Wednesday, February 27, 2013

Economic Survey 2012-13: Reflects India's Grim Reality, Cautions Against Growing Taxes

Finance Minister P. Chidambaram presented the pre-Budget Economic Survey for 2012-13 to Parliament on February 27. The Survey reflects the grim reality that India is facing a severe slowdown and must act fast to spur investment, restart stalled projects, cut interest rates and contain its fiscal deficit.

Growth Rate

The Survey made it clear that this fiscal’s five per cent growth, the slowest in the past decade, could no longer be blamed on external factors alone, and the government will have to act on the domestic front to come out of the slump.

The Economic Survey, while projecting an optimistic growth rate of 6.1-6.7 percent for 2013-14, stated that to contain the fiscal deficit the government should widen the tax base and cap subsidies, particularly through better targeting and plugging leakages. It also claimed the downturn was more or less over, and that the economy was looking up. Claiming that the downturn was “more or less over” and that the economy was looking up, the Survey projected a cautiously optimistic growth rate of 6.1-6.7 percent while conceding that the Gross Domestic Product (GDP) growth for the current fiscal was likely to slip to the decade’s low of five per cent — compared to the estimates by the Central Statistical Organisation (CSO) of 6.2 percent for 2011-12 and 9.3 percent the year before.

Fiscal Deficit

The Survey had pegged the fiscal deficit at 5.1 percent for the GDP for 2012-13, which the finance minister later revised to 5.3 in view of the rising expenditure and subdued revenue collection. For the new fiscal, the finance minister has committed to bring it down to 4.8 per- cent.

The 2012-13 Survey notes that the government needs to contain the fiscal deficit especially by shrinking wasteful and discretionary subsidies. The Survey said: "Controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG need to be raised in line with their prices prevailing in the international market.

In addition, delays in getting permissions for projects need to be curbed so that investment can pick up. Implementation of GST, if approved, would create an integrated market and bring more producers in the tax net. Also, the direct benefit transfer scheme recently rolled out on the AADHAAR platform will target subsidies better.

Agriculture Reforms

Economic Survey states that with agriculture growth rate falling short of the four per cent target in the past five years, the country’s annual economic report card (the first since the beginning of the 12th Five-Year Plan period), calls for increase in yields and reforms like a suitable sustainable strategy to maximize agricultural income and make it a viable option.

The farm sector achieved 3.6 percent growth during the 11th Five year Plan (2007-12) – higher than growth of 2.5 and 2.4 percent during ninth and 10th Five-Year Plans but lower than expectations of 4 percent growth target.

Therefore, in the face of stiff challenge of feeding its growing population, the Survey has sought urgent reforms to boost crop yield and private investment in infrastructure to motivate farmers.

Economic Survey for 2012-13 has emphasized putting in place a strategy for farm development in the eastern and northeastern regions amid saturation in crop yields in Green Revolution belt, especially in the States of Punjab and Haryana.

Tax Rate

In what may bring cheer to the well-heeled in the wake of a raging pre-Budget debate over squeezing more out of the super-rich class, the Survey suggested the government’s efforts to raise additional revenue should be through widening of the tax base and not by increasing the rates. The Survey stated: “It is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly — higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion.”

Several experts, including PMEAC Chairman C. Rangarajan, have pitched for higher rates of taxes on super-rich. The Survey, prepared by a group of economist led by Chief Economic Advisor Raghuram Rajan, said it is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in expenditure as it would only hurt development spending.

The Tax-GDP ratio touched a peak of 11.9 percent in 2007-08, but declined to 9.6 percent in 2009-10. It was 9.9 percent in 2011-12. “Raising the tax-GDP ratio to above the 11 percent level is critical for sustaining the process of fiscal consolidation in the long run,” it said.

Gross tax revenue in April-December 2012 has grown by 15 percent to over Rs. 6.81 lakh crore. However, the growth in tax collection was “significantly” short of the growth envisaged in Budget. The tax collection until December 2012, was 63.2 percent of Budget estimates, lower than the last five-year average of 69 percent.

Rate of Inflation

Predicting that headline inflation may fall to 6.2–6.6 percent by next month, the Survey stated that elevated food inflation would continue to remain an area of concern as it inched towards double digits in December 2012. While 2012, the inflation was driven by protein items, this year it has been due to increase in prices of cereals such as wheat, rice and maize.

Inflation which is one of the major areas of concern for the United Progressive Alliance (UPA) Government, has remained in the range of above seven per cent since December 2009, while to add to its woes food inflation, too, has remained on the higher side during the same period, and according to the Economic Survey for 2012-13, easy money policy of major developed and developing nations may further aggravate inflationary expectations in India.

The survey further added that inflation has remained muted in the current financial year and declined to a three year low of 6.62 percent in January 2013. The average wholesale prices-based inflation in 2012 (April-December) moderated to 7.55 percent from 8.94 percent in the corresponding period of 2011-12.

