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ECONOMIC SURVEY

2017-2018 VOLUME -1
Notes for UPSC CSE 2018

Santosh Rachuri
Santosh_rachuri@live.com
Table of Contents
Ten New Facts on the Indian Economy: ..............2
Chapter 1: State of the Economy – An analytical
overview and outlook for policy: ..........................3
Chapter 2 - New, Exciting Bird’s-Eye View of the
Indian Economy Through the GST ......................9
Chapter 3 – Investment and Saving slowdowns
and Recoveries: Cross-Country Insights for India
............................................................................10
Chapter 4 - Reconciling Fiscal Federalism and
Accountability: Is there a Low Equilibrium Trap?
............................................................................11
Chapter 5 - Is there a “Late Converger Stall” in
Economic Development? Can India Escape it? .13
Chapter 6 – Climate, Climate Change and
Agriculture: ........................................................15
Chapter 7 – Gender and Son Meta-Preference: Is
Development Itself an Antidote .........................18
Chapter 8 – Transforming Science & Technology
in India: ..............................................................19
Chapter 9: Ease of Doing Business’ Next
Frontier: Timely Justice ....................................22
Ten New Facts on the Indian Economy: favour of males if it is the last child, but in
1. There has been a large increase in favour of females if it is not the last (see the top
registered indirect and direct tax payers. two panels on India). Where there are no such
A 50 percent increase in unique indirect fertility-stopping rules, ratios remain balanced
taxpayers under the GST compared with the regardless of whether the child is the last or not
pre-GST system. Similarly, there has been an (see bottom panels on Indonesia).
addition (over and above trend growth) of about 7. There is substantial avoidable litigation in
1.8 million in individual income tax filers since the tax arena which government action
November 2016. could reduce. The tax department’s petition
2. Formal non-agricultural payroll is much rate is high, even though its success rate in
greater than believed. More than 30 percent litigation is low and declining (well below 30
when formality is defined in terms of social percent).− Only 0.2 percent of cases accounted
security (EPFO/ESIC) provision; More than 50 for 56 percent of the value at stake; whereas −
percent when defined in terms of being in the About 66 percent of pending cases (each less
GST net. than Rs. 10 lakhs) accounted for only 1.8
percent of the value at stake.
8. To re-ignite growth, raising investment is
more important than raising saving Cross-
country experience shows that growth
slowdowns are preceded by investment
slowdowns but not necessarily by savings
slowdowns may not.
9. Own direct tax (DT) collections by Indian
states and local governments (LGs) are
significantly lower than those of their
counterparts in other federal countries.
This share is low relative to the direct taxation
powers they actually have. DT/Total Revenue
3. States’ prosperity is correlated with their
for states – India (less than 10%, almost
international and inter-state trade. States
constant trend), Brazil around 20% (increasing
that export more internationally, and trade
trend) and Germany (>40%, increasing). For
more with other states, tend to be richer. But
LGs, India – Urban – 17%, Local – 5%
the correlation is stronger between prosperity
(decreasing trend), Brazil – 20% and Germany
and international trade.
(27%).
4. India’s firm export structure is
10. The footprint of climate change is evident
substantially more egalitarian than in
and extreme weather adversely impacts
other large countries. Top 1 percent of Indian
agricultural yields. (a) The impact of weather
firms account for 38 percent of exports; in all
is felt only with extreme temperature increases
other countries, they account for a substantially
and rainfall deficiencies. (b) This impact is twice
greater share (72, 68, 67, and 55 percent of
as large in unirrigated areas as in irrigated
exports in Brazil, Germany, Mexico, and USA
ones.
respectively). And this is true for the top 5
percent, 10 percent, and so on.
5. The clothing incentive package boosted
exports of readymade garments. The relief
from embedded state taxes (ROSL) announced
in 2016 boosted exports of ready-made
garments (but not others) by about 16 percent.
6. Indian society exhibits strong son “Meta”
Preference. Parents continue to have children
until they get the desired number of sons. This
kind of fertility-stopping rule leads to skewed
sex ratios but in different directions: skewed in
Chapter 1: State of the Economy – An  2nd half – robust signs of revival – economic
analytical overview and outlook for growth improved, corrective actions taken,
policy: synchronous global recovery boosted exports.
 The inevitable never happens. It’s the WB Ease of Doing Business – improved 30 spots
unexpected always – J M Keynes. + FDI liberalisation – increases flows by 20%.
 OVERVIEW – SHORT TERM - Last year –  Fiscal deficits, the current account, and
Major reforms – GST launched in July 2017 – inflation were all higher than expected, albeit
many challenges (Policy, Law, IT systems) not threateningly so, reflecting in part higher
encountered; expeditious responses followed to international oil prices—India’s historic
rationalise and reduce rates and simplify macroeconomic vulnerability.
compliance burdens.  Markets expecting rapid growth – stock prices
 Decisive action taken on Twin Balance Sheet surge; bond yields rose sharply.
challenge  4 R’s of the TBS—recognition,  Policy agenda  need to focus on 4Rs –
resolution, recapitalization, and reform; resolving major indebted cases + recapitalising
Recognition advanced further; major measures the PSBs carried to a successful conclusion +
taken to address other two Rs. reforms of PSBs that will credibly shrink the
 The new Indian Bankruptcy Code (IBC) has unviable ones and signal greater private sector
provided a resolution framework that will help participation in future + need to stabilise GST
corporates clean up their balance sheets and implementation to remove uncertainty for
reduce their debts. exporters, facilitate easier compliance, and
 Govt announced a large recapitalization expand the tax base; privatize Air-India; and
package (about 1.2 percent of GDP) to stave off any nascent threats to macroeconomic
strengthen the balance sheets of the public stability, notably from persistently high oil
sector banks (PSBs). prices, and sharp, disruptive corrections to
 In the first half of this year, India’s economy elevated asset prices.  All these are achieved
temporarily decoupled – decelerating (but  India growth at more than 8% - regain its
second best performer among major countries) status as fastest growing major economy.
as the rest of the world accelerated.  OVERVIEW – MEDIUM TERM – Broader
 5 explanations  (1) high and rising real lessons – (1) India has created one of the most
interest rates: Explanation India’s monetary effective institutional mechanisms for
conditions decoupled from the rest of the world. cooperative federalism, the GST Council.
Until mid-2016, real policy interest rates were At a time when international events have been
following global trend downwards, then drifted. marked by a retreat into economic nativism and
(RoW- decrease by 1% and India – increased by the attendant seizing of control, Indian states
2.5%). It contributed to divergence in economic and the center have offered up a refreshing
activity in two ways. First, it depressed counter-narrative, voluntarily choosing to
consumption and investment compared to that relinquish and then pool sovereignty for a larger
in other countries. Second, it attracted capital collective cause.
inflows especially into debt instruments, which  Cooperative federalism is not a substitute
caused the rupee to strengthen, dampening for states’ own efforts at furthering economic
both net services exports and the and social development. But it is a critical
manufacturing trade balance. Early 2016 to complement, needed to tackle a wide array of
Nov 2017 – rupee appreciated by 9% in real difficult structural reforms that involve the
terms against a basket of currencies. states. Ex. the “cooperative federalism
 (2) Demonetization and (3) teething difficulties technology” of the GST Council could be used to
in the new GST  economy experienced a create a common agricultural market, integrate
competiveness impact in the demonetization fragmented and inefficient electricity markets,
/GST periods. solve interstate water disputes, implement
 (4) An intensifying overhang from the TBS direct benefit transfers (DBT), make access to
challenge social benefits portable across states, and
 (5) Oil Prices and sharp falls in certain food combat air pollution.
prices that impacted agricultural incomes.  (2) 2015-2016 Survey – facilitating exit has been
one of India’s most intractable challenges,
leading to a generalisation that over the last 50 manufacturing and making the sector
years India had gone from Socialism with internationally competitive. Result – share of
limited entry to marketism without exit. The manufacturing in GDP – improved slightly. But
IBC resolution process could prove a valuable the international competitiveness – little
technology for tackling this long-standing impact – as reflected in declining
problem in the Indian corporate sector. manufacturing export-GDP ratio and
Similarly the recent FRDI bill would do the manufacturing trade balance.
same for financial firms.  Real Effective Exchange rate (REER) –
 TBS challenge – exit has proved intractable - appreciating about 21% since Jan 2014.
Policymakers have had to find a way to reduce Policymakers have struggled to come to grips
the debts of stressed companies to sustainable with the international trilemma, whereby
levels. At the same time, they have had to an independent monetary policy and an
minimize the bill to taxpayers, limit moral exchange rate objective cannot co-exist
hazard, and avoid the perception of favouring with an open capital account.
controlling equity holders (promoters). IBC  Both competitive exchange rates and open
aims to solve these problems through the capital accounts are helpful for growth.
expedient of transparently auctioning off Example for price competitiveness – Govt
stressed firms to the highest bidders, excluding export package to clothing.
those which are toxically blemished. – This is a  Clothing package of 2016  The apparel sector
work in progress. has immense potential to drive economic
 (3) Rationalising of government resources, growth, increase employment, and empower
redirecting them away from subsidies towards women in India. This is especially true as
public provision of essential private goods and China’s share of global apparel exports has
services at low prices, especially to the poor. come down in recent years. However, India has
Progress has been made in providing bank not, or not yet, capitalized on this opening.
accounts, cooking gas, housing, power and Instead, countries like Vietnam and
toilets. Pace and magnitude depends on the Bangladesh are quickly filling the space left by
actual usage- Govt estimates – 63% households China.
use toilets (QCI survey); 31 Crore Jan Dhan  6000 Crore package – largest component –
accounts (less than 5% are zero balance) + 75% rebates on state levies (ROSL) – to offset
are Aadhhar seeded (Dec 2017); nearly 35 indirect taxes levied by the states that were
million ujjwala connections issued (44% to embedded in exports. This ROSL was over and
SC/ST) and 79% came back for refills. Nearly 20 above the duty drawbacks and other incentives
lakh rural houses completed under PMAY-G in (e.g., Merchandise Exports from India Scheme
2017. (MEIS)) that were given to offset indirect taxes
 (4) Macro-economic developments – are a embedded in exports.
