Professional Documents
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Challenges
01
CHAPTER
Against the backdrop of robust macro-economic stability, the year was marked by two
major domestic policy developments, the passage of the Constitutional amendment,
paving the way for implementing the transformational Goods and Services Tax (GST),
and the action to demonetise the two highest denomination notes. The GST will create a
common Indian market, improve tax compliance and governance, and boost investment
and growth; it is also a bold new experiment in the governance of Indias cooperative
federalism. Demonetisation has had short-term costs but holds the potential for long-
term benefits. Follow-up actions to minimize the costs and maximise the benefits
include: fast, demand-driven, remonetisation; further tax reforms, including bringing
land and real estate into the GST, reducing tax rates and stamp duties; and acting
to allay anxieties about over-zealous tax administration. These actions would allow
growth to return to trend in 2017-18, following a temporary decline in 2016-17.
Looking further ahead, societal shifts in ideas and narratives will be needed to overcome
three long-standing meta-challenges: inefficient redistribution, ambivalence about the
private sector and property rights, and improving but still-challenged state capacity. In
the aftermath of demonetisation, and at a time of gathering gloom about globalisation,
articulating and embracing those ideational shifts will be critical to ensuring that Indias
sweet spot is enduring not evanescent.
(GST) while demonetisation of the large that were not disclosed to the tax authorities
currency notes signaled a regime shift to was sought to be permanently and punitively
punitively raise the costs of illicit activities. increased.
On the international front, Brexit and the 1.6 The public debate on demonetisation
US elections may herald a tectonic shift, has raised three questions. First, broader
forebodingly laden with darker possibilities aspects of management, as reflected in the
for the global, and even the Indian, economy. design and implementation of the initiative.
1.3 Start first with demonetisation. A radical Second, its economic impact in the short and
governance-cum-social engineering measure long run. And, third, its implications for the
was enacted on November 8, 2016. The two broader vision underlying the future conduct
largest denomination notes, Rs 500 and Rs of economic policy. This Survey is not the
1000together comprising 86 percent of all forum to discuss the first question.
the cash in circulationwere demonetised 1.7 Chapter 3 addresses in detail the second
with immediate effect, ceasing to be legal question. The broad conclusion is that
tender except for a few specified purposes.1 demonetisation will create short-term costs
These notes were to be deposited in the banks and provide the basis for long run benefits.
by December 30, while restrictions were
1.8 Short-term costs have taken the form of
placed on cash withdrawals. In other words,
inconvenience and hardship, especially those
restrictions were placed on the convertibility in the informal and cash-intensive sectors
of domestic money and bank deposits. of the economy who have lost income and
1.4 The aim of the action was fourfold: employment. These costs are transitory, and
to curb corruption, counterfeiting, the use may be minimised in recorded GDP because
of high denomination notes for terrorist the national income accounts estimate
activities, and especially the accumulation of informal activity on the basis of formal sector
black money, generated by income that indicators, which have not suffered to the same
has not been declared to the tax authorities. extent. But the costs have nonetheless been
The action followed a series of earlier efforts real and significant. The benefits of lower
to curb such illicit activities, including the interest rates and dampened price pressure
creation of the Special Investigation Team may have cushioned the short-term macro-
(SIT) in the 2014 budget, the Black Money economic impact.
Act, 2015; the Benami Transactions Act of 1.9 At the same time, demonetisation has
2016; the information exchange agreement the potential to generate long-term benefits
with Switzerland, changes in the tax treaties in terms of reduced corruption, greater
with Mauritius and Cyprus, and the Income digitalization of the economy, increased flows
Disclosure Scheme. of financial savings, and greater formalization
1.5 Demonetisation was aimed at signaling a of the economy, all of which could eventually
regime change, emphasizing the governments lead to higher GDP growth, better tax
determination to penalize illicit activities and compliance and greater tax revenues.
the associated wealth. In effect, the tax on 1.10 The magnitudes of short-term costs
illicit activities as well as on legal activities remain uncertain, as do the timing and extent
Strictly speaking, these notes were deprived of their legal tender status, except for specified activities (such as
1
paying utility bills). Nevertheless, demonetisation has entered the public lexicon as the term for the November 8
announcement.
Economic Outlook and Policy Challenges 3
of long-term benefits. (Chapter 3 identifies an agenda early in 2016, its ambition would
certain markers to assess the latter.) These have elicited skepticism, probably deserved.
magnitudes will depend importantly on how Yet a year on this agenda has been achieved,
policy responds to the current situation. Needed and in nearly all cases through legislative action
actions include: remonetizing the economy that commanded near-political unanimity.
expeditiously by supplying as much cash as 1.13 Beyond these headline reforms were
necessary, especially in lower denomination other less-heralded but nonetheless important
notes; and complementing demonetisation actions. The government enacted a package
with more incentive-compatible actions such of measures to assist the clothing sector that
as bringing land and real estate into the GST, by virtue of being export-oriented and labor-
reducing taxes and stamp duties, and ensuring intensive could provide a boost to employment,
that the follow-up to demonetisation does not especially female employment. The National
lead to over-zealous tax administration. Payments Corporation of India (NPCI)
1.11 The third question on the broader successfully finalized the Unified Payments
vision will also be critical to shaping the Interface (UPI) platform. By facilitating
medium term trajectory of the economy. inter-operability it will unleash the power of
Here the government has taken important mobile phones in achieving digitalization of
steps over the past year. The highlight was, payments and financial inclusion, and making
of course, the transformational GST bill, the M an integral part of the government's
which will create a common Indian market, flagship JAM-Jan Dhan, Aadhaar, Mobile--
improve tax compliance, boost investment initiative. Further FDI reform measures were
and growth and improve governance; the implemented, allowing India to become one
GST is also a bold new experiment in the of the worlds largest recipients of foreign
governance of cooperative federalism. In direct investment.
addition, the government: 1.14 These measures cemented Indias
Overhauled the bankruptcy laws so reputation as one of the few bright spots in
that the exit problem that pervades an otherwise grim global economy. India is
the Indian economy--with deleterious not only among the worlds fastest growing
consequences highlighted in last years major economies, underpinned by a stable
Survey--can be addressed effectively and macro-economy with declining inflation and
expeditiously; improving fiscal and external balances. It
was also one of the few economies enacting
Codified the institutional arrangements
major structural reforms. Yet there is a gap
on monetary policy with the Reserve
between this reality of macro-economic
Bank of India (RBI), to consolidate the
stability and rapid growth, on the one hand,
gains from macroeconomic stability by
and the perception of the ratings agencies on
ensuring that inflation control will be less
the other. Why so? Box 1 elaborates on the
susceptible to the whims of individuals possible reasons.
and the caprice of governments; and
1.15 But much more needs to be done.
Solidified the legal basis for Aadhaar, to Especially after 1991, India has progressively
realise the long-term gains from the JAM distanced itself from statism and made
trifecta (Jan Dhan-Aadhaar-Mobile), as considerable strides in improving the
quantified in last years Survey. management of the economy. Yet a broader
1.12 Had the government announced such stock-taking (discussed in Chapter 2) suggests
4 Economic Survey 2016-17
that India has to traverse a considerable distance and social justice. Broader societal shifts are
to realize its ambitions on growth, employment required in ideas and narratives to address
190 190
10 10
170 170
AA- 9 AA- 9
6 6
90 Credit /GDP 90
BBB- BBB-
GDP growth(RHS)
70 5 70 5
2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016
Source: WDI and S&P; for 2016, Indias credit data are from RBI and Credit Suisse; for 2016, Chinas credit
number is obtained by adding flows of total social financing (TSF) from the Bank for International Settlements
(BIS) to the 2015 stock obtained from the WDI.
http://krugman.blogs.nytimes.com/2015/09/17/fear-the-rating-agencies/
2
Economic Outlook and Policy Challenges 5
India also compares favourably to other countries on other metrics known to be closely related to the risk of default.