Industrial Production

With the spurt in factory output last October turning out to be an aberration in the wake of sharp downturns in the months after, the latest Economic Survey has sought to describe the industrial production scenario as a ‘mixed picture’ of sluggishness bottoming out as well as continuing for a little longer period.

What came as a surprise to the government while India Inc. maintained a ‘we said so’ stance to clamor for easing of interest rates, was that industrial growth, as measured by the Index of Industrial Production (IIP), witnessed a smart recovery with a robust 8.3 per cent expansion in October, 2012.

Despite the downward bias, the Survey has highlighted at least two factors which point to some optimism on the industrial front.

First is the data on frequency distribution of products/product groups within the IIP basket which indicates that the number of products with negative growth has declined from 182 in the fourth quarter of 2011-12 to 160 in October-November 2012.

The second positive factor is the Reserve Bank of India’s ‘Business expectation index’, which showed moderately positive growth during the third quarter of the current fiscal after posting persistent negative growth for the previous six quarters. Since the RBI business index tracks IIP growth fairly closely, the change in trend suggests a possible bottoming out of IIP growth moderation.

Foreign Direct Investment

According to the Economic Survey, Foreign Direct Investment (FDI) in India slumped by 43.3 percent at $15.85 billion in April-November period of the current financial year as compared to $27.93 billion in the corresponding period previous year. The overseas investment flows in top five services declined by 9.7 percent at $8.19 billion during the period under review.

The Survey stated that overall FDI inflows increased by 33.6 percent in 2011-12. Overseas investment inflows in services surged by 57.62 percent in the financial year ended March 31, 2012.

The document presented a day ahead of the Union Budget 2013-14 pointed out that the government has taken many policy initiatives to liberalize FDI policy for services sector. This includes increasing FDI limit from 49 percent to 74 percent in teleports and DTH and cable networks, permitting FDI up to 74 percent in mobile TV, up to 49 percent in scheduled and non-scheduled air transport services and up to 50 percent in multi-brand retail trading.

The Survey stated that the government has also amended the existing policy on FDI in single brand product retail trading.

Health Sector

The country’s spending on health remains abysmally low with the Survey revealing that the spending on health, as compared to the spending on the rest of social services, has actually been declining in the country. Raising alarm over the decline, the survey has called for increased focus on health and education if India's demographic dividend is to be used to its advantage. Between 2011 and 2016, as many as 63.5 million workers, mainly aged between 20 and 35 years, will join India's pool. For this segment to be productively engaged, spending on health and education must remain consistent, the survey says.

But the ground situation paints to a sorry picture. The combined central and state expenditure on social services as a proportion of total expenditure increased from 22.4 per cent in 2007-08 to 25.1 per cent in 2012-13 and the spending on education among all the social services also increased over this period from 43.9 to 46.6 per cent.

However, the combined general spending (federal and states) on health has fallen over the past five years from 21.5 per cent to 19.2 per cent.

Petroleum Subsidies

The 2012-13 Survey has called for addressing the key issues of petroleum subsidies, clarity on gas pricing policy, petroleum price distortion and concerns over various disputes pertaining to the New Exploration Licensing Policy (NELP). It stated that addressing the key fiscal risk of petroleum subsidies is critical in better fiscal marksmanship.

It stated further that the overall subsidy bill of the government, it said, was likely to overshoot the target of Rs.1.79 lakh crore this financial year due to higher crude oil prices. The government had put the petroleum products subsidy at Rs.43,580 crore, food subsidy at Rs.75,000 crore and fertilizer subsidy at Rs.60,974 crore, taking the total subsidy bill to Rs.1,79,554 crore for 2012-13.

Employment Rate

The 2012-13 Economic Survey stated that the employment rate between June 2011 and June 2012 went up by approximately 7 lakh led mainly by the IT and BPO sector which accounted for almost half of the increase. It stated that upward trend in employment since July 2009 continues despite the economic slowdown.

A sector wise analysis shows that the textiles sector including apparels saw 1.70 lakh job additions, followed by transport sector (0.45 lakh), metals (0.26 lakh), gems and jewelry (0.19 lakh) and automobiles (0.11 lakh) in June 2012 over June 2011.

The survey said that employment in handloom/power loom and leather sectors has marginally declined during this period.

It said that there has been a sustained and consecutive increase in employment in both the public and private sectors covered at overall level during the last eleven quarters with a total addition of 30.73 lakh employment during this recovery period.

According to the Survey, India is on the brink of a demographic revolution with the proportion of working-age population between 15 and 59 years likely to increase from approximately 58 per cent in 2001 to more than 64 per cent by 2021. Moreover around 63.5 million new entrants to the working age group between 2011 and 2016, the bulk of whom will be in the relatively younger age group of 20-35 years.

The Survey added that the annual growth rate of employment in the private sector in 2011 was 5.6 per cent whereas that in the public sector was negative.