Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Environment and Additional Topics for UPSC Prelims

UPSC : Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

The document Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev is a part of the UPSC Course Environment and Additional Topics for UPSC Prelims.
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GIST OF ECONOMIC SURVEY 2017

The Economic Survey 2016-17, written by Dr. Arvind Subramanian, Chief Economic Advisor, bears a complete new look in terms of the format and the subject matter.
Economic Survey has provided a refreshingly realistic assessment of the many challenges facing the Indian economy in the coming years.
This year's Survey comes in the wake of a set of volatile international developments – Brexit, political changes in advanced economies-and two major domestic policy developments: the GST and demonetization.

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Survey discusses and makes a point to give attention to below areas/issues:
1. Brexit and its impact
2. How Political changes in advanced economies can impact India
3. GST – its impact and benefits
4. Demonetization – short term costs and long term benefits

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Other important areas to focus:
1. Short term and medium challenges:
 Addressing Twin Balance Sheet problem of over-indebted corporates and bad-loanencumbered PSBs
 Fiscal policy of Centre and States
 Labour-intensive employment creation

2. Effectiveness of targeting of major current programs

3. Discussion of providing a Universal Basic Income (UBI)

4. Addressing the paradox situation: India’s internal integration and internal trade is strong and intensive. There is ostensibly free flow of goods, people, and capital across India and yet income and health outcomes are not converging.

Note:
 Aspirants have to keep track of the above areas and develop basic understanding of all relevant issues, and ability to analyze, and take a view on conflicting socio- economic goals, objectives and demands. The candidates must be capable of giving relevant, meaningful and succinct answers for probable questions on these above topics.
 Improve your analytical abilities and thoughts on these topics. How the above issues will impact India and the world? Analyze critically on these issues. Think what steps should be taken? Etc.

Eight Interesting Facts About India
 Economic Survey has provided the below eight interesting facts about India:

 

1. Indians on the Move: India’s internal (annual work-related) migration doubled (according to 2011 census)
2. Biases in Perception: Poor rating standards by Rating Agencies – India’s credit rating has remained unchanged at BBB- (even though our GDP growth increased and performing better than other countries esp. China). However, China’s credit rating was upgraded from A+ to AA-, despite its growth decelerated.

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

3. Weak targeting of Social programmes: Welfare spending in India suffers from misallocation. The districts accounting for the poorest 40% receive 29% of the total funding.

4. Political Democracy but Fiscal Democracy?: India has 7 taxpayers for every 100 voters ranking us 13th amongst 18 of our democratic G-20 peers.

Taxpayer per 100 Votes

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

5. India’s distinctive Demographic Dividend: India’s share of working age to non-working age population will peak later and at a lower level than that for other countries but last longer.

6. India Trades More Than China and a Lot Within Itself:
 As of 2011, India’s openness - measured as the ratio of trade in goods and services to GDP has far overtaken China’s, a country famed for using trade as an engine of growth.
 India’s internal trade to GDP is also comparable to that of other large countries and very different from the caricature of a barrier-riddled economy

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

7. Divergence within India, Big time: Spatial dispersion in income is still rising in India in the last decade (2004-14), unlike the rest of the world and even China. However, average per capita income is still lesser than that of advanced economies.

8. Property Tax Potential Unexploited: Many cities collect only 5% to 20% of their potential property taxes.

IMPORTANT INTERNATIONAL DEVELOPMENTS
 Political changes in advanced economies

 Appointment of Donald Trump as the Republican candidate for US President
 Rise and spread of blatantly racist anti-immigration political parties and movements in Europe
 There are tectonic shifts under way in the political discourse and practice in these countries
 Faced with increasing inequality, stagnant real incomes and growing material fragility of daily life, ordinary people in the developed world are beginning to see themselves as victims of globalisation.

What happens in the developed countries still matters hugely in international relations and to the rest of the world despite all the talk of a shift in global power to some large “emerging nations”.

Political backlash against globalisation in advanced countries, and China’s difficulties in rebalancing its economy, could have major implications on India’s economic prospects.

Therefore, they will need to be watched in the year — and decade — ahead.