Consider the contrast with China. In 2009, China launched an historic credit expansion, which has so far seen the
credit-GDP ratio rise by an unprecedented about 63 percentage points of GDP, much larger than the stock of Indias
credit-GDP (Figure ). At the same time, Chinese growth has slowed from over 10 percent to 6.5 percent.
How did Standard and Poors react to this ominous scissors pattern, which has universally been acknowledged as
posing serious risks to China and indeed the world? In December 2010, it increased Chinas rating from A+ to AA-
and it has never adjusted it since, even as the credit boom has unfolded and growth has experienced a secular decline.
In contrast, Indias ratings have remained stuck at the much lower level of BBB-, despite the countrys dramatic
improvement in growth and macro-economic stability since 2014.
These contrasting experiences raise a question: can they really be explained by an economically sound methodology?
persistence of the twin balance sheet are well below countries at the frontierthese
problemover-indebtedness in the corporate events have immense consequences. Given
and banking sectorswhich requires difficult that Indias growth ambitions of 8-10 percent
decisions about burden-sharing and perhaps require export growth of about 15-20 percent,
even forgiving some burden on the private any serious retreat from openness on the part
sector; the legacy issues of retroactive of Indias trading partners would jeopardize
taxation, which remain mired in litigation those ambitions (see Box 2).
even though the government has made clear
1.23 To these structural domestic and
its intentions for the future; agriculture, where
external developments must be added the
the protection of intellectual property rights,
proximate macro-economic challenges. Since
for example in seeds, remains a challenge;
the decline in oil prices from their peak in June
reform in the civil aviation sector, which has
2014 there has been a lift to incomes which
been animated as much by an interventionist
combined with government actions imparted
as liberalizing spirit; in the fertilizer sector,
dynamism by increasing private consumption
where it is proving easier to rehabilitate
and facilitating public investment, shoring up
unviable plants in the public sector rather than
an economy buffeted by the headwinds of
facilitate the exit of egregiously inefficient
weak external demand and poor agricultural
ones; frequent recourse to stock limits and
production. This year that important source
controls on trade in agriculture, which draws
of short-term dynamism may be taken away
upon the antiquated Essential Commodities
as international oil prices are now on the rise.
Act, and creates uncertainty for farmers.
Moreover, private investment remains weak
1.20 In each of these examples, there may because of the twin balance sheet problem
be valid reasons for the status quo but overall that has been the economys festering wound
they indicate that the embrace of markets for several years now (Chapter 4). Re-
even in the modest sense of avoiding intrusive establishing private investment and exports
intervention, protecting property rights, as the predominant and durable sources of
disposing of unviable public sector assets growth is the proximate macro-economic
and exiting from areas of comparative non- challenge.
advantage, and allowing economic agents
to face market pricesremains a work-in- 1.24 In sum, the steady progress on
progress. structural reforms made in the last few
years needs to be rapidly built upon, and the
1.21 Even as the domestic agenda remains unfinished agenda completed. Especially after
far from complete, the international order is demonetisation and given the ever-present
changing, posing new challenges. The impact late-term challenges, anxieties about the
of Brexit and the US elections, though still vision underlying economic policy and about
uncertain, risk unleashing paradigmatic the forgoing of opportunities created by the
shifts in the direction of isolationism and sweet spot need to be decisively dispelled.
nativism. The post war consensus in favour
of globalisation of goods, services and labor II. Global Context
in particular, and market-based economic 1.25 For India, three external developments
organization more broadly, is under threat are of significant consequence. In the short-
across the advanced economies. run, the change in the outlook for global
1.22 For India that is a late converger interest rates as a result of the US elections
that is an economy whose standards of living and the implied change in expectations of
Economic Outlook and Policy Challenges 7
US fiscal and monetary policy will impact Indias export and growth prospects described
on Indias capital flows and exchange in Box 2.
rates. Markets are factoring in a regime 1.27 Third, developments in the US, especially
change in advanced countries, especially US the rise of the dollar, will have implications for
macroeconomic policy, with high expectations Chinas currency and currency policy. If China
of fiscal stimulus and unwavering exit from is able to successfully re-balance its economy,
unconventional monetary policies. The end of the spillover effects on India and the rest
the 20-year bond rally and end to the corset of the world will be positive. On, the other
of deflation and deflationary expectations are hand, further declines in the yuan, even if
within sight. dollar-induced, could interact with underlying
1.26 Second, the medium-term political vulnerabilities to create disruptions in China
outlook for globalisation and in particular that could have negative spillovers for India
for the worlds political carrying capacity for (these are discussed in detail in Section VI.B).
globalisation may have changed in the wake For China, there are at least two difficult
of recent developments. In the short run a balancing acts with respect to the currency.
strong dollar and declining competitiveness Domestically, a declining currency (and credit
might exacerbate the lure of protectionist expansion) prop up the economy in the short
policies. These follow on ongoing trends run but delay rebalancing while also adding to
documented widelyabout stagnant or the medium term challenges. Internationally,
declining trade at the global level (figure in allowing the currency to weaken in response
Box 2). This changed outlook will affect to capital flight risks creating trade frictions
Box 2. Political Carrying Capacity of the West for Openness and Impact on India
If as T.S. Eliot said that humankind cannot bear too much reality, recent events suggest that the world cannot bear
too much globalisation either. What does this mean for Indias exports?
The first figure plots the trade-GDP ratio for the world since 1870 and highlights four phases. There were two phases
of globalisation (1870-1914, 1945-1985), one phase of hyperglobalisation (Subramanian and Kessler, 2014) between
1985-2008, and one phase of deglobalisation in the inter-war period. The question today is what is likely to happen
going forward represented by the three arrows: further globalisation, deglobalisation, or stagnation? These will have
potentially important consequences for Indian exports and growth.
Figure: Globalisation and the World (1870 to present)
Deglobalisation
25%
20%
15%
10%
5%
0%
1870
1890
1913
1929
1939
1950
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2015
During the boom years between 2003-2011 Indias real GDP growth averaged 8.2 percent, and exports grew at an
annual rate of between 20 and 25 percent (in real dollar terms, for goods and services). So, assume conservatively
that India aims to grow at 8 percent for the next decade and that that requires growth in exports of goods and
services of 15 percent, respectively.
Next, assume that the world will continue to grow at 3 percent growing forward. Define the political carrying capacity
of the world for globalisation as the worlds export-to-GDP ratio. The latest figure for that is about 21 percent;
assume that it remains stable. (Note that if world trade continues to grow more slowly than overall GDP, as it has
done in recent years, the equilibrium carrying capacitythe worlds export-GDP ratiowould actually fall.)
Political Carrying Capacity of the World for Openness (Current and Future)
12.0
7.6
11.0
7.2 10.0
9.0
6.8 8.0
7.0
6.4
6.0
GVA basic prices GDP GVA at basic prices GDP
6.0 5.0
H1 H2 H1 H2 H1 H1 H2 H1 H2 H1
In normal times, nominal GDP growth would not be of particular policy interest. But at a time when the GDP
4
deflator has been subject to unusual measurement uncertainity, nominal growth conveys additional information
about real activity.
