Will it be an Economic Survey of a changing India or a developing economy?
The last few years have been marked by volatile economic situations in the domestic and global economy. While the developed economies grapple with bringing sustainable growth, the domestic economy continues to move towards its potential rate of growth, while being careful of the excesses of the past.
In such a scenario, the Economic Survey to be published today, would present an important insight into the government’s thought process.
In general, the survey itself has undergone a change over the last couple of years as the government has released two documents instead of one. While the first one retains its essence from the past, the second one has more of technical speak with economic models assessing policy choices. It also, sometimes, explores the performance of certain marquee programmes while at the same time warning on the pitfalls of certain macroeconomic policies as well as the emerging signals from the data.
Coming to the present, developments over the past few months have had a bearing on economic activity and the economy is slowing down in the near term. The most obvious policy response would be to increase government spending support spending as demand levels came back to the norm. However, given the chosen path of fiscal consolidation for the central government, any increase in expenditure has to be well founded in the fundamentals. Any increase in revenue expenditure is unlikely to be appreciated by ratings agencies that are likely to highlight that the combined (state and central) deficits are still high, and any increase in capital expenditure would help growth albeit more slowly. The survey could shed some light as to how the government intends to do a tight rope walk of managing its finances while giving a boost to growth.
The second important aspect to watch out for will likely be the impact assessment of implementation of GST. As such, there is consensus that a sweeping tax reform like the GST could affect businesses in the short term, there could also be some disruption in government revenue streams. The last year’s survey showed how India was under-taxed with the average of emerging market’s tax to GDP ratio at 21.4% and India’s ratio at 16.4%. The survey could also weigh on demonetization and its effects on the economy while providing policy options to encourage tax paying in the future. There might be relevant policy discussions and examples from across the globe that can be used in India to give tax collection a fillip. The Indian economy is in a peculiar situation wherein indirect tax account for the majority of tax collections as against direct taxes.
The survey would also possibly highlight the requirements from a macroeconomic perspective to create a system where cash requirements would be lower than the present. A move towards the cashless or less-cash economy cannot be an immediate one and there would need to be adequate incentives and infrastructure put in before the transition can be made in a meaningful sense. In the ongoing attempt to go digital, the government has decided that the economic survey and budget documents will also made available only in an electronic form.
Lastly, one of India’s shortcomings has been the lack of export competitiveness in the economy. For the success of the ‘Make in India’ scheme, there has to be concerted push to exports and manufacturing for domestic markets. Creating such circumstances has become trickier due to the rise of protectionism in the world markets. The existing powerhouses of trade are unlikely to cede space in an environment where growth is at a premium. The survey could explain some of the policy imperatives in the current situation.
The survey also springs up some surprises every year and we can expect this year to be no different. As such, it is likely to set the stage for some policy debates in the coming months.
The writer is economist at Deloitte