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State of the Economy Seminar August 2017

NCAER forecasts growth based on both quarterly and annual models. The quarterly model forecasts that Gross Value Added at Basic Prices in (2011-12) prices will grow at 6.6 per cent in 2017–18.  For the first quarter it forecasts 5.6 per cent year-on-year growth.

NCAER retains its forecast of a growth of 7.3 per cent for 2017–18 from the last quarter for GVA (Gross Value Added) at basic prices. These forecasts at constant (2011–12) prices are based on NCAER’s annual GDP model.

The forecast for the growth of Gross Domestic Product (GDP) at market prices in 2017–18 has, however, been reduced to 7.4 per cent at constant (2011–12) prices. Real agriculture GVA is forecast to grow at 3.8 per cent, real industry GVA at 6.3 per cent, and real services GVA at 8.5 per cent in 2017–18. The Wholesale Price Index (WPI) inflation is projected at 6.7 per cent for 2017–18. The growth rates in exports and imports, in dollar terms, are estimated at 6.9 per cent and 7.0 per cent, respectively, in 2017–18. The current account balance and central fiscal deficit, as percentages of GDP, are projected at –1.0 per cent and 3.2 per cent, respectively, for 2017–18. These estimates have been revised upwards from February 2017.

In the agricultural sector, the fourth advance estimates of crop output released on August 16, 2017, reveal that the total output of food grains during 2016–17, estimated at 275.7 million tonnes, touched a new record as compared to the earlier record of 265.0 million tonnes achieved in 2013–14. The situation with regard to rainfall until the middle of August 2017 indicates that of the four main regions of the country, only two (east and north) have so far experienced normal rainfall.  Several sub-divisions of the other two regions – western region and southern region have witnessed deficient rainfall. Further, for the country as a whole, of the total 36 sub-divisions, about a little over a quarter (28 per cent) have experienced deficient rainfall. In contrast, last year saw a much better monsoon rainfall. However, a comparison over the last five years shows that the rainfall situation in 2017–18 is better than that witnessed in 2012–13, 2014–15, and even in 2015–16. Going forward, forecasts by the Meteorological Department suggest that the second half of the southwest monsoon season (August–September) is likely to see normal rainfall (94 per cent–106 per cent of the Long Period Average) in the country as a whole. If they turn out to be true, these forecasts could prove to be a boost for the economy, in general, and the agricultural sector, in particular.

As regards the industrial sector, the Index of Industrial Production (IIP) of this quarter (April–June) exhibited weak growth, especially in the month of June 2017, recording a massive decline in the growth rate from over 7 per cent in 2016–17: Q1 to just 2 per cent in 2017–18: Q1. The use-based classification of all the six categories of goods, that is, primary goods, capital goods, intermediate goods, infrastructure/construction goods, consumer durables, and consumer non-durables, shows that except for consumer non-durables, all other categories showed a significant slowdown in 2017–18: Q1  as compared to 2016–17: Q1,  Consumer non-durables, on the other hand, attained a growth of 7.7 per cent in the first quarter of 2017–18, which was marginally higher than the corresponding figure of 7.6 per cent in the same quarter of 2016–17.  It must, however, be pointed out that even the consumer non-durables category exhibited a slow-down as compared to 2016–17: Q4, when it recorded a growth of 8.8 per cent. Capital goods, the bell weather for investment spending in the economy, exhibited the most drastic decline at –3.9 per cent in 2017–18: Q1, falling from 13 per cent in 2016–17: Q1, implying recession of–4 per cent on a year-on-year (y-o-y) basis in this sector. Infrastructure/construction goods registered a significant slowdown in May and June 2017 after recording 5.2 per cent y-o-y growth in May 2017.

The first quarter lead indicators from the services sector warrant cautious optimism. While on one hand, the aviation sector, and both the domestic and international tourism sectors displayed a remarkable performance, the production of commercial vehicles showed a continuous slowdown. In terms of cargo handled at major ports, both goods moved by the railways and air cargo showed positive signs.   While FDI in the services sector improved, that in the telecommunication sector declined.

