Finance Minister Nirmala Sitharaman on Friday presented the Economic Survey that details the state of the economy ahead of the government’s Budget for fiscal year beginning April 1, 2021.
The Economic Survey 2020-21, authored by a team led by Chief Economic Adviser Krishnamurthy Venkata Subramanian, details the state of different sectors of the economy as well as reforms that should be undertaken to accelerate growth.
Here are the updates:
Highlights of the Survey
- V-shaped economic recovery due to mega vaccination drive, robust recovery in the services sector and robust growth in consumption and investment
- V-shaped recovery is due to resurgence in high frequency indicators such as power demand, rail freight, E-Way bills, GST collection, steel consumption, Etc
- India to become the fastest growing economy in next two years as per IMF
- India’s GDP is estimated to contract by 7.7% in FY2020-21
- Agriculture to clock 3.4% Growth, while industry and services to contract by 9.6% and 8.8% respectively this year
- India to have a Current Account Surplus of 2% of GDP in FY21, A historic high after 17 years
- Net FPI Inflows recorded an all-time monthly high of 9.8 Billion Dollars in November 2020
- Scores of lives saved and V-Shaped Economic Recovery bear testimony to India’s boldness in taking short-term pain for long-term gain.
Capital budget allocated for defence fully utilised since 2016-17
The allocated capital budget for defence has been fully utilised since 2016-17, reversing the previous trends of surrender of funds, according to the Economic Survey 2020-21.
“The trend of underutilisation of defence budget has also been reversed from financial year 2016-17,” the Survey stated. The allocation of defence budget. including civil estimates and pensions for 2020-21, was ₹4,71,378.00 crore, which was ₹40,367.71 crore over the budget estimates of 2019-20.
Health outcomes of States that adopted PM-JAY improved compared to those who didn’t
The health outcomes of the States that adopted Pradhan Mantri Jan Arogya Yojana (PM-JAY) improved when compared to the States that did not adopt the scheme, according to the Economic Survey 2020-21.
States that adopted the PM-JAY experienced greater penetration of health insurance and a reduction in infant and child mortality rates, as well as realised improved access and utilisation of family planning services, and greater awareness about HIV/AIDS, it added.
PLI scheme to make India integral part of global supply chain
The ₹1.46-lakh crore PLI scheme is expected to make India an integral part of the global supply chain and create huge employment opportunities, according to the Economic Survey tabled in Parliament on Friday.
The production-linked incentive (PLI) scheme was recently expanded to 10 sectors, after registering traction from global investors in the mobile manufacturing segment.
Infrastructure quintessential to boost growth; sectors to grow with unlocking of economy
Terming investment in infrastructure “quintessential” to boost growth, the Economic Survey on Friday said post unlocking of the economy, infra sectors are poised for growth and construction of roads is expected to return to the high pace attained before COVID-19.
The infrastructure sector will be the key to overall economic growth and macroeconomic stability, the Survey said emphasising that the year after the crisis (2021-22) will require sustained and calibrated measures to facilitate the process of economic recovery and enable the economy to get back on its long-term growth trajectory.
Vocational courses to be rolled out for skill development of school students
Vocational courses will be introduced phase-wise in schools for classes 9 to 12 to expose students to skill development avenues, as part of the Centre’s flagship skilling scheme Pradhan Mantri Kaushal Vikas Yojana 3.0, according to the Economic Survey 2020-21 tabled in Parliament on Friday.
The Survey for the financial year ending March said merely 2.4 per cent of India’s workforce in the age group of 15-59 years have received formal vocational or technical training, while another 8.9 per cent obtained training through informal sources.
Economic Survey exhorts rating agencies to be more transparent, less subjective in sovereign rating
India’s sovereign credit ratings do not reflect the economy’s fundamentals, the Economic Survey said on Friday and nudged the global agencies to become more transparent and less subjective in their ratings.
The Economic Survey 2020-21, tabled in Parliament, said that sovereign credit ratings methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations, and suggested that developing economies must come together to address this bias and subjectivity inherent in sovereign credit ratings methodology.
‘India’s COVID response saved over 1 lakh lives’
India’s pandemic response, focused on saving lives and livelihoods, restricted the COVID-19 spread by 37 lakh cases and saved more than 1 lakh lives, as per the Economic Survey 2020-21.
The pre-Budget document tabled in Parliament on Friday noted that in the absence of a potent cure, preventive vaccine; interplay of network structures in densely populated areas, and a high case fatality rate (CFR), India weighed the costs and opportunities strategically.