10 Economic Survey 2016-17
10.0
CPI WPI CPI_core
8.0
6.0
4.0
2.0
0.0
-2.0
RBI's inflation band
-4.0
-6.0
Aug-15
Aug-16
Aug-12
Aug-13
Aug-14
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Oct-13
Oct-14
Oct-15
Oct-12
Apr-13
Apr-14
Apr-15
Apr-16
Feb-13
Feb-14
Feb-15
Feb-16
Oct-16
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Source: CSO
-0.5 360
350
-1.0 Implementation of
340 monetary tightening
Forex at the
-1.5 330 measures by RBI
advent of
financial
320
-2.0 crisis
310
-2.5
300
-3.0 290
280
-3.5
270
-4.0 260
-4.5 250
Jun-09
Jun-10
Jun-11
Dec-09
Dec-10
Dec-11
Jun-12
Dec-12
Jun-13
Jun-14
Jun-15
Dec-13
Dec-14
Dec-15
Jun-16
Dec-16
-5.0
Figure 3c. Trends in Major Components of Figure 3d. Index of NEER, REER and US
Capital Inflows (US$ billion)* dollar exchange rate (2010=100)
18 33 105
30
15 100
27
12 95
24
9 21 90
6 18
85
15
3
12 80
0 9
75
2011:Q3
2012:Q2
2013:Q1
2013:Q3
2013:Q4
2014:Q2
2014:Q3
2015:Q1
2015:Q2
2015:Q4
2016:Q1
2016:Q3
2016:Q4
2011:Q2
2011:Q4
2012:Q1
2012:Q3
2012:Q4
2013:Q2
2014:Q1
2014:Q4
2015:Q3
2016:Q2
-3 6 NEER
3 70
REER
-6
Net FDI 0 65 USD
-9
Aug-10
Dec-10
Aug-11
Dec-11
Aug-12
Dec-12
Aug-13
Dec-13
Aug-14
Dec-14
Aug-15
Dec-15
Aug-16
Dec-16
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Net FPI -3
-12 Net Capital Inflow -6
(RHS)
benign international oil prices has receded and declined (Figure 4b). Net private remittances
is likely to exercise upward pressure on the declined by $4.5 bn in the first half of 2016-
import bill in the short to medium term. 17 compared to the same period of 2015-16,
1.36 Meanwhile, the net services surplus weighed down by the lagged effects of the
declined in the first half, as software service oil price decline, which affected inflows from
exports slowed and financial service exports the Gulf region (Figure 5).
Figure 4a. Growth of imports & export volume Figure 4b. Growth of Export of Non-Factor
(non-oil, non-gold) index (%) (3 months MA) Services (%)
18 80.0
16 Non-oil-non-gold imports 70.0
14 Non-oil exports
60.0
12
50.0
10
8 40.0
6 30.0
4 20.0
2 10.0
0 0.0
-2
-10.0
-4
-20.0
-6
-8 -30.0
Aug-14
Aug-15
Aug-16
Apr-14
Dec-14
Apr-15
Dec-15
Apr-16
Dec-16
Source: DGCIS and Survey Calculations. Source: RBI and Survey Calculations.
12 Economic Survey 2016-17
Figure 6a. Fiscal Deficit of Center (% of GDP) Figure 6b. Fiscal Deficit of States (% of GDP)
4.6 4.0
4.4
4.2 3.5
4.0
3.8 without UDAY
3.0
3.6 with UDAY
3.4
4.5 2.5
3.2
3.6
3.0 4.1
3.9
2.8 2.0 3.0
3.5 2.8 2.8
2.6 2.5 2.5
2.2 2.2
2.4 1.5
2.2
2.0 1.0
2013-14 2014-15 2015-16 2016-17 BE 2013-14 2014-15 2015-16 RE 2016-17 BE
Source: Central Government Budget documents. Source: States' Government Budget documents.
Economic Outlook and Policy Challenges 13
Figure 6c: Fiscal deficit of the General its monetary consequences. It has reduced
Government (% of GDP) sharply, the supply of one type of money
8.0 cashwhile increasing almost to the same
7.5 extent another type of moneydemand
7.0
deposits. This is because the demonetized cash
6.5
was required to be deposited in the banking
6.0
system. The striking divergence between the
red and green lines in Figure 7 captures this
5.5
Without UDAY With UDAY effect. In the third quarter of FY2017 (when
5.0
2013-14 2014-15 2015-16 RE 2016-17 BE demonetisation was introduced), cash declined
Source: Budget documents. by 9.4 percent, demand deposits increased by
43 percent, and growth in the sum of the two
IV. Outlook for 2016-17 by 11.3 percent (the corresponding figures in
1.40 This years outlook must be evaluated Q3 of the previous year were 12.5, 10.5, and
in the wake of the November 8 action to 11.7 percent).
demonetize the high denomination notes.
1.43 The price counterparts of this unusual
But it is first important to understand the
aspect of demonetisation are the surge in the
analytics of the demonetisation shock in the
price of cash (inferred largely through queues
short run (the long run benefits are addressed
and restrictions), on the one hand; and the
in Chapter 3).
decline in interest rates on the lending rate
1.41 Demonetisation affects the economy (based on the marginal cost of funds) by 90
through three different channels. It is basis points since November 9; on deposits
potentially: (by about 25 basis points); and on g-secs
an aggregate demand shock because on the other (by about 32 basis points) as
it reduces the supply of money and indicated in Figure 8.
affects private wealth, especially of those 1.44 There is yet another dimension of
holding unaccounted money; demonetisation that must be kept in mind.
an aggregate supply shock to the extent By definition, all these quantity and price
that economic activity relies on cash impacts will self-correct by amounts that will
as an input (for example, agricultural depend on the pace at which the economy
production might be affected since is remonetized and policy restrictions eased.
sowing requires the use of labour As this occurs, consumers will run down
traditionally paid in cash); and their bank deposits and increase their cash
holdings. Of course, it is possible, even likely
an uncertainty shock because economic
that the self-correction will not be complete
agents face imponderables related to
because in the new equilibrium, aggregate
the magnitude and duration of the
cash holdings (as a share of banking deposits
cash shortage and the policy responses
and GDP) are likely to be lower than before.
(perhaps causing consumers to deferor
reduce discretionary consumption and 1.45 It is too early and difficult to quantify
firms to scale back investments). all the demand, supply and uncertainty
effects but it is possible to quantify the
A. Impact on supply of cash and money
impact on liquidity/cash. Figures 9a and
and interest rates
9b plot, respectively, the headline numbers
1.42 Demonetisation is also very unusual in of cash in circulation and our estimates of
14 Economic Survey 2016-17
23.0
19.0
15.0
11.0
7.0
3.0
-1.0
-5.0
the effective cash in circulation measured in Our comparable numbers are 25 percent and
absolute terms and as a share of transactions 35 percent, respectively. In other words, the
demand.5 true extent of the cash reduction was much
1.46 Three important findings flow from smaller than commonly perceived.
the Figures. First, the liquidity crunch
1.47 Second, the true peak of the currency
(measured by the effective cash in circulation)
was smaller than the headline numbers as opposed to the psychological
indicate. The headline numbers suggest shock occurred in December, rather than
that the currency decline after November 8 November. In the first few weeks following
amounted to 62 percent by end-November, the announcement, effective currency was
narrowing to 41 percent by end-December. sustained because most of the demonetized
Economic Outlook and Policy Challenges 15
Figure 9a. Effective Currency in Circulation Figure 9b. Effective Currency in Circulation as a
(Market Perception) proportion of Estimated Transactions Demand
Effect Effective CIC , Lakh crore Effect Effective CIC , Lakh crore
ve kh
125% 17.7 6.8 10.5 ve kh
crore 125% 16.2 12.2 10.0 12.6 13.8 15.1 16.4 17.6 18.9
120% crore
120%
115% 115%
110% 110%
105% 100% 105%
100% 100%
102%
95% 95% 96%
90% 90% 91% 91%
85% 85% 86%
80% 80% 81%
75% 75% 69%
70% 70% 65%
65% 59% 65% 61%
60% 60%
55% 55%
50% 50%
45% 38% 45%
40% 40%
35% 35%
30% 30%
notes still served de facto and de jure as tender countries, bond yields rose sharply after
(for some purposes). But in December most November 8, in the US by as much as 58
of these notes were deposited in the banks, basis points as of January 19. In India, they
while the new Rs. 2000 notes that replaced had moved in the opposite direction by 32
them were not as liquid as the demonetized basis points, a comparative swing of 90 basis
currency. points. Similarly, Indias stock market had
declined by 0.93 percent (Figure 11).
1.48 Finally, the numbers also show that
the shortfall is now narrowing rapidly. At 1.52 The decline in interest rates and the
end-December 2016, effective currency was outlook triggered a large outflow of foreign
about 65 percent of estimated demand, but portfolio investment, amounting to US$9.8
this is likely to rise to around 86 percent of billion in November and December, with
demand by end-February. 60 percent of the decline accounted for by
debt outflows (Figure 3c). Curiously, though,
1.49 With these basic facts in mind, we turn the impact on the exchange rate has been
next to the macro-economic consequences relatively modest (Figure 12), perhaps because
of demonetisation thus far. of intervention by the RBI to stabilize the
rupee.
