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Economic Survey 2019-20 – Highlights & Complete Coverage
( PART 2 – GDP and Economic Performance )

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The Economic Survey of India is the flagship annual document of the Ministry of Finance, Govt of India. It is prepared under the guidance of the Chief Economic Adviser of India. This document is presented to both Houses of Parliament during the Budget Session. The first Economic Survey of India was presented in 1950-51 as part of the Union Budget. After 1964 it was separated from the Budget and presented each year during the Budget Session before the presentation of the budget. The document is non-binding.

The Union Minister for Finance & Corporate Affairs, Smt. Nirmala Sitharaman presented the Economic Survey 2019-20 in the Parliament on January 31, 2020. Krishnamurthy V. Subramanian is the Chief Economic Adviser of Ministry of Finance, Government of India.

We will present Highlights of the Economic Survey in PART 1, 2 and 3:

• PART 1 – Current Issues of Indian Economy
• PART 2 – GDP and Economic Performance
• PART 3 – Economic Sector-wise Performance

Key Highlights of the Economic Survey 2019-20

( PART 2 – GDP and Economic Performance )

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Is India’s GDP Growth Overstated? No!

• GDP growth is a critical variable for decision-making by investors and policymakers. Therefore, the recent debate about accuracy of India’s GDP estimation following the revised estimation methodology in 2011 is extremely significant.
• As countries differ in several observed and unobserved ways, cross-country comparisons have to be undertaken by separating the effect of other confounding factors and isolating effect of methodology revision alone on GDP growth estimates.
• Models that incorrectly over-estimate GDP growth by 2.7 % for India post-2011 also misestimate GDP growth over the same period for 51 out of 95 countries in the sample.
• Several advanced economies such as UK, Germany and Singapore have their GDPs misestimated with incompletely specified econometric model.
• Correctly specified models that account for all unobserved differences and differential trends in GDP growth across countries fail to find any misestimating of growth in India or other countries.
• Concerns of a misestimated Indian GDP are unsubstantiated by the data and are thus unfounded.

Thalinomics: The Economics of a Plate of Food in India

• An attempt to quantify what a common person pays for a Thali across India.
• A shift in the dynamics of Thali prices since 2015-16.
• Absolute prices of a vegetarian Thali have decreased significantly since 2015-16 across India and the four regions; though the price has increased during 2019-20.
• Post 2015-16:
  Average household gained close to Rs. 11, 000 on average per year from the moderation in prices in the case of vegetarian Thali. Average household that consumes two non-vegetarian Thalis gained close to Rs. 12, 000 on average per year during the same period.
• From 2006-07 to 2019-20:
  Affordability of vegetarian Thalis improved 29 %. Affordability of non-vegetarian Thalis improved by 18 %.

India’s Economic Performance in 2019-20

• India’s GDP growth moderated to 4.8 % in H1 of 2019-20, amidst a weak environment for global manufacturing, trade and demand.
• Real consumption growth has recovered in Q2 of 2019-20, cushioned by a significant growth in government final consumption.
• Growth for ‘Agriculture and allied activities’ and ‘Public administration, defense, and other services’ in H1 of 2019-20 was higher than in H2 of 2018-19.
• India’s external sector gained further stability in H1 of 2019-20:
• Current Account Deficit (CAD) narrowed to 1.5 % of GDP in H1 of 2019-20 from 2.1 % in 2018-19.
• Impressive Foreign Direct Investment (FDI).
• Rebounding of portfolio flows.
• Accretion of foreign exchange reserves.
• Sharper contraction of imports as compared to that of exports in H1 of 2019-20, with easing of crude prices.
• Headline inflation expected to decline by year end:
• Increased from 3.3 % in H1 of 2019-20 to 7.35 % in December 2019-20 due to temporary increase in food inflation.
• Rise in CPI-core and WPI in December 2019-20 suggests building of demand pressure.
• Deceleration in GDP growth can be understood within the framework of a slowing cycle of growth:
• Financial sector acted as a drag on the real sector (investment-growth-consumption).
• Reforms undertaken during 2019-20 to boost investment, consumption and exports:
• Speeding up the insolvency resolution process under Insolvency and Bankruptcy Code (IBC).
• Easing of credit, particularly for the stressed real estate and NBFC sectors.
• Announcing the National Infrastructure Pipeline 2019-2025.
• Survey expects an uptick in the GDP growth in H2 of 2019-20:
• 5 % GDP growth for 2019-20 based on CSO’s first Advance Estimates.
• Expeditious delivery on reforms for enabling the economy to strongly rebound in 2020-21.

