Economic Survey 2016-17 Volume 2 An...

Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 1

Economic Survey 2016-17 Volume 2

An Overview

August 11, 2017

Arvind Subramanian

Chief Economic Adviser


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


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


Outline

•Encouraging developments for the medium term

•Deflationary impulses in the near term

•Outlook and policies


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


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


Encouraging Developments. Structural Downward Shift in Inflation: Changes in oil market and domestic agriculture

8.9 % (Avg)

4.0 % (Avg)

9.0 % (Avg)

5.1 % (Avg)

1979: Drought

1980-81: (37.5$/bbl) Iran Iraq War

1982: Drought

1987: Drought1990-91: (26.7 $/bbl) First Gulf War and

Sharp rupee depreciation

1997-98: Low oil price (15$/bbl) but rising food

2009: Drought, and rising commodity …

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

18

20

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

CPI IW Inflation


Encouraging Developments. Demonetization: Decline in equilibrium cash holdings

Cash Holdings Currency in Circulation to GDP and M1

58

59

60

61

62

63

64

65

9.5

10.0

10.5

11.0

11.5

12.0

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

CIC/GDP CIC/M1 (RHS)

~ Rs 3.5

trillion

7

8

9

10

11

12

13

14

15

16

17

18

19

Ap

r 4, 2014

Jun

4, 2014

Aug

4, 2014

Oct

4, 2014

Dec

4, 2014

Feb

4, 2015

Ap

r 4, 2015

Jun

4, 2015

Aug

4, 2015

Oct

4, 2015

Dec

4, 2015

Feb

4, 2016

Ap

r 4, 2016

Jun

4, 2016

Aug

4, 2016

Oct

4, 2016

Dec

4, 2016

Feb

4, 2017

Ap

r 4, 2017

Jun

4, 2017

In R

s T

rillio

n

Rs ~3.4

Trillion


Encouraging Developments. Demonetization -Boost to digitalization for all users

0

2

4

6

8

10

12

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

May

-17

Rs

Bil

lio

n

RuPay Card usage at (eCom)

0

10

20

30

40

50

60

70

80

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

May

-17

Rs

Bil

lio

n

RuPay Card usage at POS

0

5

10

15

20

25

30

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

May

-17

Rs

bil

lio

n

UPI - Unified Payments Interface

300

400

500

600

700

800

900

1,000

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

Rs

bil

lio

n

Credit card and debit card usage at PoS

4

6

8

10

12

14

16

18

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

Ap

r-17

NEFT transactions (Rs trillion)

0

2

4

6

8

10

12

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-17

May

-17

Rs

Bil

lio

n

AEPS Inter Bank Transaction


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) 5.4

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

Encouraging Developments. Substantial increase in new tax payers


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

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

Ap

r-17

Real Credit Growth - IndustryIIP Manufacturing Growth

11

12

13

14

15

16

17

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Lak

h

Actual Data Sept 2016 trend

Oct 2016 trend

High Frequency Macro Economic Indicators Number of Two Wheelers Sold in the Domestic Market

MGNREGA: All India Mandays generated MGNREGA: Less Developed states Mandays generated


Encouraging Developments. Financial Markets exuberance decoupled from real economy related to international excess liquidity

Source: BSE, RBI

22.65

10

12

14

16

18

20

22

24

26

28

2000

7000

12000

17000

22000

27000

32000

Jan

-03

Jun

-03

No

v-0

3

Ap

r-04

Sep

-04

Feb

-05

Jul-

05

Dec

-05

May

-06

Oct

-06

Mar

-07

Aug-

07

Jan

-08

Jun

-08

No

v-0

8

Ap

r-09

Sep

-09

Feb

-10

Jul-

10

Dec

-10

May

-11

Oct

-11

Mar

-12

Aug-

12

Jan

-13

Jun

-13

No

v-1

3

Ap

r-14

Sep

-14

Feb

-15

Jul-

15

Dec

-15

May

-16

Oct

-16

Mar

-17

Aug-

17

Sensex Avg P/E (RHS)