1.50 Figures 10 12, plot the interest rate,
exchange rate, and stock market effects post B. Impact on GDP
demonetisation. Demonetisation coincided 1.53 Anecdotal and other survey data abound
with the announcement of the US election on the impact of demonetisation. But we are
results which also heralded a regime economic interested in a macro-assessment and hence
shift in the US. Hence, the impacts on India focus on five broad indicators:
are compared with comparable emerging
market countries to isolate, albeit imperfectly, Agricultural (rabi) sowing;
the demonetisation effect. Indirect tax revenue, as a broad gauge of
1.51 The most dramatic effect relates to production and sales;
interest rates (Figure 10). In almost all major Auto sales, as a measure of discretionary
16 Economic Survey 2016-17
02-08-2016
12-08-2016
22-08-2016
01-10-2016
11-10-2016
21-10-2016
10-12-2016
20-12-2016
03-07-2016
13-07-2016
23-07-2016
01-09-2016
11-09-2016
21-09-2016
31-10-2016
10-11-2016
20-11-2016
30-11-2016
30-12-2016
09-01-2017
19-01-2017
India South Korea Thailand Malaysia Indonesia S Africa US
Source: Bloomberg
105
100
95
90
85
Demonetization &
80 US Election Results
75
13-06-2016
23-06-2016
23-07-2016
02-08-2016
01-09-2016
11-09-2016
01-10-2016
11-10-2016
21-10-2016
10-11-2016
20-11-2016
30-11-2016
20-12-2016
30-12-2016
03-06-2016
03-07-2016
13-07-2016
12-08-2016
22-08-2016
21-09-2016
31-10-2016
10-12-2016
09-01-2017
19-01-2017
Source: Bloomberg
107
101
99
97
95
93
23-07-2016
02-08-2016
12-08-2016
11-10-2016
21-10-2016
31-10-2016
30-12-2016
09-01-2017
19-01-2017
03-06-2016
13-06-2016
23-06-2016
03-07-2016
13-07-2016
22-08-2016
01-09-2016
11-09-2016
21-09-2016
01-10-2016
10-11-2016
20-11-2016
30-11-2016
10-12-2016
20-12-2016
India South Korea Thai Baht Malaysia Indonesia China Singapore
Source: Bloomberg
14-17). Passenger car sales and excise taxes estimate of 11.9 percent) and 7 percent in
bear little imprint of demonetisation; property real terms (in line with both projections).
markets in the major cities and sales of two- 1.57 To assess growth after demonetisation,
wheelers show a marked decline; credit was a simply model relating money to GDP
already looking weak before demonetisation, is employed. Then, making assumptions
and that pre-existing trend was reinforced6. about the use of cash in the economy and
Indirect tax performance stripped of the the magnitude of the shift toward digital
effects of additional policy changes in 2016- payments methods, we compute the impact
17 look less robust than the headline number. on nominal and real GDP growth for
Their growth has also been slowing but not FY2017. Given the uncertainty, we provide a
markedly so after November 8. The balance range: a percentage point to 1 percentage
of evidence leads to a conclusion that real point reduction in nominal GDP growth
GDP and economic activity has been affected relative to the baseline of 11 percent; and
adversely, but temporarily by demonetisation. a percentage point to percentage point
The question is: how much? reduction in real GDP growth relative to
1.56 To estimate a demonetisation effect, the baseline of estimate of about 7 percent.
one needs to start with the counterfactual. Over the medium run, the implementation
Our best estimate of growth in the absence of the GST, follow-up to demonetisation,
of demonetisation is 11 percent in nominal and enacting other structural reforms should
terms (slightly higher than last years Survey take the economy towards its potential real
forecast because of the faster rebound in WPI GDP growth of 8 percent to 10 percent.
inflation, but lower than the CSOs advance For reasons -- good and self-serving -- the
Weak credit growth was offset to a small extent by increase in other forms of private sector borrowing such as
6
Figures 13. Rabi Sowing for Wheat and Gram (in million hectares)
10
32
Wheat Gram
9
28
8
24
7
20 6
16 5
4
12
2014-15 3
8 2014-15
2015-16 2 2015-16
2016-17
4 2016-17
Avg 5 yrs 1
Avg 5 yrs
0 0
30th 4th 11th 18th 27th 4th 11th 18th 30th 8th 15th 30th 4th 11th 18th 27th 4th 11th 18th 30th 8th 15th
Oct Nov Nov Nov Nov Dec Dec Dec Dec Jan Jan Oct Nov Nov Nov Nov Dec Dec Dec Dec Jan Jan
Source: Ministry of Agriculture & Farmers Welfare Source: Ministry of Agriculture & Farmers Welfare
Figure 14. Growth in Indirect Taxes Figure 15. Growth in Automobile Sales
(seasonally adjusted, per cent) (seasonally adjusted, per cent)
90
25
70 15
50 5
30 -5
Dec-15
Aug-16
Dec-16
Apr-15
Apr-16
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-15
Apr-15
Apr-16
Aug-15
Dec-15
Aug-16
Dec-16
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Source: Department of Revenue and survey calculations Source: SIAM and survey calculations
* Cumulative growth
Figure 16. Real Credit Growth Figure 17. Real Estate Prices
(seasonally adjusted, per cent) (seasonally adjusted, per cent)7
20 30
20
15
10
10 0
-10
5
-20
0 -30
-40
-5
-50 Launch
Non-Food
-10 Industry -60 Sales
SME Price
Personal Loans -70
-15
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
2015 Q4
2016 Q1
2016 Q2
2016 Q3
2016 Q4
Nov-15
Nov-16
May-15
Jul-15
May-16
Jul-16
Mar-15
Sep-15
Mar-16
Sep-16
Jan-15
Jan-16
Source: RBI and survey calculations Source: Knight Frank data and survey calculations
effected expeditiously (Figure 9b shows that a drag of about 0.5 percentage points. On
nearly 90 percent of transactions demand the other hand, consumption is expected to
can be met before the end of the year), and receive a boost from two sources: catch-up
decisive policy actions taken to clear away after the demonetisation-induced reduction
the uncertainty and dispel fears of over- in the last two quarters of 2016-17; and
zealous tax administration. Only then could cheaper borrowing costs, which are likely to
the effects of demonetisation prove non- be lower in 2017 than 2016 by as much as
permanent in nature. 75 to 100 basis points. As a result, spending
on housing and consumer durables and semi-
1.61 Finally, demonetisation will afford
durables could rise smartly. It is too early to
an interesting natural experiment on the
predict prospects for the monsoon in 2017
substitutability between cash and other
and hence agricultural production. But the
forms of money. Demonetisation has driven
higher is agricultural growth this year, the
a sharp and dramatic wedge in the supply
less likely that there would be an extra boost
of these two: if cash and other forms are to GDP growth next year.
substitutable, the impact will be relatively
muted; if, on the other hand, cash is not 1.65 Since no clear progress is yet visible
substitutable the impact will be greater. in tackling the twin balance sheet problem,
private investment is unlikely to recover
V. Outlook for 2017-18 significantly from the levels of FY2017. Some
A. Real GDP of this weakness could be offset through
higher public investment, but that would
1.62 Turning to the outlook for 2017-18, we depend on the stance of fiscal policy next
need to examine each of the components of year, which has to balance the short-term
aggregate demand: exports, consumption, requirements of an economy recovering from
private investment and government. demonetisation against the medium-term
1.63 As discussed earlier, Indias exports necessity of adhering to fiscal disciplineand
appear to be recovering, based on an uptick in the need to be seen as doing so.