reminder that the battle for macro-economic  3 main findings (1) The package increased
stability is never won, vigilance is always exports of readymade garments (RMG) made of
needed. 2 macroeconomic vulnerabilities for man-made fibres (MMFs)
India – Fiscal and Current account deficit –  (2) The package did not have a statistically
both tend to deteriorate when oil prices rise. positive impact on RMG made of other fibres
 Overcoming fiscal vulnerability – (1) breaking (silk, cotton, etc.); and
the inertia of Tax-GDP ratio – Economic growth  (3) The impact on MMF-RMGs increased
averaged at 6.5% since 1980s, no increase in the gradually over time; by September 2017, the
ratio. GST helps to break this + tax filers also cumulative impact was about 16 percent over
increased in the demonetisation-GST period; (2) other comparator groups.
halting the contingent liabilities (through  Open capital accounts attract foreign saving,
assumption of state discom debts, PSB providing additional funds for investment,
recapitalisation) into actual debts – they which can help growth.
contributed to about 5% of GDP to total Govt  Cross country experience suggests that
debt since 2000-01. additional savings may not necessarily boost
 Current account vulnerability – increase the growth. Rodrik  a competitive exchange rate
export growth. Make in India – goals - Reviving that boosts investment and growth will elicit its
own saving. In other words, there is economic by the Unified Payments Interface (UPI), holds
evidence suggesting competitive exchange rates the potential for significant improvements in
are more important for export-led growth. Box such capacity.
4 shows that the domestic political economy of  Indian capital – private sector – stigmatisation
exchange rates favours an open capital account carried from License Quota Control Raj – 2000s
and a stronger, less competitive exchange rate. – IT boom – some of this stigma washed away
 (5) While there are significant social and as the sector developed on its own
economic benefits to attacking corruption and competitiveness rather than proximity to the
weak governance, addressing those pathologies government, thrived in international markets.
entails challenges. GST + demonetisation –  But later 2000s, stigmatisation was reinforced
impacted cash intensive sectors of the economy. because of intense rent-seeking and corruption
In case of TBS - decision to ban promoters of associated with the allocation of spectrum, coal,
firms with nonperforming loans from the IBC land and environmental permits. That infra
auctions may have been necessary to minimize boom  TBS problem today. Public conclusion
moral hazard going forward; otherwise firms – India had capitalism without equity + little
would have an incentive to default on their liability  negative perception of Indian
loans, then offer to repay them at a discount. capital.
But it carried the possibility of fewer bidders  Now IT sector – confronting governance
and lower prices in the auctions of insolvent challenges – facing rapid technological change.
firms.  India had moved from crony socialism to
 In the case of spectrum, coal, and renewables, stigmatised capitalism. This accumulated
auctions may have led to a winners’ curse, legacy of stigmatisation inherited by the
whereby firms overbid for assets, leading to government made policy reforms difficult.
adverse consequences in each of the sectors; but  3 Meta challenges last year - addressing
they created transparency and avoided rent inefficient redistribution; accelerating the
seeking with enormous benefits, actual and limited progress in delivery of essential public
perceptional. services, especially health and education; and
 Policy design must minimise these costs correcting the ambivalence toward property
wherever possible.  there should be: greater rights, the private sector, and price incentives.
reliance on using incentives and carrots than on  This year – emphasis on education + tow more
sticks; greater focus on addressing the flow to be added – Agriculture and Employment.
problem (the policy environment that  Healthy and educated individuals, with the
incentivizes rent-seeking) than the stock ability to adapt and learn on an ongoing basis,
problem; and more recourse to calibrated rather need to be the core of the future labour force.
than blunt instruments (such as bans, Those individuals must include high numbers of
quantitative restrictions, stock limits, and women; for this to happen, they will need to
closing down of markets, including futures have a status and role comparable to men.
markets).  Agriculture  Successful economic and social
 (6) Ongoing debate on the role of markets and transformation has always happened against
states, private capital and public institutions: the background of rising agricultural
Across the world  reassessment of respective productivity. Last four years – stagnant
roles, with a clear tilt towards greater state agricultural GDP and real agricultural
involvement. The new international case is revenues – partly due to weak monsoons in two
based on the need to redistribute to check of those years.
growing inequality and cushion against the  Climate change—whose imprint on Indian
impact of globalization. agriculture is already visible—might reduce
 India – grey zone of uncertainty on the role of farm incomes by up to 20-25 percent in the
states and markets. Limitations on state medium term. The government’s laudable
capacity (center and states) affect the delivery objective of addressing agricultural stress and
of essential services such as health and doubling farmers’ incomes consequently
education. At the same time, the introduction of requires radical follow-up action, including
technology and the JAM (Jan Dhan— decisive efforts to bring science and technology
Aadhaar— Mobile) architecture, now enhanced to farmers, replacing untargeted subsidies
(power and fertiliser) by direct income support, providing India’s young and burgeoning labour
and dramatically extending irrigation but via force with good, high productivity jobs will
efficient drip and sprinkler technologies. remain a pressing medium term challenge. An
effective response will encompass multiple
 Employment – lack of consistent,
levers and strategies, above all creating a
comprehensive and current data impedes a
climate for rapid economic growth on the
serious assessment. Latest evidence suggests
strength of the only two truly sustainable
that formal sector employment is substantially
engines—private investment and exports.
greater than hitherto believed. It is clear that

Box 4. Political Economy of Interest and Exchange Rates


Policy decisions affect various groups differently. As a guide to readers, the table below lists below the
preferences of different groups in relation to interest and exchange rates, as well as the underlying
reasons. For example, strong exchange rates may be preferred by companies that sell non-tradeables
and rely on imports for their inputs: the classic case here is power companies that sell electricity to
domestic distribution companies and import their capital equipment. Conversely, services exporters
such as IT companies will be keen on competitive exchange rates because they sell mainly abroad,
while importing very little. A strong exchange rate is preferred by those who equate currency strength
with broader national strength.
Group Preference Reasons
Manufacturers, Low interest rates, weak currency Profits increase, even if some inputs are
services exporters, imported, since market share grows. This
and farmers applies both to exporters (clothing) and
firms producing for domestic market but
competing with imports (steel,
aluminium). Software exporters with
high domestic value added will favour
weak rupee.
Exception: Import- No strong Weaker rupee increases export revenues
intensive preference but increases import costs
manufacturers
Domestically Low interest rates. Profits increase; debt burden declines
oriented firms
Infrastructure Strong currency, Strong currency reduces costs without
companies low interest rates affecting revenues, which are earned in
(especially power rupees. Costs fall because firms typically
and renewables) import capital equipment, financed with
dollar loans. Low interest rates reduce
debt service burden on domestic loans
Households High interest rates Returns on savings increase. Household
saving far outweighs household
borrowing.
Equity investors – Low interest rates Corporate profits increase, so returns
Domestic rise.
Equity investors -- Low interest rates, strong currency Combination boosts dollar returns.
Foreign Tension: low rates typically lead to
weaker currency.
Bond investors – Falling interest rates Generates capital gains. Banks prefer
Domestic low rates; other investors (such as LIC)
prefer high rates.
Bond investors -- High but falling Combination maximizes dollar returns.
Foreign interest rates, Tension: falling rates weaken currency.
strong currency
Government Low interest rates Low rates reduce debt service. Extra
growth or inflation increases revenues.
Non-economic Strong currency Strong currency equated with national
actors economic strength.
 Recent developments: Global economy  (3) And if interest rates rise—or if markets even
experiencing near-synchronous recovery, the sense that central banks will need to shift their
most broad-based since 2010. The latest World stance—both bond and equity prices could
Economic outlook (WEO) by IMF – Global GDP correct sharply. Plausible scenario – IMF
growth – 2017 – 3.6% from 3.2% in 2016 and for forecasts – advanced country output gaps will
2018 – forecast at 3.9%. close in 2018  wages would start rising, eating
 Reason – recovery has spread around the globe into profits (which would prick equity
 world trade in goods and services registered valuations); and as inflation rises in tandem,
real volume growth + commodity producers policy makers would be forced into raising rates,
such as Russia, Brazil, and Saudi Arabia, which deflating bond valuations and further
for the past few years been suffering from undermining share prices.
depressed prices, have benefitted from the  What happens to growth if asset prices correct?
upswing in demand. Commodity prices  Impact is much smaller than 2007-08
increased smartly in 2017, led by petroleum, because the vulnerability now is less compared
rose by 16% to reach $61 per barrel. to a decade ago. In particular, the leverage tied
 Inflation remained quiescent – below 2% in to these assets is much lower, which would
advanced regions. Policies of US, Eurozone and minimize contagious propagation; while banks
Japan – remained accommodative despite are much better buffered, with higher levels of
strong recovery. These unusual setting - rapid capital and core deposits, and lower levels of
growth + ultra-low interest rates at a late stage risky assets.
in economic cycle  record high bond prices +  Consequences  a large decline in wealth
stock market valuations (rarest of rare would force advanced country consumers to cut
combinations) at the same time. back on their spending, which in turn would
 Forecast – for these conditions to be sustained lead firms to curtail their investments. And if
in 2018 – as companies respond to buoyant this happens, monetary and fiscal policies
demand conditions by stepping up investment, would have much less room for expansionary
governments (like US) embark on expansionary manoeuvre since interest rates are already low
fiscal policies while advanced country monetary while government debts are high. And the
policies remain simulative and world trade political implications of yet another decline in
continues to grow. asset prices, the second in a decade, could also
 Risks – usual geopolitical and geo-economic – be significant, with effects that are difficult to
war in the Korean peninsula, political upheaval imagine.
in the Middle East; aggressive output cuts by  In sum, assessing future risks hinges on two
Saudi Arabia (and Russia) in advance of the calls: interest rate policy and asset valuations.
planned listing of the Saudi Arabian oil Paul Krugman – extraordinarily low rates –
company, Aramco, which could force oil prices become an obsession in search of a justification.
even higher; a final reckoning from China’s
First justified by dislocations caused by GFC,
unprecedented credit surge in the form of
then by large output gaps + now defended on
capital controls, slowdown in growth, and a
sharply depreciating currency with inflation remains weak, even as the slack in
consequences for the global economy and trade product and labour market is disappearing
tensions that could lead to skirmishes and then rapidly.
spiral out of control.  OUTLOOK FOR 2017 – 2018: robust recovery
 Main risks – 3 sources – (1) Asset valuations taking place – reflected in overall GVA, mfg
(price-equity ratios) tend to revert to their GVA, IIP, GCF and exports.
mean. And the faster and higher they climb,  Non-food credit growth rebounded; squeeze on
especially so late in the economic cycle, the real credit to industry is abating  flow of
greater the risk of sharp corrections. nonbank resources to the corporate sector
 (2) Simultaneously high valuations of both increased by 43% compared to last year (till
bonds and equities tend to be briefly lived Dec) substituting in part for weak bank credit.
because they suffer from an acute tension: if Rural demand also recovering.
future earnings and economic growth are so  Last two quarters of this fiscal  seen an
bright, justifying high equity prices, interest increase in export growth suggests that effects
rates cannot be forever so low. of demonetisation and GST are receding.