IMPORTANT DOMESTIC DEVELOPMENTS
  Goods and Services Tax
  Demonetisation
  Other domestic policy actions

 

Goods and Services Tax (GST)
The Constitution (One Hundred and First Amendment) Act, 2016, introduced a national Goods and Services Tax in India from 1 July 2017.
The GST is a Value added Tax (VAT) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level.
It will replace all indirect taxes levied on goods and services by the Indian Central and state governments. It is aimed at being comprehensive for most goods and services.

(or)

GST is a value-added tax levied at all points in the supply chain with credit allowed for any tax paid on input acquired for use in making the supply. It would apply to both goods and services in a comprehensive manner, with exemptions restricted to a minimum.

Benefits of Goods and Services Tax (GST)
1. It will create a common Indian market
2. It will improve tax compliance and governance
3. It will boost investment and growth
4. It will reduce the cascading effect of tax on the cost of goods and services
5. It is also a bold new experiment in the governance of India’s cooperative federalism.
6. GST will have a far-reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems.

Other advantages:
1. Wider tax base, necessary for lowering tax rates and eliminating classification disputes
2. Elimination of multiplicity of taxes and their cascading effects
3. Rationalization of tax structure and simplification of compliance procedures
4. Harmonization of center and state tax administrations, which would reduce duplication and compliance costs
5. Automation of compliance procedures to reduce errors and increase efficiency

DEMONETISATION

Demonetisation
 A radical governance-cum-social engineering measure designed to tax holdings of black money.
 was enacted on November 8, 2016
 The two largest denomination notes, Rs 500 and Rs 1000—together comprising 86 percent of all the cash in circulation—were “demonetised”
 There were two previous instances of demonetisation, in 1946 and 1978, the latter not having any significant effect on cash
 But the recent action had large, albeit temporary, currency consequences.

Aim of demonetization:
1. to curb corruption
2. to curb counterfeiting
3. to curb the use of high denomination notes for terrorist activities
4. to curb accumulation of “black money”, generated by income that has not been declared to the tax authorities.
5. The honest citizens want that government fights against corruption, black money, benami property, terrorism and counterfeiting.

Long-term potential of demonetization:
 greater digitalization of the economy
 increased flows of financial savings
 greater formalization of the economy
 All of which could eventually lead to higher GDP growth, better tax compliance and greater tax revenues.
 Demonetization has been a redistributive device to transfer illicit wealth from the rich to the rest, via the government.
 misuse of cash has led to artificial increase in the cost of goods and services like houses, land, higher education, health care and so on.

Thus, this move is expected to bring more transactions under tax net, both direct and indirect taxes would move up, more digital transactions will take place and reduction in parallel economy will increase the size of formal economy as more people will disclose income and pay taxes. This will make India a more tax-complaint society.

Short-term costs or short-term macroeconomic impacts due to demonetization:
 inconvenience and hardship especially those in the informal and cash-intensive sectors of the economy who have lost income and employment.
 There have been reports of job losses, declines in farm incomes, and social disruption, especially in the informal, cash-intensive parts of the economy
 The benefits of lower interest rates and dampened price pressure may have cushioned the short-term macroeconomic impact.

Demonetisation affects the economy through three different channels. It is potentially:

1. an aggregate demand shock because it reduces the supply of money and affects private wealth, especially of those holding unaccounted money;
2. an aggregate supply shock to the extent that economic activity relies on cash as an input (for example, agricultural production might be affected since sowing requires the use of labour traditionally paid in cash); and
3. an uncertainty shock because economic agents face imponderables related to the magnitude and duration of the cash shortage and the policy responses (perhaps causing consumers to defer or reduce discretionary consumption and firms to scale back investments).

Follow-up actions to minimize the costs and maximise the benefits include:
Demonetisation has had short-term costs but holds the potential for long-term benefits. Below are the follow-up actions to minimize the costs and maximise the benefits include:
 fast, demand-driven, remonetisation (by supplying as much cash as necessary, especially in lower denomination notes)
 further tax reforms , including bringing land and real estate into the GST
 reducing tax rates and stamp duties
 acting to allay anxieties about over-zealous tax administration

These actions would allow growth to return to trend in 2017-18, following a temporary decline in 2016-17.