global economic activity. This is expected to 1.66 Putting these factors together, we
continue in the aftermath of the US elections expect real GDP growth to be in the 6 to
and expectations of a fiscal stimulus. The 7 percent range in FY2018. Even under
IMFs January update of its World Economic this forecast, India would remain the fastest
Outlook forecast is projecting an increase in growing major economy in the world.
global growth from 3.1 percent in 2016 to
1.67 There are three main downside risks
3.4 percent in 2017, with a corresponding
to the forecast. First, the extent to which the
increase in growth for advanced economies
effects of demonetisation could linger into
from 1.6 percent to 1.9 percent. Given the
next year, especially if uncertainty remains
high elasticity of Indian real export growth
on the policy response. Currency shortages
to global GDP, exports could contribute to
also affect supplies of certain agricultural
higher growth next year, by as much as 1
products, especially milk (where procurement
percentage point.
has been low), sugar (where cane availability
1.64 The outlook for private consumption and drought in the southern states will
is less clear. International oil prices are restrict production), and potatoes and onions
expected to be about 10-15 percent higher in (where sowings have been low). Vigilance
2017 compared to 2016, which would create is essential to prevent other agricultural
Economic Outlook and Policy Challenges 21
products becoming in 2017-18 what pulses likely to be one-off in nature, and in both
was in 2015-16. cases the magnitudes are uncertain.
1.68 Second, geopolitics could take oil prices 1.73 A third factor will be the
up further than forecast. The ability of shale implementation of the GST. It appears that
oil production to respond quickly should the GST will probably be implemented later
contain the risks of a sharp increase, but in the fiscal year. The transition to the GST
even if prices rose merely to $60-65/barrel is so complicated from an administrative
the Indian economy would nonetheless be and technology perspective that revenue
affected by way of reduced consumption; collection will take some time to reach full
less room for public investment; and lower potential. Combined with the governments
corporate margins, further denting private commitment to compensating the states for
investment. The scope for monetary easing any shortfall in their own GST collections
might also narrow, if higher oil prices stoked (relative to a baseline of 14 percent increase),
inflationary pressure. the outlook must be cautious with respect
to revenue collections. The fiscal gains from
1.69 Third, there are risks from the possible
implementing the GST and demonetisation,
eruption of trade tensions amongst the while almost certain to occur, will probably
major countries, triggered by geo-politics take time to be fully realized.
or currency movements. This could reduce
global growth and trigger capital flight from 1.74 In addition, muted non-tax revenues
emerging markets. and allowances granted under the 7th Pay
Commission could add to pressures on the
1.70 The one significant upside possibility deficit.
is a strong rebound in global demand and
hence in Indias exports. There are some C. The macroeconomic policy stance
nascent signs of that in the last two quarters. for 2017-18
A strong export recovery would have broader 1.75 An economy recovering from
spillover effects to investment. demonetisation will need policy support.
B. Fiscal outlook On the assumption that the equilibrium
cash-GDP ratio will be lower than before
1.71 The fiscal outlook for the central November 8, the banking system will benefit
government for next year will be marked from a higher level of deposits. Thus, market
by three factors. First, the increase in the interest ratesdeposits, lending, and yields
tax to GDP ratio of about 0.5 percentage on g-secsshould be lower in 2017-18 than
points in each of the last two years, owing 2016-17. This will provide a boost to the
to the oil windfall will disappear. In fact, economy (provided, of course, liquidity is no
excise-related taxes will decline by about 0.1 longer a binding constraint). A corollary is
percentage point of GDP, a swing of about that policy rates can be lower not necessarily
0.6 percentage points relative to FY2017. to lead and nudge market rates but to validate
1.72 Second, there will be a fiscal windfall them. Of course, any sharp uptick in oil
both from the high denomination notes prices and those of agricultural products,
that are not returned to the RBI and from would limit the scope for monetary easing.
higher tax collections as a result of increased 1.76 Fiscal policy is another potential source
disclosure under the Pradhan Mantra Garib of policy support. This year the arguments
Kalyan Yojana (PMGKY). Both of these are may be slightly different from those of last
22 Economic Survey 2016-17
year in two respects. Unlike last year, there proved grossly inadequate. It may be time to
is more cyclical weakness on account of consider something like a public sector asset
demonetisation. Moreover, the government reconstruction company.
has acquired more credibility because of 1.79 Another area of reform relates to
posting steady and consistent improvements labour. Given the difficulty of reforming
in the fiscal situation for three consecutive labor laws per se, the thrust could be to move
years, the central government fiscal deficit towards affording greater choice to workers
declining from 4.5 percent of GDP in 2013- which would foster competition amongst
14 to 4.1 percent, 3.9 percent, and 3.5 percent service providers. Choices would relate
in the following three years. But fiscal policy to: whether they want to make their own
needs to balance the cyclical imperatives with contribution to the Employees Provident
medium term issues relating to prudence and Fund Organisation (EPFO); whether the
credibility. employers contribution should go to the
1.77 One key question will be the use of the EPFO or the National Pension Scheme; and
fiscal windfall (comprising the unreturned whether to contribute to the Employee State
cash and additional receipts under the Insurance (ESI) or an alternative medical
PMGKY) which is still uncertain. Since the insurance program. At the same time, there
windfall to the public sector is both one- could be a gradual move to ensure that at
off and a wealth gain not an income gain, least compliance with the central labour laws
it should be deployed to strengthening the is made paperless, presenceless, and cashless.
governments balance sheet rather than 1.80 On the expenditure side, the results
being used for government consumption, in Chapter 9 make clear that existing
especially in the form of programs that government programs suffer from poor
create permanent entitlements. In this light, targeting. One radical idea to consider is
the best use of the windfall would be to the provision of a universal basic income
create a public sector asset reconstruction discussed later. But another more modest
company (discussed in Chapter 4) so that the proposal worth embracing is procedural: a
twin balance sheet problem can be addressed, standstill on new government programs, a
facilitating credit and investment revival; or commitment to assess every new program
toward the compensation fund for the GST only if it can be shown to demonstrably
that would allow the rates to be lowered and address the limitations of an existing one
simplified; or toward debt reduction. The that is similar to the proposed one; and a
windfall should not influence decisions about commitment to evaluate and phase down
the conduct of fiscal policy going forward. existing programs that are not serving their
1.78 Perhaps the most important reforms to purpose.
boost growth will be structural. In addition VI. Other Issues
to those spelt out in Section 1--strategic
disinvestment, tax reform, subsidy A. Redistribution: Universal Basic
rationalizationit is imperative to address Income (UBI) as a radical new vision
directly the twin balance sheet problem. As 1.81 Chapter 9 discusses Indias extensive
Chapter 4 makes clear, the problem is large, efforts at redistribution. The central
persistent and difficult, will not correct government alone runs about 950 central
itself even if growth picks up and interest sector and centrally sponsored sub-schemes
rates decline, and current attempts have which cost about 5 percent of GDP. Clearly,
Economic Outlook and Policy Challenges 23
there are rationales for many of them. But cases, the risks of making exclusion errors
there may be intrinsic limitations in terms -- that is leaving out the really deserving and
of the effectiveness of targeting. Figure 18 needy -- are high.
below provides evidence of misallocation: for 1.82 For this and other reasons, the
six of the largest programmes, it contrasts Survey (in Chapter 9) argues that serious
the share of poor in India's districts (Figure consideration be given to the new idea of a
18a) with the shortfall in allocation of funds universal basic income as a more effective way
to them. (Figure 18b shows this shortfall of achieving Mahatma Gandhis objectives of
defined as the difference in the share of fund wiping every tear from every eye. A UBI
allocation and the share of the poor.) What has the merit that it will not necessarily be
the two charts starkly convey is that often the driven by take-up capability from below but
very districts that house the most number of given from above to all the deserving. In that
poor are the ones facing the greatest shortfall sense, it is less likely to be prone to exclusion
in the allocation of funds (these districts are errors. And by directly transferring money to
consistently red across both charts). This bank accounts, and circumventing multiple
misallocation has consequences: it results in layers of bureaucracy, the scope for out-of-
exclusion of the deserving poor from access system leakages (a feature of PDS schemes)
to government welfare benefits, leakages is low. Of course, there are considerable
to non-poor and benefits to corrupt local implementation challenges which will have
actors. One of the key problems with many to be debated and addressed. Chapter 9 lays
programs is that the take-up and effectiveness out a number of possible ways forward, each
of targeting will be correlated with a states with its own challenges. But the support for
institutional and implementation capacity. this idea from all ends of the ideological
States such as Tamil Nadu and Andhra spectrum suggests that this idea should enter
Pradesh, which do not necessarily have the the realm of active policy discourse.