Fiscal Developments

• Revenue Receipts registered a higher growth during the first eight months of 2019-20, compared to the same period last year, led by considerable growth in Non-Tax revenue.
• Gross GST monthly collections have crossed the mark of Rs. 1 lakh crore for a total of five times during 2019-20 (up to December 2019).
• Structural reforms undertaken in taxation during the current financial year:
• Change in corporate tax rate.
• Measures to ease the implementation of GST.
• Fiscal deficit of states within the targets set out by the FRBM Act.
• Survey notes that the General Government (Centre plus States) has been on the path of fiscal consolidation.

External Sector

• Balance of Payments (BoP):
• India’s BoP position improved from US$ 412.9 bn of forex reserves in end March, 2019 to US$ 433.7 bn in end September, 2019.
• Current account deficit (CAD) narrowed from 2.1% in 2018-19 to 1.5% of GDP in H1 of 2019-20.
• Foreign reserves stood at US$ 461.2 bn as on 10th January, 2020.
• Global trade:
• In sync with an estimated 2.9% growth in global output in 2019, global trade is estimated to grow at 1.0% after having peaked in 2017 at 5.7%.
• However, it is projected to recover to 2.9% in 2020 with recovery in global economic activity.
• India’s merchandise trade balance improved from 2009-14 to 2014-19, although most of the improvement in the latter period was due to more than 50% decline in crude prices in 2016-17.
• India’s top five trading partners continue to be USA, China, UAE, Saudi Arabia and Hong Kong.
• Exports:
  Top export items: Petroleum products, precious stones, drug formulations & biologicals, gold and other precious metals.
• Largest export destinations in 2019-20 (April-November): United States of America (USA), followed by United Arab Emirates (UAE), China and Hong Kong.
• The merchandise exports to GDP ratio declined, entailing a negative impact on BoP position.
• Slowdown of world output had an impact on reducing the export to GDP ratio, particularly from 2018-19 to H1 of 2019-20.
• Growth in Non-POL exports dropped significantly from 2009-14 to 2014-19.
• Imports:
  Top import items: Crude petroleum, gold, petroleum products, coal, coke & briquittes.
• India’s imports continue to be largest from China, followed by USA, UAE and Saudi Arabia.
• Merchandise imports to GDP ratio declined for India, entailing a net positive impact on BoP.
• Large Crude oil imports in the import basket correlates India’s total imports with crude prices. As crude price raises so does the share of crude in total imports, increasing imports to GDP ratio.
• Significant Gold imports also correlate India’s total imports with gold prices. However, share of gold imports in total imports remained the same during 2018-19 and the first half of 2019-20, despite an increase in prices, possibly due to increase in import duty that reduced the import of gold.
• Non-POL-non-gold imports are positively correlated with GDP growth.
• Non-POL-non-oil imports fell as a proportion to GDP from 2009-14 to 2014-19 when GDP growth accelerated.
• This may be because of consumption driven growth while investment rate declined, lowering non-POL-non-gold imports.
• Continuous decline in investment rate decelerated GDP growth, weakened consumption, dampened the investment outlook, which further reduced GDP growth and along with it non-POL-non-gold imports as a proportion of GDP from 2018-19 to H1 of 2019-20.
• Under trade facilitation, India improved its ranking from 143 in 2016 to 68 in 2019 under the indicator, “Trading across Borders”, monitored by World Bank in its Ease of Doing Business Report.
• Logistics industry of India:
• Currently estimated to be around US$ 160 billion.
• Expected to touch US$ 215 billion by 2020.
• According to World Bank’s Logistics Performance Index, India ranks 44th in 2018 globally, up from 54th rank in 2014.
• Net FDI inflows continued to be buoyant in 2019-20 attracting US$ 24.4 bn in the first eight months, higher than the corresponding period of 2018-19.
• Net FPI in the first eight months of 2019-20 stood at US$ 12.6 bn.
• Net remittances from Indians employed overseas continued to increase, receiving US$ 38.4 billion in H1 of 2019-20 which is more than 50% of the previous year level.
• External debt:
• Remains low at 20.1% of GDP as at end September, 2019.
• After significant decline since 2014-15, India’s external liabilities (debt and equity) to GDP increased at the end of June, 2019 primarily by increase in FDI, portfolio flows and external commercial borrowings (ECBs).