Merchandise exports, in dollar terms, which had grown at 19.8 per cent on a y-o-y basis in April 2017, fell to 8.3 per cent and 4.4 per cent in May and June, 2017, respectively. Although the y-o-y growth rate of merchandise imports also fell, it remained in double digits, at49.1 per cent, 33.1 per cent, and 19.0 per cent in April, May, and June, 2017, respectively. The growth in service exports and imports continued to be sluggish, at barely 0.1 per cent and -4.8 per cent, respectively, on a y-o-y basis in 2017–18: Q1. While prospects for international trade, is optimistic globally, the appreciation in the exchange rate may prove to be a dampener for Indian exports. The rupee appreciated by 3.6 per cent in 2017–18: Q1 against the dollar, with the exchange rate falling from Rs/USD 67.5 in 2016–17: Q4 to 64 in 2017–18: Q1.

There was significant moderation in inflation in 2017–18: Q1, especially in June 2017. The CPI rural–urban combined inflation was 1.5 per cent in 2017–18: Q1. There has been a decline in the inflation pertaining to fruits and vegetables since 2016–17: Q3, and it stood at -9.3 per cent in 2017–18: Q1. Fuel inflation also decelerated, with both WPI and CPI inflation hovering at around 5 per cent in June 2017.

The Sensex continued to show double-digit y-o-y growth in 2017–18: Q1. The Reserve Bank reduced the policy repo rate by 25 basis points in its bi-monthly meeting in August 2017, bringing the repo rate down to 6 per cent. In a surprising move, banks also cut their savings bank deposit rate, following a 50 basis point cut in the savings bank deposit rate by the State Bank of India at the end of July, 2017. A corresponding cut in bank lending rates following the policy repo rate cut is yet to be effected, raising concerns about the efficiency of monetary policy transmission.

While it is too early to assess the fiscal aspect of the economy, especially the impact of the GST, the revenue collection in 2017–18: Q1 has fallen short of the total expenditure in the same quarter, leading to high deficits. The first quarter of 2017–18 has recorded the highest deficit indicators such as fiscal deficit, revenue deficit, and primary deficit, while also showing the highest y-o-y growth as compared to the previous eight quarters. This puts greater pressure on the government to meet the deficit target over the coming months. As regards the expenditure budget, the capital expenditure has shown a significantly higher annual growth than the revenue expenditure.

Release of NCAER’s State Investment Potential Index: The 2017 N-SIPI

NCAER released the State Investment Potential Index (N-SIPI 2017) at a launch workshop inaugurated by Ramesh Abhishek, Secretary, Department of Industrial Policy and Promotion (DIPP). Covering 20 States and the Delhi Union Territory, this is the second edition of the annual N-SIPI released by NCAER that ranks states’ on their competitiveness in business and their investment climate. As in 2016, Gujarat and Delhi again top the list of states, while Haryana and Telangana have moved rapidly up the ranks to finish among the top five.

The first NCAER State Investment Potential Index (N-SIPI 2016) was launched in March 2016. N-SIPI 2016 is a pioneering effort to provide metrics of economic governance, competitiveness and growth opportunities at the state and regional levels. The Index is designed to provide a systematic and reliable “go-to” reference for policy makers, existing businesses and potential domestic and overseas investors.

While delivering the keynote remarks at the launch of N-SIPI 2017, Mr Ramesh Abhishek, Secretary, Department of Industrial Policy and Promotion, complimented NCAER for its perceptive and insightful study on the investment potential of India’s states. He said, “The Government takes studies like the NCAER State Investment Potential Index and its findings very seriously and are using the procedural and perceptions-related parameters in both N-SIPI 2016 and this second edition in 2017 for informed policymaking. We are glad to say that the states are also supporting us in our endeavour to improve the business climate across the country.”

He suggested that studies like NCAER’s N-SIPI are aiding state governments in improving the business climate, making their states more attractive for investors. Already the inflow of FDI in the country has gone up from $45 billion to $60 billion over the last two years, though a lot more still needs to be done. He remarked, “The world is looking at India with tremendous enthusiasm and interest as a viable business destination, and we need to facilitate greater participation of investors across all states in the country. This NCAER Index opens up immense possibilities for taking this effort forward. There are several interesting pointers in the NCAER survey, especially in terms of the six pillars that will determine future policies in this sphere. I am sure N-SIPI will add another feather to NCAER’s cap, helping businesses to augment investment and helping Indian states to improve their attractiveness as business destinations.”