largest number or proportion of poor avail
themselves of the program to a greater extent B. Exchange rate policy: Vigilance
than say Bihar which has many more poor and new ways of monitoring
people and a higher poverty rate. This is not 1.83 In the aftermath of the Global
an unusual phenomenon but almost intrinsic Financial Crisis, the eurozone crisis, and
to anti-poverty and social programs. In such the China scare of 2015, international
Figure 18a. Share of Overall Poor Figure 18b. Shortfall in Allocation to Poor
trading opportunities are becoming scarcer. 1.87 A simple look at the indices of real
As discussed in Box 2, the world export- effective exchange rates suggests that since the
GDP ratio has declined since 2011, and crisis of 2013, Indias rupee has appreciated
going forward a sharp rise in the dollar is by 19.4 percent (October 2016 over Jan 2014)
expected with a corresponding decline in the according to the IMFs measure, and 12.0
currencies of Indias competitors, notably percent according to the RBIs measure. Both
China and Vietnam. Already, since July 2015, these indices could be potentially misleading.
the yuan has depreciated about 11.6 percent The RBIs measure for example assigns an
(December 2016 over July 2015) against the unusually high weight to the United Arab
dollar and as a consequence the rupee has Emirates as it is a major source of Indias
oil imports, and a transshipment point for
appreciated by 6 percent against the yuan
Indias exports. But little of this trade has
(Figure 19); the compulsions of delaying its
to do with competitiveness. More generally,
rebalancing strategy might lead to a weak
both the RBI and the IMF look at overall
currency policy going forward, especially if
trade rather than just trade in manufactures,
there are continuous pressures for capital or even more appropriately for some policy
outflows (see Economic Survey, 2016, Box purposes, labor-intensive manufacturing. As
1). a result, heavy weight is given to the euro,
1.84 Given Indias need for exports to even though it is really Asian countries, not
sustain a healthy growth rate, it is important Europe, that are Indias main competitors.
to track Indias competitiveness. 1.88 Accordingly, we construct a new real
1.85 A second reason to review Indias exchange rate index that focusses on Indias
competitiveness is the rise of countries such manufacturing competitors. Essentially, we
as Vietnam, Bangladesh, and the Philippines give a higher weight to those countries that have
that compete with India across a range of become highly competitive in manufacturing
since the Global Financial Crisis, measured
manufacturing and services.
by their change in global export market share.
1.86 Has India maintained exchange rate The details of the index construction are
competitiveness and what should it do going provided in Appendix 1 but here we highlight
forward? the findings. Figure 20 shows the IMF and
Figure 19. Yuan-Dollar and Rupee-Yuan Figure 20. Real Effective Exchange Rate
Bilateral Exchange Rates Comparsions (2014=100)
7.0 10.6 115
6.9
10.4
6.8 110
6.7
10.2
6.6
105
6.5 10.0
6.4
9.8 100
6.3
6.2
9.6
6.1 95
REER ASIA_M REER ASIA_H
6.0 9.4
REER RBI REER IMF
Mar-14
Sep-14
Mar-15
Mar-16
Sep-16
Jun-14
Dec-14
Jun-15
Sep-15
Jun-16
Dec-16
Dec-15
90
Apr-14
Aug-14
Aug-15
Dec-14
Apr-15
Dec-15
Apr-16
Aug-16
Feb-15
Feb-14
Oct-14
Oct-15
Jun-14
Jun-15
Feb-16
Jun-16
Oct-16
Table 1. Potential additional exports and jobs of FTAs with EU and UK FTA
Apparels Leather Goods Footwear
Incremental Gain in Incremental Gain in Incremental Gain in
Exports Employment Exports Employment Exports Employment
($Mn) (number) ($Mn) (number) ($Mn) (number)
EU 1483.6 76853 416.9 18542 216.9 9966
UK 603.3 31176 103.8 4615 95.3 4381
Total 2086.9 108029 520.7 23156 312.2 14347
Source: Survey Calculations.
1.95 At the same time, with the likely international cooperation. The focus will now
US retreat from regional initiatives such shift to implementing the agreements. There is
as the Trans-Pacific Partnership (TPP) universal agreement (Stern, 2006, Weitzman,
in Asia and the Trans-Atlantic Trade and 2007 and Nordhaus) that a key component to
Investment Partnership (TTIP) with the EU, tackling climate change will be to price carbon.
it is possible that the relevance of the World How has India fared on this score? This is an
Trade Organization might increase. As a important question given the major setback
major stateholder and given the geo-political to the cause of climate change created by the
shifts under way, reviving the WTO and large decline in petroleum prices since June
multilateralism more broadly could be pro- 2014.
actively pursued by India. 1.97 Table 2 and Figure 21 provide some
answers. Since June 2014, when international
D. Climate Change and India
oil prices started declining, India has increased
1.96 The Paris Agreement on climate its excise duties from Rs 15.5 per litre to Rs
change in December 2015 has been one of 22.7 per litre as of December 2016 for branded
the shining recent examples of successful petrol and from Rs 5.8 per litre to Rs. 19.7
109.1
100.0
50.0
0.0
Recommended Tax by Stern Review on
the Economics of Climate Change
-50.0
Aug-14
Jan 2 - 2015
Mar 1- 2015
Apr-14
Dec 17-2015
Jul-14
Dec-14
2012-13
2013-14
May-14
Nov-14
Nov 7- 2015
Sep-14
Oct-14
Jan 17 - 2015
Jan 2-2016
Jan 16-2016
per litre for branded diesel. Table 2 quantifies overall energy consumption? Figure 25 plots
the climate change effort undertaken by the this share against a countrys per capita GDP
major G-20 countries and India. The results in purchasing power terms. So far, and for
are striking. the conceivable future, Indias reliance on
1.98 The increase in petrol tax has been fossil fuels remains well below China (the
over 150 percent in India. In contrast, the most relevant comparator) but also below the
governments of most advanced countries have US, UK and Europe at comparable stages of
simply passed on the benefits to consumers, development (this echoes the commitment
setting back the cause of curbing climate made by India at Heiliengdamm that it
change. As a result, India now outperforms all would never exceed the per capita emission
the countries except those in Europe in terms of advanced countries). Going forward, of
of tax on petroleum and diesel. course, India needs to bend the curve to ensure
that its reliance on fossil fuels declines and
1.99 Figure 22 shows the implied carbon keeping it below the level of other countries
tax resulting from Indias actions. Having so that its good global citizenship on climate
decisively moved from a regime of carbon change can continue.
subsidies, it is now de facto imposing a carbon
tax on petroleum products at about US$150 E. Ensuring Womens Privacy
per ton, which is about 6 times greater than 1.101 In each of the last two years,
the level recommended by the Stern Review the Economic Survey has focused on a
on Climate Change. dimension of concern to women. In FY2015,
1.100 Finally, it is worth seeing Indias fossil it highlighted the violence against women
fuel use from longer term perspective. How related to coercive family planning methods.
is India faring relative to other countries at In FY2016, the Survey featured a chapter
comparable stages of economic development on Mother and Child, emphasizing the
in terms of the share of fossil fuel use in importance of government interventions to
28 Economic Survey 2016-17
90
UK
80 1700
US 1900
70
60
50 India
China
European Union
40
Japan
United States
30
0 5000 10000 15000 20000 25000 30000 35000 40000 45000
Per capita GDP 1990 Int. $
Data Source: Projections of Shares of fossil fuel is from share of fossil fuels in TPED for 2020, 2025, 2030, 2035and
2040 computed from World Energy Outlook 2016 data and projections (New Policies Scenario) for Coal, Oil and Gas
GDP per capita taken from The Maddison-Project, http://www.ggdc.net/maddison/maddison-project/home.