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev


Earlier initiatives taken by the government to curb corruption and other illicit activities:
1. creation of the Special Investigation Team (SIT) in the 2014 budget
2. the Black Money Act, 2015
3. the Benami Transactions Act of 2016
4. the information exchange agreement with Switzerland
5. changes in the tax treaties with Mauritius and Cyprus, and
6. the Income Disclosure Scheme

STEP TAKEN BY THE NAREBDRA MODI  GOVT SO FAR TO CURB BLACK MONEY

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Note:
 One should have basic/general understanding on all the above initiatives/schemes

Important policy actions other than GST and Demonetization includes:
1. Insolvency and Bankruptcy Code 2016 - a vital reform that will make it much easier to do business in India.

Government revised the bankruptcy laws so that the “exit” problem that pervades the Indian economy can be addressed effectively and expeditiously.
 Last year Survey had likened the Indian economy in the 21st century to the ‘Chakravyuh’ legend of Mahabharata – the ability to enter but not exit – cautioning the country is facing adverse consequences due to the lack of a way out for failed ventures.
 Just as a market economy requires unrestricted entry of new firms, new ideas and new technologies, it also requires an exit route so that resources are forced or enticed away from inefficient and unsustainable uses.
 Stressed corporate and bank balance sheets were partly because it was difficult for capital to exit enterprises or investments that had turned unprofitable.
 As a consequence, India was littered with firms that were too small and unproductive, taking up scarce resources more efficiently allocated elsewhere.

Government passed the Insolvency and Bankruptcy Code 2016 – this new bankruptcy law will ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters.
The move is also expected to help India move up from its current rank of 130 in the World Bank’s ease of doing business index.
Overall this legislation is a huge step towards the ease of doing business in India and has the potential to bring business practices in India closer to more developed markets over the long term.

2. More autonomy to RBI or monetary policy:
Government codified the institutional arrangements on monetary policy with the Reserve Bank of India (RBI), to ensure that inflation control will be less susceptible to the whims and fancies of individual or governments.

3. Solidified the legal basis for Aadhaar:
 Union Government notified the UIDAI (Terms and Conditions of Service of Chairperson and Members) Rules, 2016 to give legal status to Unique Identification Authority of India (UIDAI).
 Solidifying the legal basis for Aadhaar helps to realise the long-term gains from the JAM trifecta (Jan Dhan-Aadhaar-Mobile)

4. Reforms in clothing sector:
 Government enacted a package of measures to assist the clothing sector that by virtue of being export-oriented and labour-intensive could provide a boost to employment, especially female employment.
 The Rs 6,000 crore package announced in 2016 for textiles and apparel sector was a step in the right direction but the industry needs lot of reforms for the revival of the growth.
 Government has set a target to create another 30 million more jobs in the industry over the next three years.

5. Unified Payments Interface (UPI) platform by National Payments Corporation of India (NPCI)
 UPI will make e-commerce transactions easier— improvement in the ease of making payments, the ease of saving and the ease for buying financial products
 UPI will allow customers to instantaneously transfer funds across different banks with the use of a single identifier which will act as a virtual address and eliminate the need to exchange sensitive information such as bank account numbers during a financial transaction
 By facilitating inter-operability it will unleash the power of mobile phones in achieving digitalization of payments and financial inclusion, and making the “M” an integral part of the government's flagship “JAM”-Jan Dhan, Aadhaar, Mobile-- initiative.

6. FDI reform measures
 FDI reform measures were implemented, allowing India to become one of the world’s largest recipients of foreign direct investment.
 FIPB abolished, more measures to attract FDI
 With more than 90 per cent of the foreign direct investment proposals coming through the automatic route, the finance minister said it was only logical to phase out the FIPB, the body which clears FDI plans up to Rs 5,000 crore.
 The government will announce more measures to attract FDI (through further liberalisation of FDI policy), reform labour laws and push digital payments.

These measures cemented India’s reputation as one of the few bright spots in an otherwise grim global economy. India is not only among the world’s fastest growing major economies, underpinned by a stable macro-economy with declining inflation and improving fiscal and external balances. It was also one of the few economies enacting major structural reforms.
Yet there is a gap between this reality of macro-economic stability and rapid growth, on the one hand, and the perception of the ratings agencies on the other. Why so? Box 1 elaborates on the possible reasons.

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

 

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

Gist of Economic Survey - 2017 ( Part -1) UPSC Notes | EduRev

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