Dr Shekhar Shah, Director-General, NCAER, remarked that “India remains the fastest growing economy in the world and a highly desirable investment destination. The 2017 AT Kearney Foreign Direct Investment Confidence Index ranks India 8th globally, up from 11th place in 2015 and above Australia, Singapore, Spain, and Switzerland. With the third largest market in the world, the prospects for growth and investment are truly outstanding.” He further said that “Investment opportunities are expanding in India in all sectors.  The GST will weave India’s states together in ways that has not been possible before. Now, more than ever, there is a need to provide a systematic and reliable “go-to” reference focusing on India’s states for potential domestic and overseas investors. N-SIPI 2017, NCAER’s second edition in the annual series of states’ rankings, is an evidence-based index that will help build continuity, consistency and rigour in ranking investment targets for investors. As importantly, it will help state policymakers measure their state’s performance against that of others.”

What does the 2017 N-SIPI do?

Building on the success of N-SIPI 2016, N-SIPI 2017 ranks the competitiveness of Indian states on six pillars: land, labour, infrastructure, economic climate, political stability and governance, and business perceptions.  These six pillars are classified under four broad categories: factor driven (land and labour), efficiency driven (infrastructure), growth driven (economic climate and political stability and governance), and perceptions driven (ranking of business climate built on firm surveys).  A unique feature of the N-SIPI index is the integration of industry perceptions of the investment potential and business climate of a state along with the fundamentals likely to drive investment decisions in that state. Another unique feature of the 2017 N-SIPI is the explicit inclusion of the land pillar, data for which were not available in time for inclusion in the 2016 N-SIPI.

Against the backdrop of the implementation of India’s long-awaited goods and services tax, which is expected to create an integrated common market and promote competitive and cooperative federalism, the focus of many policy reforms is shifting to the states. Given the growing state-level investment opportunities, N-SIPI 2017 is hence uniquely positioned to enable decision makers to assess the business potential offered by each state and develop each state in accordance with its strengths and limitations. N-SIPI 2017 nicely complements the World Bank’s Ease of Doing Business (EOD) surveys and DIPP’s assessment of progress made by states on business reforms. It is much broader and more representative than the EOD ratings and at the same time more concise and focused than the DIPP progress assessment.

While introducing N-SIPI 2017, the lead author of the study and Visiting Senior Fellow at NCAER, Dr Indira Iyer, remarked, “N-SIPI 2017 is unique in that it measures investment potential with both a five-factor index along with a perception-based survey (the sixth factor). As with N-SIPI 2016, corruption remains the most pressing problem for business, though the severity of this problem appears to have decreased. Business sentiment is found to be optimistic and, strikingly, the next five years may see more churn in cross-border investments”.

Key 2017 N-SIPI Findings

The key findings of the 2017 N-SIPI show that Gujarat, Delhi, Andhra Pradesh, Haryana, Telangana and Tamil Nadu are the top six states for business investment potential. At a greater level of detail, Gujarat also tops the rankings for the 4th N-SIPI pillar on economic climate and the 6th pillar on perceptions. Delhi is second overall and tops the ranking on infrastructure but loses out on governance and political stability. Compared to 2016, Haryana and Telangana have made the most rapid gains moving up 12 and 8 spots to finish among the top five states in terms of their investment potential. The 2017 N-SIPI ranking of states and the relative shifts compared to 2016 are in Figure 1 and Table 1 available as an attachment below.

Although Bihar, Uttar Pradesh and West Bengal are ranked among the least favourable states for investment, they rank higher under individual pillars, with Bihar doing better on the labour pillar, Uttar Pradesh on the land pillar, and West Bengal on the economic climate pillar. Odisha maintains its rank from last year at 11th position. On the infrastructure pillar, Maharashtra, Karnataka and Odisha moved closer to the frontier, while Uttarakhand and Assam moved further away. West Bengal made the most gains on the economic climate and governance pillars, while Telangana, Punjab, Haryana and Kerala made significant gains under the perceptions pillar.