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Monetary Management and Financial Intermediation

• Monetary policy:
• Remained accommodative in 2019-20.
• Repo rate was cut by 110 basis points in four consecutive MPC meetings in the financial year due to slower growth and lower inflation.
• However, it was kept unchanged in the fifth meeting held in December 2019.
• In 2019-20, liquidity conditions were tight for initial two months; but subsequently it remained comfortable.
• The Gross Non Performing Advances ratio:
• Remained unchanged for Scheduled Commercial banks at 9.3% between March and September 2019
• Increased slightly for the Non-Banking Financial Corporations (NBFCs) from 6.1% in March 2019 to 6.3% in September 2019.
• Credit growth:
• The financial flows to the economy remained constrained as credit growth declined for both banks and NBFCs.
• Bank Credit growth (YoY) moderated from 12.9% in April 2019 to 7.1% as on December 20, 2019.
• Capital to Risk-weighted Asset Ratio of SCBs increased from 14.3% to 15.1% between March 2019 and September 2019.

Prices and Inflation

• Inflation Trends:
• Inflation witnessing moderation since 2014
• Consumer Price Index (CPI) inflation increased from 3.7 per cent in 2018-19 (April to December, 2018) to 4.1 per cent in 2019-20 (April to December, 2019).
• WPI inflation fell from 4.7 per cent in 2018-19 (April to December, 2018) to 1.5 per cent during 2019-20 (April to December, 2019).
• Drivers of CPI – Combined (C) inflation:
• During 2018-19, the major driver was the miscellaneous group
• During 2019-20 (April-December), food and beverages was the main contributor.
• Among food and beverages, inflation in vegetables and pulses was particularly high due to low base effect and production side disruptions like untimely rain.
• Cob-web Phenomenon for Pulses:
• Farmers base their sowing decisions on prices witnessed in the previous marketing period.
• Measures to safeguard farmers like procurement under Price Stabilisation Fund (PSF), Minimum Support Price (MSP) need to be made more effective.
• Divergence Between Retail and Wholesale price:
• Observed for essential agricultural commodities in four metropolitan cities of the country from 2014 to 2019.
• Divergence particularly high for vegetables like onion and tomato. This may be due to the presence of intermediaries and high transaction costs.
• Volatility of Prices:
  o Volatility of prices for most of the essential food commodities with the exception of some of the pulses has actually come down in the period 2014-19 as compared to the period 2009-14.
  o Lower volatility might indicate the presence of better marketing channels, storage facilities and effective MSP system.
• Regional variations:
  o CPI-C inflation has been highly variable across States ranging between (-)0.04 per cent to 8.1 per cent across States/UTs in financial year (FY) 2019-20 (April-December).
  o In most states, CPI-C inflation in rural areas is lower than the CPI-C inflation in urban areas
  o Rural inflation has been more variable across states than urban inflation.
• Inflation dynamics:
  o Convergence of headline inflation towards core inflation as per the CPI-C data from 2012 onwards.

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