The limits of scientific understanding of the disease, lack of good data on the mode of spread and potency of the virus made it difficult to model the likely impact of different policy options in a reliable and timely way.
To aggravate the uncertainty, it was estimated that India would have 30 crore cases and several thousand deaths by the end of May, 2020, it noted.
Enhanced government spending on healthcare to cut out-of-pocket spending
An increase in government spending on the healthcare sector – from the current 1% to 2.5-3% of GDP – as envisaged in the National Health Policy 2017 could reduce out-of-pocket expenditures, as per the Economic Survey 2020-21.
The rise in public spending can lead to a reduction in expenditures from 65% to 30% of overall healthcare spend, it noted. The Economic Survey said that for the country to effectively respond to future pandemics, the country’s health infrastructure needs to be agile.
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‘New farm laws herald new era of market freedom’
The government’s annual Economic Survey on Friday strongly defended new farm laws, saying they herald a new era of market freedom which can go a long way in improving lives of small and marginal farmers in India.
These legislations were designed “primarily” for the benefit of “small and marginal farmers”, which constitute around 85% of the total number of farmers and are the biggest sufferer of the “regressive” APMC-regulated market regime, the survey said.
The pre-budget document defended the farm laws in the backdrop of long-running farmers’ agitation at various borders of the national capital seeking repeal of these legislations expressing concern that they are pro-corporate and could weaken government regulated mandis, also called Agriculture Produce Marketing Committees (APMCs).
Optimism with caution
To summarise, India is witnessing a V-shaped economic recovery. This is the testimony to resilience and intrinsic strength of India’s economy, says Mr. Subramanian.
Given the large vaccination drive and the swift roll out of the same, we present this Survey with optimism on both health and economic fronts. At the same time, humbly requesting everyone to continue observing caution till vaccinated, he adds.
Bare Necessities: Roti, Kapada and Makaan
This Chapter of the Survey analyses how the bare necessities have changed. Access to the bare necessities has improved across all States in the country in 2018 as compared to 2012.
It is highest in States such as Kerala, Punjab, Haryana and Gujarat while lowest in Odisha, Jharkhand, West Bengal and Tripura.
Inter-State disparities declined across rural and urban areas as the laggard states have gained relatively more between 2012 and 2018.
Improved disproportionately more for the poorest households when compared to the richest households across rural and urban areas.
Increase in equity is noteworthy as rich can access private options for public goods.
A Bare Necessities Index (BNI) based on the large annual household survey data can be constructed using suitable indicators and methodology at district level for all/targeted districts to assess the progress on access to bare necessities.
Another example from the CEA: You visit a doctor for an ailment. The doctor prescribes medicine for three days, but you have it for three months. What will happen? The same happened with banking reforms, he says.
Regulatory forbearance is an emergency medicine, not staple diet, states the Survey.
During the Global Financial Crisis, regulatory forbearance helped borrowers tide over temporary hardship. Forbearance continued long after the economic recovery, for over seven years, resulting in unintended consequences for the economy.
Banks exploited the forbearance window for window-dressing their books and misallocated credit, thereby damaging the quality of investment in the economy, notes the Survey.
To promote judgement amidst uncertainty, ex-post inquests must recognize the role of hindsight bias and not equate unfavourable outcomes to bad judgement or malafide intent.
It takes about 1,600 days to close a company in India even if all the papers are fine. The same for Singapore is just 128 days! Mr. Subramanian says this to highlight excessive regulation in the country.
India over-regulates the economy resulting in regulations being ineffective even with relatively good compliance with process, states the Survey.
The root cause of the problem of overregulation is an approach that attempts to account for every possible outcome. Increase in complexity of regulations, intended to reduce discretion, results in even more non-transparent discretion
The solution is to simplify regulations and invest in greater supervision which, by definition, implies greater discretion.
A thumbs up for PM-JAY
Pradhan Mantri Jan Arogya Yojana (PM-JAY) – the ambitious program launched by Government of India in 2018 to provide healthcare access to the most vulnerable sections demonstrates strong positive effects on healthcare outcomes in a short time, notes the Survey.
Causal impact of PM-JAY on health outcomes by undertaking a Difference-in-Difference analysis based on National Family Health Survey (NFHS)-4 (2015-16) and NFHS-5 (2019-20) is following:
- Enhanced health insurance coverage: The proportion of households that had health insurance increased in Bihar, Assam and Sikkim from 2015-16 to 2019-20 by 89% while it decreased by 12% over the same period in West Bengal
- Decline in Infant Mortality rate: from 2015-16 to 2019-20, infant mortality rates declined by 20% for West Bengal and by 28% for the three neighbouring states
- Decline in under-5 mortality rate: Bengal saw a fall of 20% while, the neighbours witnessed a 27% reduction
- Modern methods of contraception, female sterilization and pill usage went up by 36%, 22% and 28% respectively in the three neighbouring states while the respective changes for West Bengal were negligible
- While West Bengal did not witness any significant decline in unmet need for spacing between consecutive kids, the neighbouring three states recorded a 37% fall
- Various metrics for mother and child care improved more in the three neighbouring states than in West Bengal.
