Summary- First Chapter- Indian Economic Outlook Book

Overall Summary

 Growth and other macro Indicators have been much better since 1991.
 Service sector growth has largely contributed to GDP growth
 GDP growth rate in the 25 year reform period- 6.5%/annum.
 6 areas for policy focus, a/c to India Development Report 2015:
o Infrastructure Development
o Acceleration of labour-intensive manufacturing
o Education and skill of workers for achieving demographic dividend
o Improvement of social sector development
o Sustainable Development
o Maximum Governance
 Value of exports has declined significantly since 2012-13.

Outlook for the Economy

 A/c to policymakers, India has potential to achieve 8-9% GDP

 GVA growth in 2016-17 without agriculture and public administration and defence would be
much lower than the overall growth.
 Inflation for 2017-18 is projected to average 4.5% in 1st half of 17-18 and 5% in 2nd half.
 Easing of international crude prices and increase in procurement of food grains maybe
moderating factors for inflation.
 Reform measures undertaken by NDA in last 3 years:

Demonetization impact on economy

 Short-run disruptions in economic activity in cash-intensive sectors such as retail trade,

hotels and restaurants, transportation, and in the unorganized sector.
 Aggregate demand compression due to adverse wealth effects.
 Benefits would include increase in taxable income due to rise

Poverty and inequality in the post-reform period

 Urban growth is the most important contributor to the rapid reduction in poverty, which
decreased by 1.36 percentage points per annum post 1991, compared to 0.44 percentage
points per annum prior to 1991.
 Poverty decreased by 2.2 percentage points per annum during 2004-05 to 2011-12
compared to 0.74 percentage points during 1993-94 to 2004-05.
 Inequality is much higher in India if we use income rather than consumption.
 It is even higher if we consider non-income indicators such as health and education.

Agriculture: Farm incomes

 Real Farmer incomes increased by 34% from 2003-13.

 In Odisha, they doubled over this period, while in Bihar and WB, farmer incomes declined.
 Hence, farmers need non-farm income apart from farm income.
 Factors such as yield increase via diversification with rise in high value crops, animal
husbandry, water efficiency, rise in minimum support price, crop insurance and improving
the productivity of small and marginal farmers were responsible for farmer’s incomes.
  Distress in agriculture in last 2 years is due to 2 factors:
o Crash in global commodity prices
o Deficit in rainfall in 2013-14 and 2014-15
 Increase in productivity can be achieved through:
o Public investment in rural infrastructure (PMKSY, RKVY)
o Drip irrigation
o Climate resilient agriculture
o Reforms in fertilizer subsidies- award directly to farmers.
o Legalizing land tenancy
o Strengthening of farmer producer organizations

Make In India: Focus on Manufacturing and Trade

 India has 58.4% share of services in GDP but its share of services in employment is only
26.4%. Manufacturing has a low share in GDP (17%) and employment(12.8%).

Emerging Issues in Macroeconomics, Agriculture and Social Sector

 GDP growth has been 7% during the 25 years since 1990 compared to 4% in the 25 years
before that.
 Reduced investment rate and decline in exports are the two issues policymakers need to
address, a/c to the author.
 Social security creation will be a necessary ingredient along with employment for sustainable
growth.

Monetary Policy Transmission

 Central Bank’s operating target is now a short-term money rate, call money rate and primary
final target is inflation.
 Continued dominance of supply shocks on inflation suggests that inflation targeting will
need to be flexible, but combined with supply side action from the government, can
successfully guide inflation expectation downward, at a minimal cost.

Diet Diversity, Malnutrition and Women’s Empowerment

 Growth in allied agriculture improves intake of nutrients by rural poor population by 0.5-1%
points compared to business-as-usual scenario.
 For urban poor, it is cereal-driven growth which is more important for enhancing nutrient
uptake.
 Women’s empowerment has the potential to increase productivity, achieve food security,
reduce hunger and improve nutritional outcomes for both children and women.

Agricultural Diversification

 Market institutions that affect price formation and degree of market integration across
states are critical in affecting agricultural diversification across states.
 State-specific factors influencing diversification positively are urbanization, population
density, ground water and relative price of horticulture, while rainfall deviation from normal
and wage rate have a significant negative impact.

Education
  The author points out that the growth rate of national income is largely affected by the
share of tertiary –educated population working in the service sector.
 An emphasis should be placed on right education and not just on ‘right to education’.
 Linkage between adult education and skill level of labour force is a crucial factor in
determining the economic performance of the country.

Job Security

 Under EPF act, establishments employing 20 or more workers are mandated to provide
contributions towards the provident fund of those employees whose wages are below a
certain threshold.
 In 2011-12, 75% of regular salaried employees earning wages below the threshold and
working in establishments employing 20 or more workers have reported to be not receiving
provident fund benefits.

Sector Focus- Industry, Trade and Preparedness for Make In India

 Given India’s comparative advantage in labour-intensive activities, there exists a huge

unexploited export potential in traditional unskilled labour-intensive manufactured products
such as textiles, clothing, footwear and toys.
 India has a huge potential to emerge as a major hub for the final assembly of a range of
products.
 A/c to the author, greater integration of domestic industries with global production
networks must form an essential part of the Make In India initiative. While India has a
potential to emerge as a major hub for the final assembly for several industries, it is
important to resist the temptation of extending tariff protection for final goods assembly, as
that would lead to inefficiencies.
 The author points out that globally competitive segments such as IT services are not
contributing in any significant way to India’s manufacturing exports and the very low
contribution of R&D and business services to India’s manufacturing exports.
 A competitive service sector should be seen as an enabler for the manufacturing sector and
not as a competitor to manufacturing.
 The author makes 2 recommendations to the ‘Make in India’ policy:
o Attention should be given to the clustering of small firms in large cities.
o Focus should be given to leading districts in lagging region as opposed to lagging
districts in lagging regions.
 Streamlining of procedures related to insolvency and bankruptcy laws is critical for the
success of the Make in India initiative as it would allow investors to exit from failing
investments in a time-bound manner and without needing to freeze funds in long legal
battles.
 The authors present a brief description of Insolvency and Bankruptcy Code 2016, which is a
single, consolidated code for insolvency unlike the existing laws which cater to a specific
group of debtors and creditors.