Services exports and private remittances also farm revenues. The so-called TOP perishables
rebounding. (tomatoes, onions, and potatoes) have
 Cash to GDP stabilised  trend in currency meanwhile fluctuated between high and low
shows that ₹. 2.8 lakh crores less cash in the prices, engendering income uncertainty for
economy (1.8% of GDP) and about ₹. 3.8 lakh farmers.
crores less high denomination notes in the  CSO estimate of real GDP growth – 2017 – 2018
economy. – 6.5%. Survey expectation – 6.75%. Nominal
 Fiscal reason for growth recovery  GST being growth at 9.5% (CSO) vs.10.5% (Survey).
collected for 11 months (for smoothening the Inflation at nearly 3.7% in line with RBI
transition) + Overall revenue expenditure forecast.
growth by the central and state governments  Inflation in December 2017 – 5.2% - upswing 
remains strong at 11.7%. Cyclical conditions due to rising global oil prices + unseasonal
may also lead to lower tax and non-tax increases in the prices of fruits and vegetables,
revenues, which act as an automatic stabilizer. and the 7th Pay Commission housing rent
 All indicators showing positive trend, but their allowances. Remove all these factors – inflation
level is still below the potential. Credit growth growing at modest pace – 4.3% – due to firms
still in negative territory + investment plans of passing GST benefits to consumers gradually.
corporate remain modest despite cost of equity  CAD – expected at 1.5 to 2% of GDP for the
has come down see next point, etc.  The twin whole year. The current account deficit can be
engines that propelled the economy’s take-off in split into a manufacturing trade deficit, an oil
the mid-2000s – exports and investment – are and gold deficit, a services deficit, and a
continuing to run below take-off speed. remittances deficit.
 Normally, when stock prices boom, as they have  H1 – (1) oil and gold balance has improved but
done in the past two years, firms issue more (2) higher trade deficit and (3) Reduced services
equity publicly, taking advantage of the reduced surplus has offset the improvement.  (2) and
cost of capital to embark on new investment (3) reflects deterioration in economy’s
projects. This happened in the mid-2000s and competitiveness.
again around 2010. In the last two years,  FE reserves - $432 billion (ending Dec 2017).
especially in the first eight months of this year,  Fiscal developments  Bond yields rose sharply
there has once again been a pick-up in equity- – from 6.2% in 2016 to 7.3% in 2018 -- Reflects
raising activity. If current trends continue, the concerns fiscal deficit (FD) might be greater
number of issues and their value could double than budgeted + higher inflation expectations +
the levels recorded in the previous six years. rebound in activity that would narrow the
(2007-2008 – at 3% of GDP; now till December output gap + expectations of rate increase by
2017 the issues stands at 1.5% of GDP, lower US. Besides, RBIs Open market operations to
than 2007-08 levels while the Price/Earnings sterilise the impact of foreign flows induced by
remain almost same as 2007-08 at present @25). high interest rates contributed to high bond
 There has been a similar experience in the US yields.
(of limited public offerings) but there is one  FD for first 8 months exceeded the target –
crucial difference: the US private corporate shortfall in revenue + reduced dividends from
sector is stashed with cash because of high enterprises + fast pace in expenditure due to
profits and weak investment opportunities. advancement of budget cycle. Partially offset by
Firms face a capital feast not famine. But this disinvestment receipts (may exceed
is not the case in India, as firms face significant disinvestment targets).
capital needs, arising from low levels of profit  Personal IT collections – 2% of GDP in 2013-
and cash, and high leverage (debt-to-equity) 2014 and 15-16 to 2.3% in 2017-18
ratios. (demonetisation + GST – formalisation of
 Agriculture  Sowing has been lower in both economy).
Kharif and Rabi, reducing the demand for  The FD contains ₹ .80000 crore in capital to
labour. Pulses and oilseeds have seen an PSBs – not affect aggregate demand as such
increase in sowing, but this has translated into were deemed as finance rather than
unusually low farm gate prices (below their expenditure in international accounting
minimum support price, MSP), again affecting practice.
 Market borrowings do not necessarily reflect and growth  force macroeconomic policies to
the underlying FD because in India market be tighter.
borrowings are determined not just by the fiscal  The Indian stock market surge is different from
deficits but also by a distinctively Indian that in advanced economies in three ways:
arrangement, the National Small Savings Fund growth momentum, level and share of profits,
(NSSF). and critically the level of real interest rates.
 Essentially, the government gets deposits from Low levels of the latter have been invoked to
the public—independent of its deficit-induced justify the high valuations in advanced
borrowings—in the form of various savings economies. By that token, India’s valuations
schemes to the public, encompassed in the should be much lower. So, what appears to be
NSSF. Currently, these schemes offer above- driving India’s valuations are a fall in the ERP
market rates, risk free investment options, and reflected in a massive portfolio re-allocation by
favourable tax breaks, both at the time of savers towards equity in the wake of policy-
deposit and withdrawal, not available in most induced reductions is the return on other assets.
regular savings schemes.  But sustaining these valuations will require
 Net Market borrowings = FD – NSSF net flows. future growth in the economy and earnings in
If NSSF net flows increase, for any given fiscal line with current expectations, and require the
deficit, market borrowings should decline; and portfolio re-allocation to be semi-permanent.
vice versa. Market borrowings and hence the Otherwise, the possibility of a correction in
supply of g-secs are endogenous to these them cannot be ruled out.
autonomous flows. So it’s perfectly possible for
market borrowing to increase, even when the Chapter 2 - New, Exciting Bird’s-Eye View
fiscal deficit decreases or remains constant. of the Indian Economy Through the GST
 At the level of the state governments, the  The GST has been widely heralded for many
converse has been true. The states have chosen things, especially it’s potential to create one
to reduce their reliance on the NSSF in order to Indian market, expand the tax base, and foster
reduce their borrowing cost (market rates are cooperative federalism. + it will create a vast
substantially lower than NSSF rates).  2016- repository of information which will enlarge and
27, market borrowings increased by 0.2% of surely alter our understanding of India’s
GDP more than the FD. economy.
 OUTLOOK FOR 2018-19: acceleration of  Findings: (1) There has been a large increase in
global growth  boost to export demand. the number of indirect taxpayers (by more than
Remittances already increasing, may revive 50% - 3.4 million) ; many have voluntarily
further due to rising oil prices. chosen to be part of the GST, especially small
 Private investment poised to rebound - enterprises that buy from large enterprises and
Translating this potential into an actual want to avail themselves of input tax credits;
investment rebound will depend on the  New filers – B2C – only 17%, bulk of
resolution and recapitalization process. If this is transactions – B2B and exports – 30-34%.
delayed, so is the private capex cycle.  Composite scheme – pay a small tax on their
 Consumption demand  reduction in real turnover + not eligible for input tax credits 
interest rates could help, but if oil prices minimises their admin burden but difficult to
increase it will crimp real incomes and sell to larger firms as they would not be able to
spending. If higher oil prices require tighter secure input tax credits. However, though
monetary policy to meet inflation target, real eligible under composition scheme, more than
interest rates could exert a drag on 54% registered under regular scheme. (because
consumption. small B2C companies buy from large companies
 Growth forecast for India – 7 to 7.5%. Biggest  to get the input credits, registering under
source of upside potential – exports; regular)
implementation of IBC process – must be a  (2) The distribution of the GST base (₹ 65-70
priority to kick-start private investment. lakh crore) among the states is closely linked to
 Key risk – persistent high oil prices; affect their Gross State Domestic Product (GSDP),
inflation, Current account, the fiscal position allaying fears of major producing states that the
shift to the new system would undermine their
tax collections and shift the tax base to in the private non-agriculture sector but 93
consumer states; percent of their total turnover.

Chapter 3 – Investment and Saving


slowdowns and Recoveries: Cross-
Country Insights for India
 The ratio of gross fixed capital formation to
GDP climbed from 26.5 percent in 2003,
reached a peak of 35.6 percent in 2007, and then
 (3) New data on international exports – strong slid back to 26.4 percent in 2017.
correlation between export performance and  The ratio of domestic saving to GDP – similar
states standard of living. Five states— evolution – rising from 29.2% in 2003 to a peak
Maharashtra, Gujarat, Karnataka, Tamil of 38.3% in 2007, before falling back to 29% in
Nadu, and Telangana—in that order account for 2016.
70% of India’s exports.  India’s investment and savings cycles gone
 The five largest importing states are through sharp swings in the last two decades –
Maharashtra, Tamil Nadu, Uttar Pradesh, no other country seems to have gone through
Karnataka and Gujarat; such large boom and bust during the period.