As noted by Dr Indira Iyer, the team leader for the 2017 N-SIPI, corruption continues to be the number one constraint faced by businesses, as found in the N-SIPI 2016 and 2017 surveys. But perceptions of corruption may be changing: the 2017 N-SIPI reports a decline in the percentage of respondents citing corruption as a constraint to conducting business from 79 percent in 2016 to 57 percent in 2017.  Getting approvals for starting a business is still the second-most pressing constraint faced by businesses in 2017 as was the case in 2016, but, again, the percentage of firms reporting this has decreased from 72 percent to 53 percent.

The 2017 N-SIPI perception survey shows that the availability and quality of skilled labour, access to finance and tax policy are the other major issues of concern to businesses. These happen to be the focus areas of government action under the National Skill Development Mission and the Jan Dhan Yojana, and with the implementation of the GST from July 2017, the problems related to tax policy are expected to become better.

NCAER plans to update this evidence-based index annually. Along with DIPP’s assessment of business reforms and the World Bank’s index on the ease of doing business, N-SIPI should aid governments in policy making as well as allow both Indian and foreign investors to make informed investment decisions.

The India Policy Forum 2017

NCAER held the 14th India Policy Forum at the India International Centre in New Delhi on July 11-12, 2017. The IPF is NCAER’s annual economic policy research conference that brings together academics, policymakers, industry representatives, media, and researchers for discussions on key issues of Indian economic policy. The IPF includes presentations of original commissioned papers, leading to a published volume, and the annual IPF Lecture. A distinguished international Advisory Panel and an international Research Panel guide the IPF. The annual IPF Volume is the highest ranked economic journal out of India based on citation counts.

The keynote address at IPF 2017 was delivered by Arvind Subramanian, Chief Economic Advisor, Government of India. Complimenting NCAER on its efforts over the years to promote applied policy research across India’s many economic development challenges, Dr Subramanian highlighted the need for “relevance, rigour, and timeliness” in policy research. He said that in his work as the CEA, he had found how policymakers simply do not have the luxury of waiting for the perfect answer, but nonetheless wanted experience and accumulated wisdom on what works and does not work in economic policy. “It is great to be here among this wonderful audience and an interesting array of papers and topics for the IPF’s presentations,” commented Subramanian, while releasing the 13th IPF 2016-17 volume.

Shekhar Shah, Director General of NCAER and co-editor of the IPF Volume, said that he “welcomed both the advice that the CEA had for researchers and his suggestion to provide an expert resource that government economists could turn to for ready reference and quick queries on policy and technical issues of data and methodology.” He added, “NCAER would be more than happy to explore a ‘help-line’ resource of the kind that Subramanian had recommended.”

Karthik Muralidharan, Associate Professor at the University of California, San Diego, and co-editor of the IPF volume, said that “Academics do need different time frames to ensure that their answers are correct, but that is exactly the gap that we try to bridge with the India Policy Forum. Increasingly, the IPF features papers that draw upon a mountain of high quality research and produce definitive assessments of the best policy advice. These policy assessments can be invaluable go-to resources for policymakers in a hurry.”

Subramanian’s address was followed by presentations of five papers on the solvable challenge of air pollution in India; a deep dive into state budgets in India; India’s linkages into global value chains; the implementation of ICT in agriculture; and the drivers of growth of India’s cities and towns in the 2000s.

In addition to Subramanian, several sessions of the IPF were chaired by key policymakers, including S. P. Singh Parihar, Chairman of the Central Pollution Control Board, Anup Wadhawan, Additional Secretary, Ministry of Commerce and Industry, and Ramesh Chand, Member of NITI Aayog. B. J. Panda, Member of the Lok Sabha, participated in a final panel discussion on market failure versus government failure in India.

The 14th IPF included a Policy Roundtable on financial inclusion and household finance in India, with the Panel debating the difficulties on the supply and demand side of household finance that need to be overcome in order to promote much greater financial inclusion of the relatively large percentage of the population that remained outside the formal financial system.

The IPF 2017 ended in the evening of 12th July with the Annual IPL Lecture delivered by Professor Lant Pritchett of the Harvard Kennedy School at the Imperial Hotel. Pritchett’s IPF Lecture on “Avoiding the morning-after blues: Building state capability while times are good,” combined different strands of his work on why countries should use periods of high growth to the fullest to build the capabilities of the state. His work along with Lawrence Summers had shown that such periods do not persist indefinitely. Countries therefore need to focus their energies and resources on realistic pathways to build state capacity during the “good times”.

