Economic Survey of India 2017-18:
Policy Reforms in Zeitgeist of Stigmatized Capitalism
Economic Surveys have sometimes been seen as portends of the Budget that follows. It is often used to engage in a sort of crystal ball gazing and guess work to predict the Budget proposals. However, a more useful manner of looking at these is that the Economic Surveys provide a much needed context to the Budget.
Economic Survey 2018-191 in much the same manner is not only a report card of the Government for the year past, but also provides a context in which the Budget proposals would arrive. In the following paragraphs, we have attempted to flesh out those areas that we perceive may see an amount of thrust in the Budget proposals. Not just that, we believe that the following paragraphs will supply you, the reader, with a certain amount of clarity vis-a-vis the "Why" of the Budget proposal, providing, as it were, the context within which the Finance Minister would stand to deliver his speech. Between these lines, there could be technical monsters that present themselves - for instance, certain tax proposals may be a necessary concomitant of what the Government may seek to achieve via the Budget in the context of the economic scorecard of the country. These have, in some places, been sought to be presented as separate highlights within this page.
Our reading of the Survey indicates that while at an overall level, there are no immediate causes for alarm, nonetheless, the Government has a tight rope walk ahead of it, in balancing the need for economic growth with the deficit levels. This nuance appears in paragraph 1.29, and therefore, in the very first chapter, where the Economic Survey notes:
"It is that zeitgeist (or Maahaul) of stigmatized capitalism—an accumulated legacy inherited by the government—that made policy reforms so difficult and makes the recent progress in addressing the Twin Balance Sheet challenge noteworthy."
In any event, based on High frequency indicators2 in its outlook for 2017-18, the Economic Survey suggests that a robust recovery is taking hold. However, the level of indicators remain below potential.
The CSO3 has forecast the real GDP4 at 6.5 percent. However, the Economic Survey pegs this the expectation of GDP growth in 2017-18 at 6.75 percent. The Current Account Deficit remains well below the 3 percent of GDP threshold beyond which vulnerability emerges, and foreign exchange reserves are at US$432 billion (spot and forward) at end December 2017 (well above prudent norms, as the Survey notes).
GST revenue collections are robust. The Survey predicts the GST revenue growth as compared to the Annual revenues of indirect taxes in 2016-17 at 12 percent.
GST Revenue Collection (in lakh crores)
Particulars of collection
agency and tax
Nature of Tax
States 4.4 SGST 2.5
Center 5.3 CGST 2.5
Excise 1.4 IGST 4.9
Service 2.5 Cesses 0.9
CVD / SAD 1.4 Not applicable Total 10.9
Estimated Growth of GST 12%
With the rate of growth in GST being 12 percent (on an estimate basis), and the nominal GDP growth of 10.5 percent projected in the Survey, the buoyancy of GST amounts to 1.14. This is a major change from the historic buoyancy of indirect tax that has been at around 0.9 percent.
GST as an information mining tool
"The GST has been widely heralded for many things, especially its potential to create one Indian market, expand the tax base, and foster cooperative federalism. Yet almost unnoticed is its one enormous benefit: it will create a vast repository of information, which will enlarge and surely alter our understanding of India’s economy."5 With this statement the Survey establishes GST as a game changer in the information that it acts as a tool to gather. Some exciting new findings arising out of GST data mining are highlighted here:
- the assumption that the B2C firms (i.e. the smaller firms) would opt for composition has been proved wrong as such firms nonetheless purchase from large enterprises
- distribution of GST base among the states appears closely related to their Gross State Domestic Product allaying fears that the shift to GST would undermine major producing states' tax collections
- there is a strong correlation between export performance and states' standard of living
- Internal trade of India is a whopping 60 percent of the GDP, which beats the estimates by 10 percent
- India's formal non-farm payroll is substantially greater than believed - social security measures hint at 31 percent of the non-agricultural work force as formal sector payroll, but GST data suggests formal sector payroll of 53 percent
Other Determinants of Growth
Personal income tax collections have been pegged at 2.3 percent for the FY 2017-18 at the back of measures such as demonetization and GST. The other two significant aspects that have been highlighted by the Survey are:
- Exports (hailed, as it were, as the biggest source of upside potential) and
- Implementation of the Insolvency and Bankruptcy process
Based on the above, inter alia, the Survey pegs the growth rate between 7 and 7.5 percent.6
Timely Justice - A Measure of Ease of Doing Business
It has been widely acknowledged, and stated extremely succinctly by Amrit Amirapu that "Justice Delayed is Development Denied".7 Especially taken note of are tax cases - with the average pendency of 6 years per case, the situation has been rather politely deemed to be acute! Per illustrative data quoted by the Survey, the value of government projects in six infrastructure ministries that are currently stayed by court injunctions, as well as the average duration of their stays has been tabulated as given below:
Stayed Projects - Stock (6 ministries as on October 31, 2017)
Ministry Stayed Projects Total Value
Duration of Stay
Shipping 2 2,620 5.9
Power 11 23,913 3
Road 30 11,216 3
Petroleum 2 342 0.9
Mines 12 106 3
Railways 12 13,882 3
Total 52 52,081 4.3
The total legal expenditure of the Corporate India between 2015-16 was close to 20 thousand crores. Other damning statistics relate to tax cases where the Survey notes that the success rate of the Department at all three levels of appeal - Appellate Tribunals, High Courts, and Supreme Court - and for both direct and indirect tax litigation is under 30 percent. "The Department unambiguously loses 65 percent of its cases. Over a period of time, the success rate of the Department has only been declining, while that of the assessee has been increasing".