 The states with the largest internal trade  Private investment accounts for 5% out of the
surpluses are Gujarat, Haryana, Maharashtra, 6.3% overall investment decline over 2007-08
Odisha and Tamil Nadu. and 2015-16. The fall in saving, by about 8
 (4) India’s exports are unusual in that the percentage points over the same period, has
largest firms account for a much smaller share been driven almost equally by a fall in
than in other comparable countries. household and public saving. The fall in
 Exports superstars— firms that account for a household saving has in turn been driven by a
disproportionately large share of exports. Top fall in physical saving, partly offset by an
1% of exporting firms – 50% of exports. It is also increase in the holding of financial assets
argued that bigness influences sectoral (within that –shift towards market instruments
composition of exports and helps create – explained in previous chapter).
comparative advantage and improve long term  Data suggests that the investment episodes
prospects. (slowdowns for two or more consecutive years)
 Until now, no such data exists; GST helped in are more frequent than saving episodes, while
constructing such firm level exports data  Top common episodes (both investment and saving
1% of firms - 38% (India), 72,68,67,55 – Brazil, slow) are relatively unusual. However, after
Germany, Mexico and USA. Top 5% - 59% 2008, this pattern has reversed with saving
(India), 91, 86,91 and 74; top 25% - 82%(India), episodes catching up with investment episodes.
99,98,99 and 93 in those countries. The relatively lowest number of investment
 (5) Internal trade – 60% of GDP – greater than episodes in the latest period (2008-2014)
the estimated in last year’s survey. The reflects concerted efforts in emerging economies
correlation of per capita GSDP with to revive investment after the global financial
international exports is stronger than with crisis via stimulus and other policies. + both
inter-state trade. slowdowns tend to be similar in duration but
 (6) India’s formal sector non-farm payroll is investment slowdowns are greater in
substantially greater than currently believed. magnitude.
Formality defined in terms of social security  India has not experienced any slowdown till
provision yields an estimate of formal sector recently – not during the ‘lost decade’ (Braxil,
payroll of about 31 percent of the non- Mexico in 1980s), not during the East Asian
agricultural work force; formality defined in crisis, not even after India’s own balance-of
terms of being part of the GST net suggests a payments crisis in 1991. The current slowdown
formal sector payroll of 53 percent. – in which both investment and saving have
 (7) Similarly, the size of the formal sector slumped – is the first in India’s history.
(defined here as being either in the social
security or GST net) is 13 percent of total firms
 India’s current investment/saving slowdown providing. If a citizen does not pay, he becomes
episode has been lengthy compared to other a free rider (using the service without paying),
cases. and cannot complain if the state provides a poor
 Investment vs. savings – both are important in quality service. If he exits (not using the service
the long run but what needs to be prioritised at at all), he loses interest in holding the state
present? – Policies should focus on encouraging accountable. Only if he pays and uses the
investment, rather than saving to boost growth service will he try to hold the state accountable.
(Rodrik). Hence the expression: no representation
 Cross country experience and data suggests without taxation. In other words, taxation is the
that the relationship (of growth) is significantly economic glue that binds citizens to the state in
positive for investment episodes, but a necessary two-way relationship.
insignificant for saving. A 1% fall in investment  The “aid” and “natural resource” curses
is expected to dent growth by 0.4-0.7%. illustrate what happens when countries rely on
 India’s investment decline seems particularly non-tax sources of government revenues:
difficult to reverse, partly because it stems from economic and institutional development is
balance sheet stress and partly because it has stunted.
been usually large. Cross -country evidence  Direct taxes feel more like expropriation
indicates a notable absence of automatic because they reduce citizens’ disposable income,
bounce-backs from investment slowdowns. The the earnings that they get to keep. With indirect
deeper the slowdown, the slower and shallower taxes, citizens are burdened but that sense is
the recovery. At the same time, it remains true leavened to the extent that citizens feel they are
that some countries in similar circumstances exercising choice.
have had fairly strong recoveries, suggesting  Direct taxation and development: General
that policy action can decisively improve the Government: (1) Economic and Political
outlook. development has been associated with a rising
 Clear and urgent policy – Govt has launched – share of direct taxes in total taxes. OECD data
Step up in public investment since 2015-2016; shows that advanced countries collect a
policies to resolve the TBS challenge. These substantially higher proportion of their taxes as
steps will have to be followed up, along with direct taxes than do emerging markets. Over
complementary measures: easing the costs of time, this has risen. Later Europe in 1970s
doing business further, and creating a clear, discovered Value Added tax (indirect tax) as an
transparent, and stable tax and regulatory important source of revenue, but still the share
environment. of direct taxes is around 70% of total taxes.
 In addition, creating a conducive environment  Other than China, India has the lowest share of
for small and medium industries to prosper and direct taxes in total taxes. India is not an
invest will help revive private investment. outlier: its direct tax share is similar to other
countries at a comparable stage of development.
Chapter 4 - Reconciling Fiscal Federalism However, unlike in other countries its reliance
and Accountability: Is there a Low on direct taxes seems to be declining, a trend
Equilibrium Trap? that will be intensified if the Goods and Services
 Taxation is not just a vehicle for raising state Tax (GST) proves to be a buoyant source of
revenue. It can also be critically important for revenue.
economic and political development.  Direct taxation and development: Sub-
 Bessley and Persson – there is a social contract federal levels: Fiscal Decentralisation –
between Citizens and the state. “The State’s embraced not just as desirable economic but
role is to create conditions for prosperity for all also as a political and philosophical principle 
by providing essential services and protecting spending and tax decisions must reflect local
the well-off via redistribution. The citizen’s part preferences as far as possible.
of the contract is to hold the state accountable  At the second tier, all countries are broadly
when it fails to honour that contract. comparable in their reliance on devolved
 But a citizen's stake in exercising accountability resources, but India stands out as a country
diminishes if he does not pay in a visible and where the second tier (states) generate a very
direct way for the services the state commits to low share of its revenue from direct taxes: about
6 percent in India compared to 19 percent in time despite per capita spending by RLGs
Brazil in 2016 and a hefty 44 percent in increasing almost 4-fold.
Germany.  Revenue patterns – ULGs are different – 44%
 At the third tier, India’s rural local own revenue compared to RLGs only 5% own
governments (RLGs) stand out on both counts. revenue – the major portion is dependent on
RLGs’ reliance on own resources is just 6 state devolution.
percent compared to 40 percent for third-tier  Per capita own revenue collected by ULGs is
governments in Brazil and Germany. And about 3 per cent of the urban per capita income
panchayats raise about 4 percent of their while the corresponding figure is only 0.1% for
overall resource envelope in the form of direct RLGs.
taxes, compared with about 19 and 26 percent  Variation across states - there are two
in Brazil and Germany respectively. categories—RLGs of those States that collect
 India’s urban local governments (ULGs), some direct taxes and own tax revenue (e.g.
meanwhile, are much closer to international Kerala, Andhra Pradesh and Karnataka in our
norms. Their own revenues as a share of total sample), in contrast to RLGs of states like Uttar
revenues are actually higher than Brazil and Pradesh that almost entirely depend on
Germany, while their direct tax share (about 18 transfers.
percent of total revenues) is only marginally  Most devolved funds are spent on roads, other
lower than Brazil (19 percent) and somewhat basic services, sanitation and community
lower than Germany (26%).  ULGs have assets, given that most funds are tied to sectors
emerged more fiscally empowered than RLGs so and schemes.
far in India (according to data taken for large  In many states, RLGs and ULGs have not been
cities). devolved enough taxation powers. Successive
 Local Governments: 73rd CAA – 1992 – Devolution Reports of the Ministry of
Panchayats as institutions of self-government. Panchayati Raj (MoPR) show that the share of
RLGs or panchayats were mandated to have revenues assigned to local governments in
three tiers (at the district, intermediate and many states are much less vis-à-vis expenditure
village levels) in states with population of over assignments.
20 lakh. States were mandated to devolve such  Even though most states have constituted
functions and authorities to RLGs which would SFCs, very few seem to have accepted their
enable them to function as institutions of self- recommendations in full or even to a significant
governance. 29 matters listed by the extent, especially those that carry financial
constitution. implications for them. As per the latest MoPR
 States were also supposed to constitute a Devolution Report (2015-16) the percentage of
quinquennial State Finance Commission (SFC) acceptance of such recommendations varies
to determine the share of their financial from as low as 11 percent in Karnataka to above
resources going to the local tiers, analogous to 50 percent in West Bengal, Andhra Pradesh and
the Finance commission at the union level. Rajasthan to full acceptance in Kerala.
 Empowered in such a manner, ULGs and RLGs  Why is the less revenue collection from direct
were mandated to prepare and implement taxes by RLGS?  Common answer is that
plan(s) for economic development and social higher levels especially the states have not
justice. Most states created 3 levels of RLGs. devolved enough taxation powers to the
Over the last two decades, they have gained as Panchayats. For example, the permissible taxes
institutions with substantial say in grassroots for panchayats include property and
development issues. However, the tied nature of entertainment taxes but not land taxes or tolls
a considerable part of resource flow constrains on roads (except local panchayat roads).
spending autonomy in RLGs.  But given their power how they have performed
 Expenditure patterns of different tiers of and collected revenue to their potential? 
government  The central and state Property taxes are the principal sources of
governments spend on an average 15- 20 times direct tax revenue at the third tier of
more per capita than do RLGs. ULGs spend government, apart from professional taxes.
about 3 times more. This gap is persisted over  Land tax – assessed and collected at state level;
the finding is that the states collect a small
fraction of their potential: an all-India average service delivery, such taxes are often viewed as
of 19 per cent if unreasonably low land values a "tribute" to a state rather than a contribution
are assumed, and about 7 per cent on more to and acknowledgement of the state in raising
realistic land value assessments. the quality of life.
 See graph for RLGs below:  One consequence is middle class exit to more
privately provided services (Safety, health and
education) that only serves to exacerbate the
problem.
 Breaking that self-reinforcing cycle of
inadequate delivery-low direct taxes-weak
accountability-inadequate delivery is
perhaps the heart of the governance
challenge in India.

