Economic Survey 2016-17 Volume 2 An Overview Arvind Subramanian Chief Economic Adviser August 11, 2017 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 1
Why Volume 2, Why Now? Before this year, two volumes were released on the day before the Budget Volume 1 was analytical and policy and ideas-oriented Volume 2 featured a sectoral review and included historic data for first three quarters Pattern changed due to advancement of budget calendar Split the release of two volumes Only Volume 1 was released before the budget Volume 2 to be released in July so that historic data covers the whole year Statistical Appendix (Historical Data) provided as Microsoft Excel files for ease of use Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 2
Survey Volume 2 1. State of the Economy: An Analytical Overview 2. Fiscal Developments 3. Monetary Management and Financial Intermediation 4. Price and Inflation 5. Climate Change, Sustainable Development and Energy 6. External Sector 7. Agriculture and Food Management 8. Industry and Infrastructure 9. Services Sector 10. Social Infrastructure, Employment and Human Development Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 3
Outline Encouraging developments for the medium term Deflationary impulses in the near term Outlook and policies Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 4
Encouraging (and Mixed) Developments 1.Rekindled optimism on structural reforms 2.Growing confidence that macro-economic stability inflation and external balance has become entrenched: Regime shift 3.Demonetization s long-term positive consequences 4.Demonetization s short-term costs 5.Extraordinary financial market confidence/exuberance Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 5
Encouraging Developments. Structural Reforms Launch of the GST: 13.5 lakh new registrants In-principle decision to privatize Air India Further rationalization of energy subsidies Actions to address the Twin Balance Sheet challenge Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 6
Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Encouraging Developments. Structural Downward Shift in Inflation: Changes in oil market and domestic agriculture 20 1980-81: (37.5$/bbl) 1987: Drought 1990-91: (26.7 $/bbl) 18 Iran Iraq War First Gulf War and 1979: Drought 1982: Drought Sharp rupee 16 depreciation 14 1997-98: Low oil price (15$/bbl) but rising food 2009: Drought, and rising commodity 20 18 16 14 12 12 10 10 8 8 6 6 4 8.9 % (Avg) 9.0 % (Avg) 4 2 0 CPI IW Inflation 4.0 % (Avg) 5.1 % (Avg) 2 0 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 7
Apr 4, 2014 Jun 4, 2014 Aug 4, 2014 Oct 4, 2014 Dec 4, 2014 Feb 4, 2015 Apr 4, 2015 Jun 4, 2015 Aug 4, 2015 Oct 4, 2015 Dec 4, 2015 Feb 4, 2016 Apr 4, 2016 Jun 4, 2016 Aug 4, 2016 Oct 4, 2016 Dec 4, 2016 Feb 4, 2017 Apr 4, 2017 Jun 4, 2017 In Rs Trillion Encouraging Developments. Demonetization: Decline in equilibrium cash holdings Cash Holdings Currency in Circulation to GDP and M1 19 18 12.0 65 17 16 15 14 13 Rs ~3.4 Trillion ~ Rs 3.5 trillion 11.5 11.0 64 63 62 12 11 10 9 8 10.5 10.0 61 60 59 7 9.5 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 58 CIC/GDP CIC/M1 (RHS) Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 8
Rs billion Rs Billion Encouraging Developments. Demonetization -Boost to digitalization for all users Sep-16 Sep-16 Oct-16 Oct-16 Nov-16 Nov-16 Dec-16 Dec-16 Jan-17 Jan-17 Feb-17 Feb-17 Mar-17 Mar-17 Apr-17 Apr-17 May-17 May-17 Rs billion Rs Billion Sep-16 Sep-16 Oct-16 Oct-16 Nov-16 Nov-16 Dec-16 Dec-16 Jan-17 Jan-17 Feb-17 Feb-17 Mar-17 Mar-17 Apr-17 Apr-17 May-17 Rs Billion Jan-15 Sep-16 Apr-15 Oct-16 Jul-15 Nov-16 Oct-15 Dec-16 Jan-16 Jan-17 Apr-16 Feb-17 Jul-16 Mar-17 Oct-16 Apr-17 Jan-17 May-17 Apr-17 12 AEPS Inter Bank Transaction 80 RuPay Card usage at POS 12 RuPay Card usage at (ecom) 10 8 6 70 60 50 40 10 8 6 4 2 30 20 10 4 2 0 0 0 30 25 20 15 10 5 0 UPI - Unified Payments Interface 1,000 900 800 700 600 500 400 300 Credit card and debit card usage at PoS 18 16 14 12 10 8 6 4 NEFT transactions (Rs trillion) Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 9
Encouraging Developments. Substantial increase in new tax payers FY: 2015-16 FY: 2016-17 Growth in New Tax Payers (%) 25.1 45.3 Possible additional taxpayers due to Demonetization (in Lakh) (calculated as excess over previous year s growth) Growth in Returned Income (%) 38.6 54.3 Possible addition of Returned Income (in Crore) 10,587 Average Taxable Income (in Lakh) 2.5 2.7 5.4 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 10
Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Lakh Demonetization: Short term impacts on real economy and informal sector 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0 High Frequency Macro Economic Indicators Real Credit Growth - Industry IIP Manufacturing Growth Number of Two Wheelers Sold in the Domestic Market 17 16 15 14 13 12 Actual Data Sept 2016 trend 11 Oct 2016 trend MGNREGA: All India Mandays generated MGNREGA: Less Developed states Mandays generated Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 11
Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Encouraging Developments. Financial Markets exuberance decoupled from real economy related to international excess liquidity 32000 27000 22000 17000 12000 7000 2000 Average P/E during boom period was 18.6 Sensex Avg P/E (RHS) Long-term average P/E since 1990-91 has been ~18 28 26 22.65 24 22 20 18 16 14 12 10 Source: BSE, RBI Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 12
Deflationary Impulses: Outlook for Inflation and Growth Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 13
Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Inflation : Substantial overachievement 9.0 8.0 Consumer Price Inflation 7.0 6.0 End March 2017 target 5.0 4.0 3.0 Medium term target 2.0 1.0 Headline CPI CPI Refined core Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 14
Inflation Outlook: Determining factors Outlook for capital flows and the exchange rate Influenced by the outlook and policy in advanced economies, especially the US Recent nominal exchange rate appreciation Good monsoon but bottlenecks in fruits and vegetables Introduction of the GST 7th Pay Commission awards Farm loan waivers Output gap End-period inflation within target; average inflation below target Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 15
Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Growth: Across the board deceleration in real activity since Q2 FY 2017 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0 Real Credit Growth - Industry -6.0 IIP Manufacturing Growth -8.0-10.0 11 9 7 5 3 1-1 -3 GVA growth GFCF growth (real) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013-14 2014-15 2015-16 2016-17 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 16
Growth outlook from a Twin Balance Sheet perspective: Need for deleveraging Spain Housing Crash Japan Bubble 3.0 1.1 1.8-0.2 Thailand Asian Financial 5.5 5.2 2.9 1.0 11.4 7.9 China Credit Surge US Subprime Crisis India Growth Boom 7.5 7.3 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 230 210 190 170 150 130 110 90 70 50 30 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 17
Farm Loan Waivers: Deflationary not Inflationary Likely magnitude: 1.25 lakh crore- for states which have already announced; 2.7 lakh crore if all states implement Deflationary because of FRLs of States: for example, UP has slashed capital expenditure to accommodate waiver Potential impact on demand: 58 thousand crore - states which have already announced; 1.14 lakh crore if all states implement State fiscal impact: reduction by 0.35 percent of GDP - states which have already announced; reduction by 0.7 percent of GDP if all states implements Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 18
TBS: Rising Stress in Power and Telecom Sectors 3,900 3,600 3,300 Power sector debt with IC<1 (Rs bn) Share of debt with IC<1 (%) (RHS) 75% 70% 65% 1,800 1,500 Telecom sector debt with IC<1 (Rs bn) Share of debt with IC<1 (%) (RHS) 60% 55% 50% 3,000 60% 1,200 45% 2,700 2,400 55% 50% 900 600 40% 35% 30% 2,100 1,800 45% 40% 300 25% 20% 1,500 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 35% - 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 15% Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 19
Agriculture Puzzle: Reduced farm revenues in non-cereal crops despite good monsoon Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 20
Revenue, Quantity and Price Movement of Arhar 100 90 80 70 60 50 40 30 20 10 0 Phase 1: As quantity goes up total revenue goes up Price (LHS) Revenue (RHS) Quanity (RHS) 2013 2014 2015 2016 200 180 160 140 120 100 80 60 40 20 0 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 21
