SECTION 2: POLICIES IN PERSPECTIVE

The survey starts by giving a glance of the 8 interesting facts about India, at the outset itself, as given below:

1. Indians on The Move: New estimates based on railway passenger traffic data reveal annual work-related migration of about 9 million people, almost double what the 2011 Census suggests.

2. Biases in Perception: China’s credit rating was upgraded from A+ to AA- in December 2010 while India’s has remained unchanged at BBB(–). From 2009 to 2015, China’s credit-to-GDP soared from about 142 per cent to

205 per cent and its growth decelerated. The contrast with India’s indicators is striking—it shows India in better position. This shows poor standards followed by the global popular rating agencies.

3. New Evidence on Weak Targeting of Social Programs: Welfare spending in India suffers from misallocation—the districts with the most poor are the ones that suffer from the greatest shortfall of funds in social programs. The districts accounting for the poorest 40 per cent receive only 29 per cent of the total funding.

4. Political Democracy but Fiscal Democracy: India has 7 taxpayers for every 100 voters which ranks it at 13th amongst 18 of the democratic G-

20 countries.

5. India’s Distinctive Demographic Dividend: India’s share of working age to non-working age population will peak later and at a lower level than that for other countries but last longer. The peak of the growth boost due to the demographic dividend is fast approaching, with peninsular states peaking soon and the hinterland states peaking much later.

6. India Trades More Than China and a Lot Within Itself: As of 2011, India’s openness -

measured as the “ratio of trade in goods and services to GDP” has far overtaken China’s (a country famed for using trade as an engine of growth). India’s internal trade to GDP is also comparable to that of other large countries and very different from the caricature of a barrier-riddled economy.

7. Divergence within India, Big Time: Spatial dispersion in income is still rising in India in the last decade (2004–14), unlike the rest of the world and even China. That is, despite more porous borders within India than between countries internationally, the forces of “convergence” have been elusive.

8. Property Tax Potential Unexploited: Evidence from satellite data indicates that Bengaluru and Jaipur collect only between 5 per cent to 20 per cent of their potential property taxes.

Introduction: The Economic Survey for 2014–15 spoke about the “sweet spot” for the Indian economy that could launch India onto a trajectory of sustained growth of 8–10 percent. The Survey 2015–16 assessed that “for now, but not indefinitely, that sweet spot is still beckoningly there”. While this year’s Survey (2016–17) suggests that shifts in the underlying vision will be needed to overcome the major challenges ahead, thereby accelerating growth, expanding employment opportunities, and achieving social justice. In the aftermath of demonetisation, and because cyclical developments will make economic management harder, articulating and embracing those shifts will be critical to ensuring that that sweet spot does not disappear.

The Survey cites the historic economic policy developments of 2016-16 in the following terms—

(i) On the domestic side, a constitutional amendment paved the way for the

long-awaited and transformational goods and services tax (GST) while demonetisation of the large currency notes signalled a regime shift to punitively raise the costs of illicit activities.

(ii) On the international front, Brexit and the US elections may herald a tectonic shift, forebodingly laden with darker possibilities for the global, and even the Indian, economy.

Demonetisation: It was a “radical” governance-cum-social engineering measure (two largest denomination currency notes, Rs 500 and Rs. 1000— comprising 86 percent of all the cash in circulation—were demonetised on November 8, 2016). The aim of the action was fourfold:

(i) Curbing corruption,

(ii) Curbing counterfeiting,

(iii) Checking terrorist activities, and

(iv) Curbing accumulation of black money.

Before demonetisation several steps were taken to curb such illicit activities—the creation of the Special Investigation Team (SIT) in the 2014 budget; the Black Money Act, 2015; the Benami Transactions Act of 2016; the information exchange agreement with Switzerland and changes in the tax treaties with Mauritius and Cyprus; and the Income Disclosure Scheme.

Demonetisation was aimed at signalling a regime change, emphasizing the government’s determination to penalize illicit activities and the associated wealth. In effect, the tax on illicit activities as well as on legal activities that were not disclosed to the tax authorities was sought to be permanently and punitively increased. The public debate on demonetisation has raised three questions—

(a) its broader aspect of management, as reflected in the design and implementation of the initiative;

(b) its economic impact in the short and long run; and

GST move: GST bill being cleared is transformational in nature, as per the Survey. The proposed tax will create a common Indian market, improve tax

compliance, boost investment and growth—and improve governance. Besides, the tax is also a bold new experiment in the governance of cooperative federalism. In addition, the government—

(i) Overhauled the bankruptcy laws so that the “exit” problem that pervades the Indian economy—with high negative consequences (as highlighted in the Survey 2015–16) can be addressed effectively and speedily;

(ii) Codified the institutional arrangements on monetary policy with the Reserve Bank of India (RBI), that inflation control will be less susceptible to the whims of individuals and the caprice of governments; and

(iii) Solidified the legal basis for Aadhaar, to realise the long-term gains from the JAM trifecta (Jan Dhan-Aadhaar-Mobile).

Other reforms: Beyond these headline reforms were other less-heralded but nonetheless important actions—

(i) The government enacted a package of measures to assist the clothing sector that by virtue of being export-oriented and labour-intensive could provide a boost to employment, especially female employment.

(ii) The National Payments Corporation of India (NPCI) successfully finalized the Unified Payments Interface (UPI) platform. By facilitating inter-operability it will unleash the power of mobile phones in achieving digitalization of payments and financial inclusion, and making the “M” an integral part of the government’s flagship JAM initiative.

(iii) Further FDI reform measures were implemented, allowing India to become one of the world’s largest recipients of foreign direct investment.

These measures cemented India’s reputation as one of the few bright spots in an otherwise grim global economy. India is not only among the world’s fastest growing major economies, underpinned by a stable macro-economy with declining inflation and improving fiscal and external balances. It was also one of the few economies enacting major ‘structural reforms’. Yet there is a gap between this reality of macro-economic stability and rapid growth, on the one hand, and the perception of the ratings agencies on the other. Economic reforms are not, or not just, about overcoming vested interests, they are increasingly about shared narratives and vision on problems and

solutions.