional courses

Health/ Nutrition/ Cleanliness:

  1. SRS (2013) reports that a significant 30 per cent of all deaths occur in the age group 0-4 years; the percentages are higher for girl children in both rural and urban areas
  2. Consumption of contaminated drinking water, improper disposal of human excreta, lack of personal and food hygiene, and improper disposal of solid and liquid waste are major causes of diseases in developing countries like India: Swachh Bharat initatives & corresponding allocations
  3. The 2014 Human Development Report (HDR) presents the Human Development Index (HDI) values and ranks for 187 countries in terms of three basic parameters: to live a long and healthy life, to be educated and knowledgeable, and to enjoy a decent standard of living. India ranked 135 (lowest among BRICS)
  4. Government spending on healthcare in India is only 1.2 per cent of GDP which is about 4 per cent of total government expenditure, less than 30 per cent of total health spending
  5. As a percentage of the GDP, expenditure on social services has declined from 6.9 per cent in 2009-10 to 6.7 per cent in 2014-15 (BE), with expenditure on education increasing from 3.0 per cent to 3.1 per cent and on health declining from 1.4 per cent to 1.2 per cent.

Others

  1. Physical connectivity seems to be lagging behind: While financial and digital connectivity are surging ahead, basic physical connectivity appears to lag behind. Stagnant investment has led to congestion, strained capacity, poor services, weak financial health, and deteriorating competitiveness of logistics-intensive sectors, typically manufacturing. Congestion has effectively led to the railways ceding a significant share in freight traffic to the roads sector. This is not a welcome development since rail transport is typically more cost and energy efficient. 2017 Budget impact: Railway will introduce end-to-end solutions for some commodities but overall railway budget overlay is bad considering fund crunch. Higher outlay for transport sector at Rs 24,1387 crore
  2. Low skill manufacturing: India still has potential comparative advantage in terms of cheaper and more abundant labour. But these are nullified by other factors that render them less competitive than their peers in competitor countries. These includes costs & time involved in logistics of goods transfer, labor laws impacting labor costs advantage etc. (FY1617 Survey)
  3. Exports (both manufacturing & services) seems to have slowed down in last 5 years
  4. A new Cohortbased Migration Metric3(CMM)—shows that annually inter-state labor mobility averaged 5-6 million people between 2001 and 2011, yielding an inter-state migrant population of about 60 million and an inter-district migration as high as 80 million. But what is still a mystery is that this equalizing forces of internal integration of goods, people & capital have not been able to address divergence of income & consumption across states (FY1617 Survey)

Needs Identified

  1. Creating more rapid employment opportunities is clearly a major policy challenge.
  2. Strengthening the physical connectivity of the Indian population
  3. Power to 300 million household without electricity: Balancing the need to absorb health cost in coal power generation (average US $ 27.26/ ton) against the implication of the same in pricing is required to ensure access to energy. 2017 Budget impact: 20 GW of solar capacity to be installed
  4. Liberating the SLR requirements and PSL requirements to allow more efficient deployment of funds for overall improvement in health of banking sector: 2017 Budget impact: Banking sector to be under pressure on account of increased outgo under priority sector (10 lakh crore credit to agriculture)
  5. Agriculture and food sectors need huge investment in research, education, extension, irrigation, fertilizers, and laboratories to test soil, water, and commodities, and warehousing and cold storage
  6. A national common market for agricultural commodities
  7. Reviving targeted public investment as an engine of growth in the short run not to substitute for private investment but to complement it and indeed to crowd it in.
  8. Private investment must remain the main engine of long-run growth

Our experience of the last quarter shows a Governments strong resolve in moving towards a less cash society. This has advantages of faster transfer of funds to poor, fiscal savings with DBT.

BUT a similar concerted effort seems to be lacking when it comes to more basic areas like health, education, holistic network infrastructure, energy access to un-electrified households. The recent budget announcements seem to have a definite focus in rural (as highlighted in GREEN) but still there are significant areas left untouched.

Our next article will take this issue headlong where we will discuss in more details why we feel that the enormous efforts in “Demonetization exercise & allied cashless initiatives” skews out more interesting & exciting use case of JAM (Trinity of Jan Dhan, Aadhar, Mobile) around basic health care, education & other critical areas of growth

 

Sources:

  1. http://indiabudget.nic.in/survey.asp (ECONOMIC Survey 2015-16 Chapter 1 & 2, ECONOMIC Survey 2016-17). Pls. note the above is just a summary points extracted from the report to highlight the key concern areas. For further details, refer to the original reports. Also any mismatch between the above summary and the original report may be attributed to un-intended errors from our side.
  2. http://www.hindustantimes.com/union-budget/budget-2017-10-key-takeaways-from-fm-arun-jaitley-on-the-farm-sector/story-BHai9AI82hZwpSriOI7eQM.html
  3. http://www.moneycontrol.com/news/economy/live-union-budget-2017-18-key-takeawaysfinance-minister-arun-jaitleys-speech_8389841.html
  4. Featured Image made from collage of Microsoft clip arts

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