Revenue, Quantity and Price Movement of Arhar 100 90 80 70 60 50 40 30 20 10 0 Phase 2 : As quantity declines total revenue goes down Price (LHS) Revenue (RHS) Quanity (RHS) 2013 2014 2015 2016 200 180 160 140 120 100 80 60 40 20 0 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 22
Revenue, Quantity and Price Movement of Arhar Phase 3 : The relationship doesn t hold this year: Output up, revenue down 100 200 90 80 70 60 50 40 30 20 10 0 Price (LHS) Revenue (RHS) Quanity (RHS) 2013 2014 2015 2016 180 160 140 120 100 80 60 40 20 0 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 23
Revenue, Quantity and Price Movement of Arhar 100 90 80 70 60 50 40 30 20 10 0 The relationship doesn t hold because of sharp decline in prices Price (LHS) Revenue (RHS) Quanity (RHS) 2013 2014 2015 2016 200 180 160 140 120 100 80 60 40 20 0 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 24
Selected Agricultural Commodities: Real Revenues, Quantities and Prices Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 25
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Percent High real rates and deteriorating competitiveness 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 125 120 115 110 105 100 95 90 Real Interest Rate (per cent) REER Asia-H REER RBI REER Asia-M NEER Cross-country Real Bond Yield (per cent) as of May 2017 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 70 68 66 64 62 60 58 4.6 2.7 2.7 2.1 India Thailand Indonesia China Singapore Taiwan Korea Malaysia Rupee/$ 0.7 0.5 0.3 Rupee per Chinese Yuan (RHS) 10.5 10.3 10.1 9.9 9.7 9.5 9.3 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 26
Growth Outlook: Summary Balance of risks to growth has shifted to the downside Balance of probability has correspondingly shifted away from the upper end of the growth forecast in February 2017-08-11 Economic Survey 2016-17 Volume II: 27 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 27
Monetary policy: Technical assessment Structural decline in inflation and inflation outlook create scope for lower rates Temporary factors reduce scope for lower rates Neutral nominal rates based on RBI studies of neutral real rates between 5.25 and 5.75 percent But economic cycle must be factored in (Taylor rule): if growth below potential and there is economic slack, actual rate must be below neutral Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 28
Monetary Policy: Technical assessment Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 8.00 7.75 7.50 7.25 7.00 6.75 6.50 6.25 6.00 5.75 5.50 5.25 5.00 Repo Rate and Nominal Neutral Rate Nominal Neutral Rate Repo Rate 25 bps 75 bps Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 29
Monetary Policy. Technical assessment: Policy cuts are reflected in incremental lending, especially private banks Repo Rate and Bank Groupwise Weighted Average Lending Rates on Fresh Rupee Loans 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 Repo Public Sector Banks Private Sector Banks 203 bps 175 bps 171 bps Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 30
Fiscal Outlook Downside risks include GST receipts, growth outlook, spectrum receipts, 7 th Pay Commission Upside potential include compliance benefits from the GST and Demonetization Magnitude and pace of final consolidation relative to the commitments made may need to be assessed going forward Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 31
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Agriculture: Over longer horizons, there is no necessary opposition between farmer and consumer interests Lakh hectare Growth Crop 2016-17 2017-18 2016-17 2017-18 Rice 266.93 280.03 2.1 4.9 Pulses 116.95 121.28 35.0 3.7 Moong 28.31 28.89 39.2 2.1 Tur 45.19 37.51 54.7-17.0 Coarse Cereals 156.81 156.95 3.2 0.1 Oilseeds 165.49 148.88 6.3-10.0 Sugarcane 45.64 49.71 1.6 8.9 Jute & Mesta 7.55 7.04-2.3-6.9 Cotton 96.48 114.34-8.7 18.5 Total 855.85 878.23 5.2 2.6 100 80 60 40 20 0-20 -40 Production Lagged WPI (RHS) Arhar 60 50 40 30 20 10 0-10 -20 Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 32
Agricultural policies Remunerative MSPs backed by effective procurement Eliminate restrictions that impede realization of better prices: Stock limits, export restrictions, impediments to the implementation of e-nam Time also ripe to consider whether direct support (as opposed to indirect support) can be more effective Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 33