htm, 2013 version. Per capita GDP for EU calculated from the above source does not include Malta, Cyprus and
Luxembourg
Share of fossil fuels in energy consumption, 1971 onwards till most recent available from World Bank Data
Share of fossil fuels for US for the year 1900 from US Energy Information Administration/ Annual Energy Review
2011
Share of fossil fuels for UK from Warde (2007)8. Shares pertain to those of England and Wales
77.0% 75.5%
55.0%
34.1% 33.3%
29.9% 32.8% 31.9%
27.1% 28.4%
26.2%
20.3%
10
Swachhata Status Report, National Sample Survey Organisation, 2016
11
The differences between Census-2011 and more recent data sources are in large part due to the rapid acceleration
of toilet provision under the Swachh Bharat Mission
12
The Rapid Survey on Gender Norms and Sanitation and Hygiene, and Implications by life-stage (adolescent girls,
pregnant women, and mothers of children under 5), covered 10 states with different levels of sanitation coverage
across 5 geographical zones.
13
All proportions cited in this section are conditional means after controlling for other confounding factors including
caste, religion, Above Poverty Level or Below Poverty Level status, rural/urban, gender, and Individual Household
Latrine (IHHL) availability. All numbers cited are statistically significant at 95% confidence interval.
14
The rapid survey captured long distances as the respondents self-reported variable.
30 Economic Survey 2016-17
toilets, women report far greater use socially considered taboo or ignored. Second,
of these in-home facilities than men, recognizing the positive behavioral patterns
suggesting that there may be a greater that women demonstrate upon obtaining
demand amongst women. Coffey et access to sanitation services is critical. Equally,
al (2016) found a revealed preference when these services are denied, they face
for households to defecate in the open considerable insecurity and nutritional risks.
because of a variety of factors (caste For this reason, ensuring safe and adequate
and soak pit latrines, especially). But it sanitation, water security and hygienethe
appears from the Rapid Survey that for objectives of Swachh Bharatas part of
households that do have a toilet, patterns a broader fundamental right to privacy is
of toilet usage are better for women becoming a serious policy issue.
than men. This fact is also independently
F. Indias Soon-to-Recede
confirmed in the NSSO Survey (2016).
Figure 24 shows that, of the women Demographic Dividend
in households with toilets, 62 percent 1.108 2016 was a turning point in global
reported use of the toilet always (only demographic trends. It was the first time
52 percent men reported exclusive usage since 1950 that the combined working age
in such households). In rural households, (WA) population (15-59) of the advanced
the proportion of regular use by women countries declined (Ip(2015)). Over the next
was 56 percent (men, 43 percent); and three decades, the United Nations (UN)
in urban households, 75 percent of projects that China and Russia will each see
women reported exclusive usage (men, their WA populations fall by over 20 percent.
72 percent). What this pattern of usage India, however, seems to be in a demographic
suggests is that women and girl-children sweet spot with its working-age population
could take a key leadership role to play projected to grow by a third over the same
in Swachh Bharats objective of creating period; always remembering that demography
defecation free communities, by nudging provides potential and is not destiny.
men and boys of the household to 1.109 Economic research in the last
change their own defecation behaviors. two decades has suggested that the growth
1.107 The first step to tackling this issue surges in East Asia may have been driven by
is to acknowledge the problem. This means demographic changes (Bloom et al. (2003)).
generating more information on a topic that is In particular, countries with large working age
populations relative to the overall population
Figure 24. Usage of Toilets by Women
appear to benefit from greater economic
75%
72% dynamism. Younger populations are more
62% entrepreneurial (adding to productivity
56%
52% growth); tend to save more, which may also
43%
lead to favourable competitiveness effects
(Prasad, Rajan and Subramanian (2007),
Wei and Zhang (2011)); and have a larger
fiscal base because of economic growth and
because there are fewer dependents (children
Rural Urban Total
Women Men and elderly) for the economy and government
Source: Rapid Survey (2016). to support (Bloom et al. (2010)).
Economic Outlook and Policy Challenges 31
1.110 Theory suggests that the specific 2 children per female), causing the share of
variable driving the demographic dividend is working age population to rise until the early
the ratio of the working age to non-working 2000s, then to fall as ageing began to set in.
age (NWA) population-- an intuitive number, In India, however, the decline in TFR has
because a magnitude of 1 essentially means been much more gradual.
that there are as many potential workers as 1.115 The growth consequence is the
dependents. Both the level and the growth of following. Unlike the East Asian successes,
the WA/NWA ratio have a positive impact India should not expect to see growth surges
on economic activity (Bloom and Canning or growth decelerations of the magnitudes
(2004)). experienced by the East Asian countries, at
Distinctive Indian Demography least not on account of the demographic
dividend. This does not rule out accelerations
1.111 Figure 25 compares the evolution of
for other reasons, related to reforms and
the WA/NWA ratio between 1970 and 2050
strength of domestic institutions. At the
(based on the medium variant population
same time, India might be able to sustain
projections by the UN) for India, Brazil,
high levels of growth (on account of the
Korea, and China. It illustrates three distinct
demographic dividend) for a longer time.
features about the Indian demographic profile
that have key implications for the growth 1.116 A final distinctive feature in
outlook of India and the Indian states. India is the large heterogeneity among the
states in their demographic profile and
1.112 First, Indias demographic cycle
evolution. Figure 25B shows the evolution
is about 10-30 years behind that of the
in the working age population for ten Indian
other countries, indicating that the next few
states, which should be viewed against the
decades present an opportunity for India to
comparable evolution for the other emerging
catch up to their per capita income levels.
market countries (shown in Figure 25A).15
1.113 In addition, Indias WA to NWA
1.117 There is a clear divide between
ratio is likely to peak at 1.7, a much lower
peninsular India (West Bengal, Kerala,
level than Brazil and China, both of which
Karnataka, Tamil Nadu and Andhra Pradesh)
sustained a ratio greater than 1.7 for at least
and the hinterland states (Madhya Pradesh,
25 years. Finally, India will remain close to
Rajasthan, Uttar Pradesh, and Bihar). The
its peak for a much longer period than other
peninsular states exhibit a pattern that is
countries.
closer to China and Korea, with sharp rises
1.114 This distinctive pattern has a cause and declines in the working age population.
and consequence. The cause is shown in The difference, of course, is that the working
Figure 26A, which plots the total fertility rate age ratio of most of the peninsular states will
(TFR) for comparable countries and groups peak at levels lower than seen in East Asia
of countries. The figure illustrates that all (West Bengal comes closest to Koreas peak
these countries started the post-World War because of its very low TFR). In contrast,
II era with roughly the same very high TFR the hinterland states will remain relatively
rates. In China and Korea, TFR then declined young and dynamic, characterized by a rising
rapidly to below-replacement levels (less than working age population for some time,
New demographic projections for the states from 2011-2051, based on the latest fertility and mortality indicators,
15
have been done by Professor S Irudaya Rajan and Dr S Sunitha at the Center for Development Studies, Kerala.