Chapter 5 - Is there a “Late Converger


Stall” in Economic Development? Can
India Escape it?
 For all the gloom pervading the world, these are
the best of economic times for humanity and
especially for those living in poorer countries.
 In the central level also – the under collection The global “bads” – war, violence, deprivation
relative to potential afflicts as much as the and poverty – are at unprecedentedly low levels.
other two tiers. Meanwhile the global goods – standards of
 Conclusion: The 73rd and 74th amendments to living, access to essential services, and material
the constitution in the early 1990s were well-being more generally – have improved at a
watershed developments in India’s federal historically unprecedented pace to reach levels
structure, its governance and accountability. never witnessed in humanity’s history.
 State and local governments in India do not  Economic Convergence – the process of poorer
conform to cross country trends – rely more on countries “catching up” with richer countries
devolved resources and much less on their own and closing gaps in standards of living, has been
resources and collect less direct taxes. The a big driver of some of these developments.
bigger problem is that they are not fully  Since mid-1980s, this process has broadened 
utilising the taxation powers they already no of countries growing faster than advanced
possess. economies increased.
 The status quo can be an equilibrium desired by  India - In 1960, India was a low income country
all actors with higher tiers (both Centre and with a per capita income (in 2011purchasing
states) using their devolution powers to control power parity (PPP) terms) of $1,033. This was
and influence lower levels; and the latter, equivalent to about 6 percent of U.S. per capita
unable and unwilling to tax their proximate income at the time. However, India attained
citizens, need outside resources even if they are lower middle-income status in 2008 and today
not always untied. But this is a low- has a per capita income of $6,538, which is 12
equilibrium, perhaps even a trap. percent of the U.S. If per capita income in India
 The fiscal model of the states and third tier grows at 6.5 percent per year, India would reach
institutions could forever be based on outside upper-middle income status by the mid -to-late
resources which—like foreign aid and natural 2020s.
resources or other forms of ‘redistributive  Middle income trap connotes that – Middle
resource transfers’ (Economic Survey 2016-17 income countries would grow more slowly than
Volume I, Chapter 13)—come with weak what would be expected given their level of
accountability mechanisms and weak own income (i.e., slower than richer countries),
resource generation capacity. impeding the transition from middle income to
 There is a broader challenge— afflicting all high income status.
tiers of government—in the limited ability to  Two reasons for that – (1) As countries attained
collect direct taxes. Given the quality of public middle income status, they would be squeezed
out of manufacturing and other dynamic sectors according to the gravity model. 2016 – 9.6
by poorer, lower-cost competitors. country equivalents  During the period of
 (2) They would lack the institutional, human, hyperglobalization world trade-GDP rose by
and technological capital to carve out niches about 14 percentage points, from about 17
higher up the value-added chain.  Thus they percent of world GDP to about 31 percent.
are pushed from below and unable to grasp the About one-third could have been due to the
top, find themselves in middle income status. process of economic convergence.
 However, as it turned out, there was neither a  If the current process of convergence continues
middle income trap nor stall. They as a group and adds another country equivalent, the
continued to grow as fast as or faster than the distribution of world output will become even
convergence demanded. Ex. Korea, Portugal, more dispersed, resulting in an additional
Poland have indeed achieved high income increase in the world’s trade-GDP ratio of 1
status. percentage point. But whether politics, esp. in
 Convergence process of India – attempting to AEs and China, might be able to sustain such
make the transition to Middle Income Status an increase in trade is the question.
from Lower middle income (Late Convergence -  (B) Thwarted structural transformation: Good
After the GFC): The GFC represented a growth and sustainable growth: Successful
watershed event, marked by a sharp decline in development requires two kinds of structural
rates of growth across the world. For example, transformations: 1) a shift of resources from low
world growth declined from 4.3 percent in the productivity to high productivity sectors (as
ten-year period prior to the GFC to 2.9 percent highlighted by Sir Arthur Lewis); and 2) a
in the decade after the GFC. larger share of resources devoted to sectors that
 The possibility of such a “Late Converger Stall” have the potential for rapid productivity
arises because of four possible headwinds in the growth.
post-Global Financial Crisis era that were  In many cases, resources do not shift in this
largely absent for the early convergers such as way; they shift from informal, low productivity
Japan and Korea. sectors to ones that are marginally less
 (A) Hyperglobalisation repudiation: Developing informal/more productive. These are the cases
countries that came late to convergence now of thwarted structural transformation.
face a very different trading environment from  Manufacturing – critically important for
their predecessors. Early convergers benefited ensuring successful transformations. This
from the process of rapid globalisation, reflected sector exhibits unconditional convergence
in dramatic increases in the world trade-GDP toward the world frontier, so that it can become
ratio. Es. Japan, South Korea and China. an escalator for rapid growth – if countries
 But this led to backlash in advanced countries manage to get on to it. This is why “premature
since 2011 – decline in world trade- GDP ratios. de-industrialization,” the tendency for
Means the trading opportunities available to manufacturing in late convergers to peak at
early convergers no longer available. lower levels of activity and earlier in the
 How to understand this hyperglobalisation development process, is such a cause for
repudiation? – Gravity model of trade. This concern. (Read this part in Survey again)
theory implies that smaller countries tend to  (C) Human Capital regression: Key difference
trade more than larger ones. A world made up between early convergers and late convergers –
of two equal-size countries will experience more human capital. In early convergence, it was the
trade than a world in which the larger country alignment of human capital endowment
accounts for 95 percent of world output. Over (educated but relatively unskilled labour) with
time, the world is becoming more equal in the the sector associated with structural
distribution of the underlying output. That is transformation, namely manufacturing, that
the consequence of convergence. Therefore, if allowed for the percolation and spread of
there is convergence, the gravity model dynamism to the rest of the economy. Shifts in
suggests there will also be increased trade. the labour from farm to factory – possible
 Ex. 1970 to 2000 – 7.05-7.5 country equivalents because of this coincidence: growth and
 means it was as if there were 7.0 – 7.5 structural transformation based on
equally sized countries trading with each other comparative advantage.
 The late convergers are doubly challenged. Not possible only when labour productivity grew
only have they failed to provide even the basic rapidly enough.
education necessary for some structural  Indian agricultural productivity growth has
transformation, that failure will prove been stagnant, averaging roughly 3 percent
increasingly costly because the human capital over the last 30 years. For the late convergers,
frontier for the new structural transformation agricultural productivity is critical not just for
has probably shifted further away. Technology feeding people but for ensuring human capital
will increasingly favour skilled human capital, accumulation in those who move from
where the requisite skills will include agriculture to the modern sectors. Agriculture
adaptability and the ability to learn continually. could yet come back to haunt the structural
 Great strides have been made in India’s transformation fortunes of the late convergers.
primary school enrolment, which is now nearly  Lessons for India: India has been rapidly
universal for both boys and girls at elementary catching up since 1980, an average per capita
level. Yet, both cross-country evidence and GDP growth of 4.5% - highest among
evidence from India suggests that educational democracies.
outcomes are incommensurate with years of  But this fast growth has occurred with limited
schooling: learning lags attending, as it were. transfer of labour resources from low
 The LPC (Learning Poverty Count) simply productivity to high productivity and dynamic
measures the number of children who do not sectors, and despite relatively modest
meet the basic learning benchmark, whereas agricultural growth. The risk for India–as for
the LPG (Learning Poverty Gap) additionally the other late convergers–is that resources
takes into account how far each student is from (especially labour) will move from low
the benchmark. In other words, the LPG productivity, informal sectors to other sectors
measures the gap between the the basic that are marginally less formal and only
learning benchmark and the average scores of marginally more productive. That is the “late
those students who did not meet the converger stall” that India must avoid.
benchmark.  Rapidly improving human capital–– healthy
 On math and reading, India’s absolute LPC is individuals, including all women, with the basic
between 40 and 50 percent: in other words, education to continually learn and adapt––will
roughly 40-50 percent of children in rural India be key to sustaining India’s dynamic growth
in grades 3 to 8 cannot meet the fairly basic trajectory.
learning standard.  Rapidly improving agricultural productivity––
 LPG – 25% for reading and a little lower for against the headwinds of climate change and
math.  on average, each child in grades 3 to 8 water scarcity––will be another key to
scores 2.2 compared to the score of 3 necessary achieving good growth and hence sustainable
to meet the second grade learning requirement. growth. And, of course, the hyperglobalization
 It is sobering enough that learning poverty backlash in advanced countries, over which
counts are around 40 percent, roughly where India has little control, must recede to create a
India’s consumption poverty numbers were in favourable external climate to sustain rapid
the 1970s. But if technology going forward is growth. There is no Late Converger Stall, as
going to be even more human capital intensive yet, but it would be wise to act to head it off.
as current trends suggest (dotted yellow line),
the wedge between the opportunities offered to Chapter 6 – Climate, Climate Change and
the future labour force and the capabilities to Agriculture:
take advantage of them will widen even further.  The last few seasons have witnessed a problem
That is the true magnitude of India’s human of plenty: farm revenues declining for a number
capital challenge. of crops despite increasing production and
 (D) Climate Change induced agricultural market prices falling below the Minimum
Stress: Lewisian structural transformation – Support Price (MSP).
requires release of resources into modern sector  Medium to long term  productivity to be
under conditions of rising agricultural increased, price and income volatility to be
productivity. Part of the reason was the need reduced in the backdrop of resource constraints.
to produce enough food to a growing population,
 Shortages of water, deterioration in soil quality,  (1) Temporal and Spatial patterns of
and climate change induced temperature temperature and Precipitation: The average
increases and rainfall variability – impact increase in temperature between the most
agriculture. recent decade and the 1970s is 0.45°C and
 Why agriculture matters?  (1) Farmers hold a 0.63°C in the Kharif and Rabi seasons
special place in Indian hearts and minds respectively.
(Gandhi First Satyagraha – on behalf of
farmers) + history and literature contributed to
the farmer acquiring mythic status in Indian
lore.