From a Policy perspective, the Survey suggests the following measures:
- Expanding judicial capacity in the lower courts and reducing existing burden on the higher courts via additional capacity to deal with economic and commercial cases at the lower levels, reducing the original side jurisdiction from the High Courts and lesser exercise of discretionary jurisdiction by the higher courts
- Tax department should limit its appeal - recognizing the bureaucratic risk aversion, the survey suggests the constitution of an independent panel to decide on further appeals
- Increasing state expenditure on judiciary
- Creation of more subject matter and stage specific benches
- Reduction of reliance on injunctions and stays and stricter timelines for decision on these
- Better court case management and court automation on the lines of Crown Court Management Services of the UK
Deep Dive - Selected Highlights of the Survey
Fiscal Developments during the year
The Survey notes that there are 3 distinct patterns on revenue front till November 2017.
- the gross tax collections are reasonably on track
- non tax revenues have visibly underperformed
- non-debt capital receipts, mainly proceedings from disinvestments are doing well
%age Growth in Items of Receipt (April to November)
2014-15 2015-16 2016-17 2017-18
Gross tax revenue 6.5 20.8 21.5 16.5
Net tax revenue 4.3 12.5 33.6 12.6
Non tax revenue 20.5 34.9 1.0 -29.7
Total revenue receipts 7.8 17.8 24.8 1.1
Non-debt capital receipts -17.3 180.3 57.1 89.9
Non-debt receipts 7.3 20 25.8 4.6
In contrast to revenue, the expenditure had been robust - which in the present context of the data, appeared to be a euphemism for "tearaway". In any event, the rationale provided by the Survey appears to be sound inasmuch as that:
- due to advancing of the budget cycle the spending agencies planned in advance and could implement their expenditure plans effectively, and before time, as it were and
- front loading of certain expenditure as a pat of prudent expenditure management
In any event, this had led to a certain amount of pressure on the revenue and fiscal deficit on a year on year basis - note the inordinately high percentages for 2017-18 in the table below.
Deficit Indicators (%age of BE)
2015-16 2016-17 2017-18
Revenue Deficit 87.5 98.6 152.2
Fiscal Deficit 87 85.8 112
Renegotiation of PPAs8 by certain states
One of the key objectives of the Electricity Act, 2003 is promotion of competition in the electricity sector. Section 63 of the Act specifies that (notwithstanding anything contained in section 62), the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government. A tariff order shall, unless amended or revoked, continue to be in force for such period as may be specified in the tariff order. The revised tariff policy was published in January, 2016.
With the recent rounds of auctions, very low tariffs came to be discovered. Auction for wind based power held by SECI 9 held in February 2017 realised a tariff of INR 3.46/unit. The lowest feed in tariff for wind on the other hand is at INR 4.16/unit. Second wind auction led to a tariff of INR 2.64/unit - which while welcome in some ways, led to renegotiations of PPAs already signed from certain discoms. Per CRISIL, such renegotiations have the potential of risk to investment worth INR 48000 crores. The Survey takes note of this risk and suggests that "affordable financing holds the key for financing sustainable energy projects". The Survey notes that risk mitigating instruments such as payment guarantee fund or a foreign exchange fund available to developers could be a way forward. Renewable energy has already been placed under the priority sector lending and the bank loan for solar roof-top systems is to be treated as a part of home loan/home improvement loan with subsequent tax benefits. Currently, the levelized tariff is approaching grid parity. The Survey advocates a case for revisiting the subsidies and incentives being given to the renewable energy sector.