32 Economic Survey 2016-17
Source: Panel A: UN World Population Prospects (2015). Panel B: Census of India and projections by Prof. Irudaya
Rajan, CDS, Kerala (for Fig. 28 & 29).
plateauing out towards the middle of the skills, and employment opportunities must
century. be the focus. Of course, heterogeneity within
1.118 This divide in the WA/NWA ratio India offers the advantage of addressing
of the peninsular and the hinterland states some of these concerns via greater labour
can be traced to the difference in their levels mobility, which would in effect reduce this
of TFR (see Fig. 26B, which is the fertility demographic imbalance.
counterpart of Fig. 25B). Demographically Growth Consequences
speaking, therefore, there are two Indias,
with different policy concerns: a soon-to- 1.119 This demographic pattern will have
begin-ageing India where the elderly and two important growth consequences. First,
their needs will require greater attention; and it seems that the peak of the demographic
a young India where providing education, dividend is approaching fast for India. Figure
Economic Outlook and Policy Challenges 33
28A shows that this peak will be reached in Figure 27. Per Capita Income in 2011 and the
the early 2020s for India as a whole; Figure Demographic Dividend (2011-31)16
28B shows that peninsular India will peak 1.8
around 2020 while hinterland India will peak BIH J&K
It is assumed that every state earns the same growth dividend from an increase in the WA/NWA ratio as the all-India
16
average. This is a critical assumption, and one that may not be true, since the actual dividend will depend on the
governance, the policy framework in place at the state level, and also on internal migration between states.
34 Economic Survey 2016-17
fall back, unless offset by robust reforms population ageing for economic growth."
and growth, while the relatively rich Kerala Oxford review of economic policy 26.4
will probably converge to the average as its (2010): 583-612.
growth momentum declines rapidly. 4. Coffey Diane, Gupta Aashish, Hathi
1.123 The growth boost from the Payal, Spears, D., Srivastav Nikhil, Vyas
demographic dividend is likely to peak Sangita (2016). Understanding Open
within the next five years, as India's share of Defecation in Rural India, EPW
working age population plateaus. However, 5. Curtis C. and Minjas J (1985). Expanded
India may not see the sharp growth Polysterene for mosquito control.
decelerations experienced by the East Asian Parasitology Today 1, 36.
countries because its working age ratio 6. Ip, Greg. How Demographics Rule the
will fall much more gradually than those Global Economy. Wall Street Journal.
in other countries. In addition, the sharp Nov. 22, 2015 [http://www.wsj.com/
demographic differences between peninsular articles/how-demographics-rule-the-
India and hinterland India will generate wide global-economy-1448203724, accessed:
differences in the timing of the peak, as well 11:08 am, January 23, 2016]
as opportunities to attenuate demographic
imbalances via greater labour mobility (see 7. National Sample Survey Organization
Chapter 12). Even so, the urgency of reforms (NSSO). 2016. Swachhata Status Report.
to maximise this soon-to-recede dividend Ministry of Statistics and Programme
cannot be overstated. Implementation, Govt of India.
8. Prasad, Eswar S., Raghuram G. Rajan, and
References Arvind Subramanian. "Foreign Capital
1. Aiyar, Shekhar, and AshokaMody. "The and Economic Growth." Brookings
Demographic Dividend: Evidence from Papers on Economic Activity 1.2007-1
the Indian States." India Policy Forum. (2007): 153-230.
No. Volume 9. National Council of 9. Singh, J, Bhoi S, Gupta V, Goel A (2008).
Applied Economic Research, 2013. Clinical Profile of Venomous Snake
2. Bloom, David E., David Canning, Bites in a North Indian Military Hospital.
and Jaypee Sevilla. "The demographic Journal of Emergencies, Trauma, and
dividend: A new perspective on the Shock 1, 78-80.
economic consequences of population 10. Spears,D., Ghosh,A., Cumming,O.
change. Rand Corporation, 2003. (2013). Open Defecation and Childhood
2. Bloom, David E., and David Canning. Stunting in India: An Ecological Analysis
"Global Demographic Change: of New Data from 112 District
Dimensions and Economic Significance." 11. Wei, Shang-Jin, and Xiaobo Zhang. "The
Population and Development Review 34 competitive saving motive: Evidence
(2008): 17-51. from rising sex ratios and savings rates
3. Bloom, David E., David Canning, in China." Journal of political Economy
and Gnther Fink. "Implications of 119.3 (2011): 511-564.
Economic Outlook and Policy Challenges 35
Appendix 1. Currency Weights for Alternative Exchange Rate Indexes
IMF RBI Asia-H Asia-M
25 countries 36 currencies 30 countries 30 countries
1 United States 17.82 8.80 7.86 11.44
2 China 12.47 10.84 43.51 31.12
3 Germany 9.08 3.36 5.04
4 Japan 6.13 2.72 2.10 3.15
5 United Kingdom 5.58 2.36 2.60 3.52
6 France 4.63 1.61 1.96
7 Belgium 4.53 2.64 3.95
8 Italy 4.33 1.39 2.09
9 Korea, 4.26 2.65 2.26 3.39
10 Singapore 3.53 3.37 2.30 3.45
11 United Arab Emirates 2.84 11.44
12 Australia 2.47 2.36
13 Netherlands 2.39 0.94 1.41
14 Canada 2.20 0.69
15 Spain 2.12
16 Taiwan 1.96 1.18 0.83 1.24
17 Malaysia 1.90 2.07 1.12 1.68
18 Russian Federation 1.85 0.97 1.12 1.46
19 Thailand 1.70 1.28 1.18 1.77
20 Indonesia 1.51 3.02 0.71 1.06
21 Switzerland 1.42 4.80 0.70 0.94
22 Brazil 1.41 1.51
23 Sweden 1.34 0.40
24 Israel 1.28 0.95 0.77 1.16
25 Turkey 1.26 0.69 0.96 1.01
26 Saudi Arabia 5.51 1.93 1.94
27 Hong Kong 3.41 4.01 5.63
28 Kuwait 2.52
29 Nigeria 2.49
30 Iran 2.38 0.55 0.82
31 South Africa 2.08 0.57 0.86
32 Qatar 1.89
33 Vietnam 0.81 5.80 3.36
34 Egypt 0.75
35 Sri Lanka 0.74 0.56 0.85
36 Bangladesh 0.73 1.21 1.09
37 Mexico 0.58 4.45 2.57
38 Kenya 0.45
39 Pakistan 0.36
36 Economic Survey 2016-17
40 Argentina 0.25
41 Philippines 0.24 1.36 0.88
42 Poland 0.90 0.64
43 Czech Republic 0.71 0.51
Euro Area 27.08 12.69 11.56 15.62
Total weight 100.01 99.98 100.00 100.00
Top 20 currencies 93.30 88.91 92.76 91.33
ASIA-H (ASIA-M) refers to the notional basket where Asian countries are given considerably
(moderately) more weight than the other 2 indices. The top 3 currencies under each of the
weighting schemes are shown in bold.
How are these weights determined? For each trading partner, we take two weights: the first is
based on its actual share in Indias manufacturing imports (say W1); the second is computed by
focusing on those countries that have increased their global manufacturing export sharebetween
2010 and 2015 based on UNCTAD data. For each such country, we calculate the ratio of its
increase to the sum of the increase of all countries (W2). So, for example, if ten countries
increased their collective share by say 10 percentage points, including a 4 percentage point
increase by China, Chinas share will be 0.4, and similarly for other countries. In ASIA-H,
we assign equal weights to W1 and W2. In ASIA-M, we assign weights of 0.75 and 0.25,
respectively for W1 and W2.
Economic Outlook and Policy Challenges 37
Appendix 2: Details of Survey on Sanitation
Sample Size: The sample used for the rapid study consisted of respondent categories spread
across lifecycle:
adolescent girls (10-19 years of age);
pregnant women;
women with children of age 0-60 (completed) months.
Men from a sub-sample of households were also covered under the study for a comparative
insight.
For this purpose, the country was divided into 5 geographic zones- Highest IHHL coverage,
High IHHL coverage, Medium IHHL coverage, Low IHHL coverage and Lowest IHHL
coverage and 2 states were selected from each zone (1 low performing and 1 high performing
state with respect to IHHL construction). Two districts each from the states, 12 PSUs from
each district and 18 households from each PSUs resulted in a sample frame of 4320 households,
with 5705 individuals (4255 women and 1450 men).
State and districts were selected based on IHHL coverage. One High performing and one
low performing state was selected from each zone Similarly one high performing and one low
performing district was selected from each state. Also, sample of 18 respondents was randomly
selected from the sampling frame, equally divided among the three respondent categories. A
limitation of this study is that it is not a nationally representative sample.