 (2) For economic reasons – accounts for 16% of
the GDP and 49% employment. Poor
agricultural performance can lead to inflation,
farmer distress and unrest, and larger political
and social disaffection—all of which can hold
back the economy.
 Arthur Lewis – economic development is always
and everywhere about getting people out of
agriculture and of agriculture becoming over
time a less important part of the economy (not
in absolute terms but as a share of GDP and
employment).
 Why Agriculture cannot be dominant,
permanent source of livelihood – productivity 
industrialization and urbanization must
provide those higher productivity alternatives  Between the 1970s and the last decade, Kharif
to agriculture. rainfall has declined on average by 26
 Ambedkar warned – about the dangers of millimetres and Rabi rainfall by 33 millimetres.
romanticising rural India – He derided Village Annual average rainfall for this period has on
as “a sink of localism, a den of ignorance, average declined by about 86 millimetres.
narrow mindedness and communalism”.  Data suggests that rise in the number of days
 So the irony is that the concern about farmers with extremely high temperatures, and a
and agriculture today is to ensure that corresponding decline in the number of days
tomorrow there are fewer farmers and farms with low temperatures.
but more productive ones.  means all good and  Rainfall extremities – proportion of dry days as
successive economic and social development is well as wet days increased steadily over time 
about facilitating this transition in the context manifests the climate change effects of extreme
of a prosperous agriculture and of rising weather outcomes.
productivity in agriculture because that will  Temperature increases have been particularly
also facilitate good urbanization and rising felt in the North-East, Kerala, Tamil Nadu,
productivity in other sectors of the economy. Kerala, Rajasthan and Gujarat. Parts of India,
 Long Run agricultural performance  Real agri for example, Punjab, Odisha and Uttar Pradesh
growth since 1960 has averaged about 2.8% in have been the least affected.
India. China around 4%.  Extreme rainfall deficiencies are more
 Volatility of agricultural growth has declined concentrated in Uttar Pradesh, North-East, and
over time, but continue to be more than China. Kerala, Chattisgarh and Jharkhand.
Production of cereals has become more robust to  Spatially temperature increases and rainfall
drought. An important contributing factor is declines seem to be weakly correlated.
that agriculture in India even today continues  (2) Impact of weather on Agricultural
to be vulnerable to the vagaries of weather Productivity: Two findings: (i) The impact of
because close to 52 percent (73.2 million temperature and rainfall is highly non-linear
hectares area of 141.4 million hectares net sown and felt almost only when temperature
area) of it is still un-irrigated and rainfed.
increases and rainfall shortfalls are extreme. In absence of any adaptation by farmers and any
the Indian context, marginal changes in changes in policy, farm incomes will be lower by
weather have little or no impact. around 12% in the coming years. Unirrigated
 (ii) These extreme shocks have highly divergent areas – worst affected – losses up to 18% of
effects between unirrigated and irrigated areas annual revenue.
(and consequently between crops that are  Overall the analysis here suggests at least three
dependent on rainfall), almost twice as high in main channels through which climate change
the former compared with the latter. (See below would impact farm incomes – an increase in
table) average temperatures, a decline in average
 Unirrigated areas – defined as districts where rainfall and an increase in the number of dry-
less than 50 percent of cropped area is irrigated days.
– bear the brunt of the vagaries of weather.  Policy implications – India needs to spread
 For agricultural yields, level of rainfall + when irrigation – and do so against the backdrop of
it rains plays crucial role. rising water scarcity and depleting
 (3) Crop Impacts: The clear pattern that groundwater resources. This is a challenge.
emerges is that crops grown in rainfed areas— Ground water depletion is most alarming in
pulses in both Kharif and Rabi—are vulnerable North India – 13% decline in water table over
to weather shocks while the cereals—both rice the past 30 years.
and wheat—are relatively more immune.  Fully irrigating Indian agriculture, that too
 Impact on farm revenue  Extreme against the backdrop of water scarcity and
temperature shocks reduce farmer incomes by limited efficiency in existing irrigation schemes,
4.3 percent and 4.1 percent during kharif and will be a defining challenge for the future.
rabi respectively, whereas extreme rainfall Technologies of drip irrigation, sprinklers, and
shocks reduce incomes by 13.7 percent and 5.5 water management—captured in the “more
percent (See table below). crop for every drop” campaign—may well hold
the key to future Indian agriculture (Shah
Committee Report, 2016) and hence should be
accorded greater priority in resource allocation.
And, of course, the power subsidy needs to be
replaced by direct benefit transfers so that
power use can be fully costed and water
conservation furthered.
 Need to embrace agricultural science and
technology with renewed ardour. Swaminathan
(2010) urged that anticipatory research be
undertaken to pre-empt the adverse impact of a
rise in mean temperature. Agricultural
research will be vital in increasing yields but
also in increasing reliance to all the pathologies
that climate change threatens to bring in its
 In a year where temperatures are 1 degree
wake: extreme heat and precipitation, pests,
Celsius higher farmer incomes would fall by 6.2
and crop disease.(especially important for crops
percent during the kharif season and 6 percent
– pulses, soyabean that are most vulnerable to
during rabi in unirrigated districts. Similarly,
weather and climate).
in a year when rainfall levels were 100
 PMFBY – weather based models and technology
millimetres less than average, farmer incomes
(drones) need to be used to determine losses and
would fall by 15 percent during kharif and by 7
compensate farmers within weeks (Kenya – in
percent during the rabi season.
days).
 Swaminathan et. al. (2010) show that a 1 degree
 In thinking about agricultural policy reforms in
Celsius increase in temperature reduces wheat
India, it is vital to make a clear distinction
production by 4 to 5 percent.
between two agricultures in India. There is an
 IPCC – temperatures in India likely to rise by
agriculture—the well-irrigated, input-addled,
3-4°C by the end of 21st century  in the
and price-and-procurement-supported cereals
grown in Northern India—where the challenge  This distinction is crucial – if a country’s
is for policy to change the form of the very performance is atypical in development time,
generous support from prices and subsidies to the policy strategy will have to be far different
less damaging support in the form of direct from that if a country’s performance is typical.
benefit transfers. In the former, bleaker case, development itself
 Then there is another agriculture (broadly, non- cannot be counted upon to improve the role and
cereals in central, western and southern India) status of women. The burden on government,
where the problems are very different: civil society, and other stakeholders will
inadequate irrigation, continued rain correspondingly be greater.
dependence, ineffective procurement, and  3 specific dimensions of gender – (1) Agency -
insufficient investments in research and relate to women’s ability to make decisions on
technology (non-cereals such as pulses, reproduction, spending on themselves,
soyabeans, and cotton), high market barriers spending on their households, and their own
and weak post-harvest infrastructure (fruits mobility and health.
and vegetables), and challenging noneconomic  (2) Attitudes - relate to attitudes about violence
policy (livestock). against women/wives, and the ideal number of
 The cooperative federalism “technology” of the daughters preferred relative to the ideal
GST Council that brings together the Center number of sons.
and States could be promisingly deployed to  (3) Outcomes relate to son preference
further agricultural reforms and durably raise (measured by sex ratio of last child), female
farmers’ incomes.(Agriculture – state subject). employment, and choice of contraception,
education levels, age at marriage, age at first
Chapter 7 – Gender and Son Meta- childbirth, and physical or sexual violence
Preference: Is Development Itself an experienced by women.
Antidote  Findings  progress is being made – India’s
 Govt launched Beti Bachao Beti Padhao – performance is better than or at par with that
January 2015 – targeted the worsening Child of other countries accounting for the level of
Sex Ratio (CSR) in India through a mass development.
campaign aimed at creating awareness and  Progress most notable – agency women have in
changing social norms. decision making regarding household
 The intrinsic values of gender equality are purchases and visiting family and relatives.
incontestable. But now there is growing There has been a decline in the experience of
evidence that there can also be significant gains physical and sexual violence. Education levels
in economic growth if women acquire greater of women have improved dramatically but
personal agency, assume political power and incommensurate with development.
attain public status, and participate equally in  Use of female contraception: nearly 47 percent
the labour force. of women do not use any contraception, and of
 In developing countries, working women also those who do, less than a third use female
invest more in the schooling of their children. controlled reversible contraception. These
IMF Chief Lagarde – women’s participation in outcomes can be disempowering, especially if
the workforce to the level of men can boost the they are the consequence of restrictions on
Indian economy by 27%. reproductive agency.
 Gender Indices – Global Gender Gap index of  Since not many women use methods of
WEF. Gender Inequality Index of UNDP – rank reversible contraception, they have little control
countries in chronological time. Need to take over when they start having children, but only
development time in to consideration as role of seem to have control over when they stop having
women evolves with development. children. This could affect other milestones
 Policy making – to be informed by both early on in a woman’s life; for example, women
development time and chronological time. may not get the same access to employment that
Urgency of action should spring from men do.
assessments in chronological time but that  North-Eastern states doing substantially better
must be leavened by the understanding that than the hinterland states even in development
comes from assessments in development time. time; hinterland states are lagging, some
associated with their level of development and size preference – Indian parents, on average,
some even beyond that; surprisingly, some want to have at least two children.
southern states such as Andhra Pradesh and  The findings suggest that gender indicators are
Tamil Nadu fare worse than expected given more responsive to wealth in India than they
their level of development. are in the typical country  even if India is
 The level of employment of women has come lagging in development time, it can expect to
down from 36% in 2005-06 to 24% in 2015-16. catch up with other countries as household
On the supply side, increased incomes of men wealth increases.
allows Indian women to withdraw from the  Govt launched many schemes – BBBP, Sukanya
labour force, thereby avoiding the stigma of Samriddhi Yojana, paid maternity leave, crèche
working; higher education levels of women also facilities etc.
allow them to pursue leisure and other non-  Just as India has committed to moving up the
work activities all of which reduce female ranks in the ease of doing business indicators,
labour force participation. it should perhaps do so on gender outcomes as
 On the demand side, the structural well. Here, the aim should be broader. Many of
transformation of Indian agriculture due to the gender outcomes are manifestations of a
farm mechanization results in a lower demand deeper societal preference, even meta-
for female agricultural labourers. preference for boys, leading to many “missing”
 + insufficient availability of types of jobs that women and “unwanted” girls. So, Indian society
women say they would like to do – regular, part- as a whole should perhaps resolve—the miles to
time jobs which provide steady income and go before society can sleep in good conscience—
allow women to reconcile household duties with to consign these odious categories to history
work – and types of sectors that draw in female soon.
workers. + Safety concerns + social norms about
household work + caring for children and elders Chapter 8 – Transforming Science &
– militates against women’s mobility and Technology in India:
participation in paid work.  Science, technology, and innovation have
 Finally, the sex ratio of last birth is biased instrumental and intrinsic value for society.
against females and is lower by 9.5 percentage They are key drivers of economic performance
points in 2015-16 in comparison to other and social well-being.