Long-term average P/E since 1990-91 has

been ~18

Average P/E during boom

period was 18.6


Deflationary Impulses: Outlook for Inflation and Growth


Inflation : Substantial overachievement

Consumer Price Inflation

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Feb

-14

Ap

r-14

Jun

-14

Aug-

14

Oct

-14

Dec

-14

Feb

-15

Ap

r-15

Jun

-15

Aug-

15

Oct

-15

Dec

-15

Feb

-16

Ap

r-16

Jun

-16

Aug-

16

Oct

-16

Dec

-16

Feb

-17

Ap

r-17

Jun

-17

Headline CPI CPI Refined core

Medium term target

End March 2017 target


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


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

6.0

8.0

10.0

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Jul-

16

Oct

-16

Jan

-17

Ap

r-17

Real Credit Growth - Industry

IIP Manufacturing Growth

-3

-1

1

3

5

7

9

11

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2013-14 2014-15 2015-16 2016-17

GVA growth GFCF growth (real)


Growth outlook from a Twin Balance Sheet perspective: Need for deleveraging

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

30

50

70

90

110

130

150

170

190

210

230

Japan Bubble

Thailand Asian Financial

Spain Housing Crash

China Credit Surge

India Growth Boom

US Subprime Crisis

1.8 -0.2

2.9 1.0

7.5 7.3

11.4 7.95.5 5.2

3.0 1.1


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


TBS: Rising Stress in Power and Telecom Sectors

35%

40%

45%

50%

55%

60%

65%

70%

75%

1,500

1,800

2,100

2,400

2,700

3,000

3,300

3,600

3,900

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Power sector debt with IC<1 (Rs bn)

Share of debt with IC<1 (%) (RHS)

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

-

300

600

900

1,200

1,500

1,800

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Telecom sector debt with IC<1 (Rs bn)

Share of debt with IC<1 (%) (RHS)


Agriculture Puzzle: Reduced farm revenues in non-cereal crops despite good monsoon


Revenue, Quantity and Price Movement of Arhar

0

20

40

60

80

100

120

140

160

180

200

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015 2016

Price (LHS) Revenue (RHS) Quanity (RHS)

Phase 1: As quantity goes up total revenue goes up


0

20

40

60

80

100

120

140

160

180

200

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015 2016



Phase 2 : As quantity declines total revenue goes down


0

20

40

60

80

100

120

140

160

180

200

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015 2016



Phase 3 : The relationship doesn’t hold this year: Output up, revenue down


0

20

40

60

80

100

120

140

160

180

200

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015 2016



The relationship doesn’t hold because of sharp decline in prices


Selected Agricultural Commodities: Real Revenues, Quantities and Prices


High real rates and deteriorating competitiveness

Real Interest Rate (per cent)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Cross-country Real Bond Yield (per cent) as of May 2017

4.6

2.7 2.7

2.1

0.70.5

0.3

0.00.51.01.52.02.53.03.54.04.55.0

India Thailand Indonesia China Singapore Taiwan Korea Malaysia

Per

cen

t

90

95

100

105

110

115

120

125

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

REER Asia-H REER Asia-MREER RBI NEER

9.3

9.5

9.7

9.9

10.1

10.3

10.5

58

60

62

64

66

68

70

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Rupee/$ Rupee per Chinese Yuan (RHS)


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: 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


Monetary Policy: Technical assessment

Repo Rate and Nominal Neutral Rate

5.00

5.25

5.50

5.75

6.00

6.25

6.50

6.75

7.00

7.25

7.50

7.75

8.00

Dec

-14

Ap

r-15

Aug-

15

Dec

-15

Ap

r-16

Aug-

16

Dec

-16

Ap

r-17

Aug-

17

Repo Rate

Nominal Neutral Rate

25 bps

75 bps


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

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

Repo

Public Sector Banks

Private Sector Banks

175 bps

203 bps

171 bps


Fiscal Outlook

• Downside risks include GST receipts, growth outlook, spectrum receipts, 7th 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


Agriculture: Over longer horizons, there is no necessary opposition between farmer and consumer interests

-20

-10

0

10

20

30

40

50

60

-40

-20

0

20

40

60

80

100

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

Production Lagged WPI (RHS)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

Cereals156.81 156.95 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

Arhar


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

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