- Overall, the comparison reflects significant improvements in several health outcomes in states that implemented PM-JAY versus those that did not
– Source: PIB
More allotment needed for health
Another pop culture reference from the CEA – this time it is Hindi movie 3 idiots, where one of the protagonists mothers speaks on how her sizable income goes to her husband’s medical needs.
An increase in public healthcare spending from 1% to 2.5-3% of GDP can decrease the out-of-pocket expenditure from 65% to 35% of overall healthcare spending, states the Survey.
COVID-19 pandemic emphasized the importance of healthcare sector and its inter-linkages with other sectors – showcased how a health crisis transformed into an economic and social crisis.
India’s health infrastructure must be agile so as to respond to pandemics – healthcare policy must not become beholden to ‘saliency bias’.
National Health Mission (NHM) played a critical role in mitigating inequity as the access of the poorest to pre-natal/post-natal care and institutional deliveries increased significantly. The scheme should be given prominence under Ayushman Bharat.
A regulator for the healthcare sector must be considered given the market failures stemming from information asymmetry.
Telemedicine needs to be harnessed to the fullest by investing in internet connectivity and health infrastructure
Inequality and Growth: Conflict or Convergence?
This Chapter of the Survey deals with inequality and growth. Mr. Subramanian explains it with a story from Malgudi Days, the famous novel from R.K. Narayan which was later adapted into a TV series.
Both inequality and per-capita income (growth) have similar relationships with socio-economic indicators in India, unlike in advanced economies.
Economic growth has a greater impact on poverty alleviation than inequality.
India must continue to focus on economic growth to lift the poor out of poverty. Redistribution in a developing economy is feasible only if the size of the economic pie grows, says the Survey.
India’s Sovereign Credit Rating does not reflect its fundamentals
The fifth largest economy in the world has never been rated as the lowest rung of the investment grade (BBB-/Baa3) in sovereign credit ratings, states the Survey.
Credit ratings map the probability of default and therefore reflect the willingness and ability of borrower to meet its obligations.
India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history. The Survey recalls how India shipped gold to repay its debt.
India’s ability to pay can be gauged by low foreign currency denominated debt and forex reserves.
Does Growth lead to Debt Sustainability? Yes, But Not Vice-Versa!
That’s the second Chapter of the Economic Survey. Debt sustainability depends on the ‘Interest Rate Growth Rate Differential’ (IRGD), i.e., the difference between the interest rate and the growth rate.
In India, interest rate on debt is less than growth rate – by norm, not by exception, says the CEA.
Negative IRGD in India – not due to lower interest rates but much higher growth rates – prompts a debate on fiscal policy, especially during growth slowdowns and economic crises, he says.
Growth causes debt to become sustainable in countries with higher growth rates; such clarity about the causal direction is not witnessed in countries with lower growth rates, the Survey states.
Active fiscal policy can ensure that the full benefit of reforms is reaped by limiting potential damage to productive capacity. Fiscal policy that provides an impetus to growth will lead to lower debt-to-GDP ratio. Given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios.
COVID and economy
CEA K.V. Subramanian launches the Economic Survey app. This year’s Economic Survey is dedicated to COVID warriors, he says.
The first chapter of the Economic Survey speaks about India’s policy response to COVID-19 response, amidst a once-in-a-lifetime crisis.
India’s policy response guided by the principle advocated in Mahabaratha ‘Saving a life that is in jeopardy is the origin of dharma’. India recognised that the GDP growth will come back and it certainly has, but human lives will not, says Mr. Subramanian.
India’s policy response also derived from extensive research on epidemiology, especially that looked at Spanish Flu of 1918. One of the key insights was that pandemic spreads faster in higher and denser population and intensity of lockdown matters most at the beginning of the pandemic, he adds.
As per the survey estimates, India avoided about 37 lakh cases and about 1 lakh deaths through the policies it adopted.
Even without the lockdown, the economy would have significant economic impact. Strong correlation of lockdown with decline in cases and deaths is found across states, not just within a few states. Hence Economic Survey infers that lockdown had a causal effect on Saving Lives and Livelihoods.