 But they are also important for deeper reasons:
countries.
a scientific temper, with its spirit of enquiry, the
 Son preference – development is not proving to
primacy accorded to facts and evidence, the
be an antidote – Son preference giving rise to ability to challenge the status quo, the
sex selective abortion and differential survival adherence to norms of discourse and the
has led to skewed sex ratios at birth and elevation of doubt and openness.
beyond, leading to estimates of 63 million  The open spirit of inquiry that is fundamental
missing women. to science can provide a bulwark against the
 Another phenomenon – Son meta-preference – darker forces of dogma, religious obscurantism,
Parents adopting fertility stopping rules – and nativism that are threateningly resurfacing
(Families where a son is born are more likely to around the world.
stop having children than families where a girl  Innovations in science and technology are
is born) having children until the desired integral to the long-term growth and dynamism
number of sons are born. This leads naturally to of any nation. The pursuit of science also creates
notional category of unwanted girls which is a spirit of enquiry and discourse which are
estimated at over 21 million. In some sense, critical to modern, open, democratic societies.
once born, the lives of women are improving but  Historical contributions – many – first use of
society still appears to want fewer of them to be Zero as revealed in Bakhshali manuscript (AD
born. 200 – 400), Arybahata Brahmagupta,
 The only exception to this pattern is with Bhaskara, Madhava of Sangamagrama, C V
regards to the first child. Even parents who Raman, S N Bose, Ramanujan, etc.
have a first-born son are likely to continue  Independent India – Nuclear Energy
having children, which reflects a pure family programme, hybrid seeds – Green Revolution,
Mangalyaan mission, LIGO, vaccines and students in STEM in US compared to China. It
generic drugs, etc. appears that fewer Indian students have been
 India needs to rekindle the excitement and enrolling in recent years for such degrees,
purpose that would attract more young people whether due to more attractive options after a
to the scientific enterprise  address some of master’s degree or rising work visa challenges.
the India’s most pressing development  On the other hand, there is an increase in
challenges. enrolment of Ph.D programs in India – 1.26
 Investing in science is also fundamental to lakh in 2015-16, 62% from STEM.
India’s security: the human security of its  Publications – 2013 – rank – 6th – rank has been
populations; the resilience needed to address increasing – annual publication growth @14%
the multiple uncertainties stemming from between 2009 and 2014 + the quality also
climate change; and the national security improving.
challenges stemming from new emerging  The Nature Index (which publishes tables based
threats, ranging from cyber warfare to on counts of high-quality research outputs in
autonomous military systems such as drones. the previous calendar year covering the natural
 Trend from 2004-2005 till 2016-2017 shows that sciences) – ranked India at 13 in 2017.
the spending on R&D has been stagnant at 0.7%  Patents - If journal publications reflect a
of GDP (well below US – 2.6 China – 2.1Korea country’s prowess in science, patents reflect its
– 4.2, Israel – 4.3). Public expenditure is standing in technology. According to the WIPO,
dominant – its share has come down from 75% India is the 7th largest Patent Filing Office in
to about 60%. the World. India produces fewer patents per
 60% of public expenditure – key government capita.
funding agencies – Atomic Energy, Space,  Much of India’s low patent output could be due
Earth Sciences and technology and to its lower middle-income status. However,
biotechnology. In that health is very low despite patents have grown much faster with income in
the severe health challenges being faced by the countries like China, Korea, and Japan. Unless
country. there is a greater focus on R&D, rising income
 India is unique – government dominant in alone will not allow India to catch up in the near
carrying R&D + Government not only primary future.
source of R&D funding but also primary user of  Major challenge – domestic patent system –
funds. Also, government expenditure on R&D – India’s patent applications and grants grown
taken almost entirely by central Govt. also, rapidly in foreign jurisdictions, the same is not
universities play a relatively smaller role in true at home. (5000 patent grants for Indians in
research activities of the country. Govt foreign offices and little over 800 at home).
specialised agencies – taking up more research Stricter examination process + severe backlog +
work  universities confined to largely high rate of pendency + shortage of man power.
teaching role (unlike in many countries where In 2016-17, only 132 examiners  takes 5 years
universities play a major role). or more for granting. Given the rapid rate of
 There is a need for greater State Government technological obsolescence, the inordinate
spending, especially application oriented R&D delays in processing patents penalizes
aimed at problems specific to their economies innovation and innovators within the country.
and populations.  Way Forward  (1) Improve math and cognitive
 According to one analysis (Forbes, 2017) there skills at the school level – Though access has
are 26 Indian companies in the list of the top been improved, the learning outcomes have
2,500 global R&D spenders compared to 301 been weak  this weakens denies India access
Chinese companies. 19 (of these 26) firms are in to the intellect and energies of millions of young
just three sectors: pharmaceuticals, people.
automobiles and software. India has no firms in  (2) Encourage investigator-led research 
five of the top ten R&D sectors as opposed to SERB (Science and Engineering Research
China that has a presence in each of them. Board) – 2008 – statutory body under DST – it
 Ph.Ds. in Science, Technology, has sanctioned more than 3500 projects to
Engineering, and Mathematics (STEM)  individual scientists. It is a promising start that
Indian students – less than half as many Ph.D
needs to expand with more resources and science. India already has a strong foundation
creative governance structures. of life science research institutes which together
 (3) Increase funding for research from private can make significant contributions in this area.
sector as well as from state governments –  (C) National mission on Energy Storage System
incentivise private sector to both undertake  Energy storage technologies (e.g., batteries)
more R&D and support STEM research through help in energy management and power quality
CSR activities. The types of R&D activities in electric power systems. India has lagged in
permitted under CSR needs to be increased. manufacturing renewable energy generation
Govt can also work with private sector to create systems. Substantial investments in energy
new R&D funding opportunities. Ex. 50:50 storage systems will ensure that India can be a
partnership with SERB for industry relevant leader in manufacturing energy storage
research under Ucchatar Avishkar Yojana. systems  round the clock electricity to villages
 State governments too need to recognize the using off-grid RE systems.
need to invest in application oriented research  (D) National mission on mathematics 
aimed at problems specific to their economies Mathematics has two special advantages for
and populations. This would both strengthen India: i) it is not capital intensive; ii) standards
state universities as well as provide much of excellence are universal.  improve teaching
needed knowledge in areas such as crops, at all levels + establish five institutes of
ecology and species specific to a state. mathematical sciences + conduct Olympiads
 (4) Link national labs to universities and create etc. to boost India’s capital and research profile
new knowledge eco-system  the separation of in mathematics within a decade.
research from teaching has been an Achilles  (E) National mission on Cyber Physical Systems
heel for Indian science. Universities have  The term Cyber Physical System (CPS) refers
students but need additional faculty support, to machine based communication, analysis,
while research institutes have qualified faculty inference, decision, action, and control in the
but are starved of bright young students context of a natural world. A multidisciplinary
brimming with energy and ideas. A closer area – AI, mathematics, Big Data Analytics,
relationship between the two in specific Block Chains, contextual learning etc.
geographic and spatial settings would help  (F) National mission on Agriculture 
nurture research in areas reflecting the fields of improving agricultural productivity + creating
science in which the national research centres resilience to changing climate, water scarcity,
have strengths. pests and crop diseases. Mission could help
 If success in research requires a deep overcome the weaknesses of agricultural
commitment to excellence, commercial success research.
requires speed and nimbleness. Government  (6) Leverage Scientific diaspora – scientists and
rules such as those requiring L1 for engineers from India are now living outside –
procurement are simply not geared to providing more live in US. However, with the strength of
the flexibility that is needed at the frontiers of India’s economy and growing anti-immigrant
research where speed, product quality and atmosphere in some Western countries, India
reliability make all the difference between has an opportunity to attract back more
success and failure. scientists. There has been an increase in
 (5) Take a mission driven approach to R&D: (A) number of Indian scientists returning to work
National Mission on Dark matter - India is one in India but the numbers are still modest.
of the leading countries in high energy physics  No of schemes – INSPIRE, Ramanujan
and relevant mathematics. The payoffs from fellowship, VAJRA etc.  could be enhanced to
this research will have implications on space take advantage of opportunities to recruit in a
missions of the future, quantum computing, way to build whole research groups; the
newer solutions to energy problems etc. This inducements should be such as to allow them to
mission can build on the strong foundation of do good research (laboratory resources, ability
astronomy and astrophysics research institutes to hire post-docs, housing etc.) rather than
in the country. financial, to ensure that home grown talent has
 (B) National mission on Genomics – Genomic a level playing field.
research lies at the heart of the future of life
 (7) Improve the culture of research  Great  Lagging on – enforcing contracts – marginally
achievements in the sciences decline after improved.
middle age, and youth, conceptual achievement,  The importance of an effective, efficient and
and scientific revolutions are linked. Hence it is expeditious contract enforcement regime to
imperative that there be greater representation economic growth and development cannot be
of younger scientists in decision making bodies overstated. A clear and certain legislative and
in their areas of expertise. executive regime backed by an efficient
 (8) Greater public engagement of the Science judiciary that fairly and punctually protects
and research establishment: If science is to property rights, preserves sanctity of contracts,
garner greater support from society, it will and enforces the rights and liabilities of parties
require scientists to engage more vigorously is a prerequisite for business and commerce.