Logistics - Challenges and Suggested Plan
With GST, the next big step has to be logistics, given the avowed objective of a single market economy. However, there is much to be desired in this sector. Amongst the challenges are multiple policy making bodies, unfavourable modal mix, and general apathy towards logistics, that plagues the industry. If the benefits of GST are to be harnessed, logistics would have to play a key part therein. The Survey suggests certain key action plans
- Formulation of National Integrated Logistics Policy to bring in greater transparency and enhance efficiency in logistics operations
- Develop integrated IT Platform as a single window for all logistics related matters and act as a Logistics marketplace
- Usher in ease of documentation, faster clearance, digitization.
- Bring down logistics cost to less than 10% of GDP by 2022
- Faster clearances for setting up of logistics infrastructure like Multi-modal logistic parks (MMLPs), Container Freight Station (CFS), Air Freight Station (AFS) & Inland Container Depot (ICD).
- Introduce professional standards and certification for service providers
- Promote introduction of high-end technologies like high-tech scanning equipment, RFID, GPS, EDI, online Track & Trace systems in the entire logistics network.
- Improve Logistics skilling in the country and increase jobs in Logistics sector to 40 million by 2022
Hybrid Annuity Model in Infrastructure Development
While addressing Industry and Infrastructure sector, the Survey takes a special note of the Hybrid Annuity Model. This model, mooted for road construction, is a combination of EPC (Engineering, Procurement and Construction) model and BOT - Annuity (Build, Operate, Transfer) model. Under the EPC model, the private players construct the road and have no role in the road’s ownership, toll collection or maintenance. National Highways Authority of India (NHAI) pays private players for the construction of the road. The Government with full ownership of the road, takes care of toll collection and maintenance of the road.
Under the BOT model
- private players have an active role in road construction, operation and maintenance of the road for a specified number of years as per agreement. After the completion of the years of operation, the private players transfer the asset back to the Government.
- the private players arrange all the finances for the project, while collecting toll revenue (BOT toll model) or annuity fee (BOT annuity model) from the Government, as agreed.
In the BOT annuity model, the toll revenue risk is taken by the Government. The Government pays private player a pre-fixed annuity for construction and maintenance of roads.
Hybrid Annuity Model combines EPC (40 per cent) and BOT-Annuity (60 per cent) Models. On behalf of the Government, NHAI releases 40 per cent of the total project cost, in five tranches linked to milestones. The balance 60 per cent is arranged by the developer. The developer usually invests not more than 20-25 per cent of the project cost, while the remaining is raised as debt.
In BOT toll model, the private players did not show their willingness to invest, since they had to fully arrange for the entire finances, either through equity contribution or debt. NPA-riddled banks were reluctant to lend to these projects. Since there was no compensation structure such as annuity, the developers had to take entire risk in low traffic projects. The essence of Hybrid Annuity Model arose due to requirement of better financial mechanism where the risk would be spread between developers and the Government.
Issue of vacant housing
The Survey takes a special note of the issue of vacant housing. Of the total residential stock. the Survey finds that 12.38 percent are vacant. The Survey states that "India’s housing requirements are complex but till now policies have been mostly focused on building more homes and on home ownership. The above data suggests that we need to take a more holistic approach that takes into account rentals and vacancy rates. In turn, this needs policy-makers to pay more attention to contract enforcement, property rights and spatial distribution of housing supply vs. demand." However, with a strong stress on this issue, the possibility of tax proposals impacting vacant housing could be expected.
Amongst the various issues discussed in the Economic Survey, the aspects analysed by us are essentially areas of concern that may potentially impact both policy making and law in relation to taxation as well as other sectors. One of the factors stressed upon in the Economic Survey is effective enforcement of contracts, through a more effective judicial process; this will significantly contribute to the ‘ease of doing business’.
From this analysis of the Economic survey, the key policy measures in the near to medium term could be in the road, logistics, judicial and energy sectors.
We believe it relevant to mention that this is the first in the many exercises to be undertaken by us with respect to the analysis of the upcoming Budget. We would be happy to have you, our readers, researching and reflecting on our analysis to engage with us about your thoughts and perceptions to encourage fluid dialogue.
With special thanks to Siddharth Sharma and Shivangi Nanda.
- the Survey
- Overall Gross Value Addition (GVA), manufacturing GVA, Index of Industrial Production (IIP), Gross Capital Formation and exports.
- Central Statistics Office
- Gross Domestic Product
- paragraph 2.1 of the Survey
- Persistently high oil prices (at current levels) remain a key risk. They would affect inflation, the current account, the fiscal position and growth, and force macroeconomic policies to be tighter than otherwise.
- Power Purchase Agreements
- Solar Energy Corporation of India