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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 2
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 3
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 4
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 5
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 6
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 7
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 8
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 9
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 10
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 11
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 12
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 13
Deflationary Impulses: Outlook for Inflation and Growth
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 14
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 15
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 16
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)
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 17
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 18
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 19
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)
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 20
Agriculture Puzzle: Reduced farm revenues in non-cereal crops despite good monsoon
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 21
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 22
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)
Revenue, Quantity and Price Movement of Arhar
Phase 2 : As quantity declines total revenue goes down
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 23
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)
Revenue, Quantity and Price Movement of Arhar
Phase 3 : The relationship doesn’t hold this year: Output up, revenue down
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 24
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)
Revenue, Quantity and Price Movement of Arhar
The relationship doesn’t hold because of sharp decline in prices
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 25
Selected Agricultural Commodities: Real Revenues, Quantities and Prices
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 26
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)
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 27
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 28
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 29
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 30
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 31
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 32
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
Chief Economic Adviser Economic Survey 2016-17 Volume 2: Overview 33
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