with society. Much of science is – and should be  Actions taken by the government – scrapped
– a public good, and hence that will always over 1000 redundant legislations + rationalised
require substantial public funding  R&D tribunals + amended arbitration and
institutions need to make stronger efforts to conciliation act + reduced intra-government
engage with the public.  Require much litigation + expanded lok adalat programme to
greater efforts at science communication reduce the burden on judiciary + National
whether through the media or through regular Judicial Data Grid (NJDG) – every high court is
tours and lectures for school and college digitised.
students as well the general public. Scientists  Findings: (1) Delays and pendency of economic
need to create broad public support for their cases are high and mounting in the Supreme
work and not treat it as an entitlement, given Court, High Courts, Economic Tribunals, and
the many claims on the public purse. And if they Tax Department, which is taking a severe toll
do that, they will find a receptive and on the economy in terms of stalled projects,
supportive public. mounting legal costs, contested tax revenues,
 Conclusion: A doubling of R&D spending is and reduced investment more broadly;
necessary and much of the increase should come  (2) Delays and pendency stem from the increase
from the private sector and universities. To in the overall workload of the judiciary, in turn
recapture the spirit of innovation that can due to expanding jurisdictions and the use of
propel it to a global science and technology injunctions and stays; in the case of tax
leader from net consumer to net producer of litigation, this stems from government
knowledge India should invest in educating its persisting with litigation despite high rates of
youth in science and mathematics, reform the failure at every stage of the appellate process;
way R&D is conducted, engage the private  (3) Actions by the Courts and government
sector and the Indian diaspora, and take a more acting together can considerably improve the
mission-driven approach in areas such as dark situation.
matter, genomics, energy storage, agriculture,  Facts: (1) Economic tribunals
and mathematics and cyber physical systems. Telecommunications - TDSAT), electricity
 Vigorous efforts to improve the “ease of doing (Appellate Tribunal for Electricity- APTEL),
business” need to be matched by similar ones to environment (National Green Tribunal- NGT),
boost the “ease of doing science.” consumer protection (National Consumer
Disputes Redressal Commission- NCDRC),
Chapter 9: Ease of Doing Business’ Next central income tax (Income Tax Appellate
Frontier: Timely Justice Tribunal- ITAT), and central indirect taxes
 India jumped thirty places to break into the top (Customs, Excise and Service Tax Appellate
100 for the first time in the World Bank’s Ease Tribunal- CESTAT).  Average age of pending
of Doing Business Report (EODB), 2018. The cases – 3.8 years; 25% increase in cases
rankings reflect the government’s reform compared to 2012.
measures on a wide range of indicators.  (2) High Courts – Creation of tribunals didn’t
 Positives – Taxation and insolvency issues + alter the pendency at the HCs nor their ability
protecting minority investors + obtaining credit to deal with other economic cases. Total backlog
+ getting electricity. cases – 3.5 million. Average pendency – 4.3 to 6
years. Reduction in cases – due to counting +
transfer of cases to district courts etc. NJDG  Supreme Court’s recent experiment with
helped but more is needed to improve the constituting an exclusive bench for taxation
situation. produced impressive results, which may be
 Possible reasons for pendency and delay: (1) replicated for other subject matters, and
High courts: Generalised overload of cases, emulated by other High Courts that do not have
Burden from expansion of discretionary special rosters for daily hearings.  Reducing
jurisdictions, without any countervailing pendency and backlog.
measures that either balance the scope of other  There are other profound benefits of dedicated
jurisdictions or improve overall administration subject- matter benches. Such benches ensure
and efficiency. Article 226 and 227 that the Supreme Court speaks in one voice,
interpretation – expansion – increase in cases – and there is continuity and consistency of legal
more than 50% of cases pending constitute wit jurisprudence. Further, they create efficiencies
petitions. by allowing the judge to focus on the specialized
 (2) Burden from original side jurisdiction – HC branch of law placed before her.
transforming into the court of first instance for  The Supreme Court’s experience also confirms
some civil cases. Data compiled for survey that Courts can take steps within existing
suggests that HCs take longer to clear civil suits design and capacity constraints to ameliorate
as compared to their district counter parts. pendency, particularly through specialized
 (3) Supreme Court (SC) – Expansion of Special treatments of cases.
Leave Petition under Article 136 – data  The experience of the SC’s management
suggests that the rate at which SC admits SLPs indicates that it may be more prudent to create
increased from 25% (2008) to 40%(2016). High category-wise benches that exclusively deal
level of pendency nearly 85% are SLP cases. with cases at the stage of final hearing for the
 (4) Rising pendency – from injunction of cases entire working week, so that they are given the
and stays by courts. Ex. IPR cases – 60% being necessary attention.
stayed - Lengthy interim orders, ex parte ad  Expenditure of administration of justice 
interim stays, increasing rate of pendency of Total spending on Administration of Justice by
cases at final arguments, and few final States and the Centre constitutes
judgments in IPR cases16 are common traits of approximately 0.08- 0.09% of GDP which is low
IPR practice across different High Courts. when compared to other countries, especially
Nearly 50% of these cases are pending at the common law countries. Research shows that
stage of pleadings, which is the stage at which while general spending on the judiciary may not
parties are required to complete formal impact pendency, spending on modernization,
requirements before hearing. Average age at computerization and technology leads to shorter
final disposal – 7.9 years. average trial lengths.
 Costs of delay: More than ₹ 50000 Crore  The Government may consider including efforts
government projects stayed – Power, roads and and progress made in alleviating pendency in
Railways are worst hit. Being debt financed, the the lower judiciary as a performance-based
project cost increase by close to 60%. incentive for States. Further, expenditure may
 The overall impact of rising pendency at be prioritized for filing, service and other
Appellate Tribunals, High Courts and the delivery related issues that tend to cause the
Supreme Court, coupled with the rising use of maximum delays.(30% of case life – taken up by
injunctions and other blunt instruments has led formal proceedings – summons and notices –
to spiralling legal expenses of corporate India. tech upgradation helps in reducing the same).
 Taxes – Case Study – 2017 March – 1.37 Lakh  However, building additional judicial capacity
direct tax cases – 0.2% constitute 56% of total may not be effective unless existing capacity is
demand value and 66% of cases each less than fully utilized. The higher judiciary is currently
₹ 10 lakh – 1.8% of total locked up value. operating at 63.6% of existing capacity.
 At all the three levels – Appellate tribunals,  Policy Implications: Steps to be considered: (1)
HCs and SCs – the success rate is under 30%. Expanding judicial capacity in the lower
The dept. loses 65% of its cases. Dept. is the courts and reducing the existing burden
largest litigant – nearly 85% of cases. on the HCs and SC: (a) Build capacity in lower
judiciary to deal with economic and commercial
cases and allow HCs to focus on streamlining Volume-II
and clarifying questions of law. (b) Courts may
revisit the size and scale of their discretionary An Overview of India’s Economic
jurisdictions and avoid resorting to them unless Performance in 2017-18:
necessary, to reclaim the envisaged  Average growth from 2014-15 to 2017-18 – 7.3%
constitutional and writ stature of the higher (estimating 6.5-6.75% in 2017-18) – India’s
judiciary; (c) existing capacity ought to be fully growth is significantly higher than most
utilised. economies of the world. this growth has been
 (2) The tax department exercising greater self- achieved in a milieu of lower inflation, improved
restraint by limiting appeals, given its low current account balance and notable reduction
success rate. This could either take the form of in the fiscal deficit to GDP ratio makes it all the
ex ante rules limiting appeals, for example, to no more creditable.
more than one in four High Court verdicts or no  In the recent years, the wedge between the real
more than one in three arbitration cases; or, and nominal GDP growth has narrowed
given the long shadow of the 3 Cs (CBI, CVC, significantly. While real GDP growth averaged
and CAG) in inducing bureaucratic risk- 6.4 per cent between 2012-13 and 2014-15, the
aversion, perhaps an independent Panel could nominal growth was 12.5 per cent in this period.
be created to decide on further appeals of tax In comparison, during the three-year period
verdicts against the Department. from 2015-16 to 2017-18, the real and nominal
 (3) Substantially increasing state expenditure GDP average growth is estimated to be 7.2 per
on the judiciary, particularly on their cent and 10.1 per cent respectively, pointing to
modernisation. higher differences in the former period than
 (4) Building on the success of the Supreme latter. (due to more inflation in former period).
Court in disposing tax cases, creating more  CSO – 2017-18 – GVA 6.1% compared to 6.6%
subject-matter and stage-specific benches that in 2016-17 due to lower growth in Agriculture
allow the Court to build internal specializations (2.1%) and industry sector (4.4%) while services
and efficiencies in combating pendency and growing at 8.3% (more than 2016-17).
delay;  The real per capita income (measured in terms
 (5) Reducing reliance on injunctions and stays. of per capita net national income at constant
Courts may consider prioritizing stayed cases, (2011-12) prices is one of the important
and impose stricter timelines within which indicators representing the welfare of people of
cases with temporary injunctions may be a country. It is expected to increase from Rs.
decided, especially when they involve 77,803 in 2015-16 to Rs. 86,660 in 2017-18,
government infrastructure projects; growing at an annual average rate of 5.5 per
 (6) Improving Court Case Management and cent. In nominal terms it increased by an
Court Automation Systems. average of 9.0 per cent per annum from Rs.
 Recent experience with the GST has shown that 94,130 in 2015-16 to Rs. 111,782 in 2017-18.
vertical cooperation between the center and 
states--Cooperative Federalism--has brought
transformational economic policy changes.
Perhaps there is a horizontal variant of that--
one might call it the Cooperative Separation of
Powers--that could be applied to the
relationship between the judiciary on the one
hand, and the executive/legislature on the
other, duly preserving their independence.
 Conclusion: Coordinated action between
government and the judiciary-- a kind of
horizontal Cooperative Separation of Powers to
complement vertical Cooperative Federalism
between the central and state governments--
would address the “Law’s delay” and boost
economic activity.