The 2017 Rabi Season and Doubling Farmers’ Income

A good monsoon in 2016, which brought great relief to farmers suffering from the impact of poor rains over the last two years, has helped achieve record or near-record production of most Kharif crops in 2016-17. NCAER’s latest report on the short-term agricultural outlook for the 2017 Rabi season released today, points out that India is now heading towards replicating this achievement in the case of Rabi crops too. As per the NCAER 2017 Rabi Report, the Gross Value Added in agriculture and the allied sector registered a significant 3.3 per cent year-on-year growth in the Q2 of 2016-17 as compared to 1.8 per cent growth in Q1. Overall, a robust growth of 4.1 per cent was recorded in the agriculture sector in 2016-17 as against the previous year’s drought-impacted growth rate of 1.2 per cent. In comparison, the latest official estimates suggest 4.4 per cent growth for 2016-17 and 0.8 per cent for 2015-16.

These and other findings of ongoing research at the NCAER were discussed today at a national workshop on the Indian Agricultural Outlook: The 2017 Rabi Season and Doubling Farmers’ Income.  The NCAER research has been supported by the National Food Security Mission, Ministry of Agriculture & Farmers Welfare, and Government of India.

Smt. Sudha P. Rao, Principal Adviser in the Department of Agriculture, Cooperation and Farmers Welfare in the Ministry of Agriculture & Farmers Welfare, while releasing the NCAER Rabi Report today, noted that “There are many positive indications in the agricultural sector and agricultural production in the country today. The importance of agriculture in the Indian economy is underscored by the fact that 54.6% of India’s population is engaged in agriculture and contributes 17% to GDP. However, the sector faces many dilemmas, especially with regard to farmers’ welfare. Many initiatives have been announced in the Union Budget 2017-18 for farmers’ welfare and the objective of doubling farmers’ income by 2022. There is a focus on enhancing agricultural productivity, investment in warehousing and cold chains, crop insurance, and promotion of ancillary activities. We have achieved record production of rice, wheat and pulses this year helped by various programmes implemented by the government. Other issues that need to be addressed are optimization of irrigation practices, fertilizer yields and support systems for farmers like the launch of the Soil Health Card and the Pradhan Mantri Krishi Sinchai Yojana.”

The workshop offered the Indian policy and economic research community and experts in the agriculture sector an opportunity to discuss current and prospective agricultural policies and their implications for the economy. The extensive day-long discussions by the delegates at the conference also provided insights and delineated the way forward for improving India’s short-term agricultural prospects. In addition, the major findings emanating from the government’s initiatives for doubling farmers’ income by 2022 were also discussed at the conference.

The findings of the NCAER report are based on a comprehensive assessment of various factors including farm input prices and availability, monsoon rainfall, national and international market demand conditions and government policies impacting this year’s Rabi and Kharif crop production. The forecast for wheat production in the Rabi season is 96.0-98.7 million tonnes compared with the Government’s estimate of 96.6 million tonnes assuming normal weather conditions through harvest. The NCAER forecast for Rabi rice production is over 13 million tonnes compared with the Government’s estimate of 12.8 million tonnes.

While introducing NCAER’s short and medium-term agricultural scenarios, the principal author and team leader of the study, and NCAER’s Senior Research Counsellor, Dr Rajesh Chadha remarked, “The agriculture sector is projected to grow by 4.1% in 2016-17, which is more than double the drought-impacted growth rate of 1.2 % in 2015-16. After a record or near-record production of most Kharif crops in 2016-17, India is heading for a record or near-record production of Rabi crops. The government is working diligently for the betterment of farmers and farming through various innovative programmes with the aim of doubling farmers’ income by 2022.”

National Workshop on Indian Agricultural Outlook Rabi Outlook and Farmer’s Income Issues

A National Workshop on the Rabi Outlook 2017 and Farmers’ Income on March 7, 2017 will be held at the India International Centre, New Delhi. The Workshop is being jointly organized by the NCAER and its research partner, the National Food Security Mission of the Government of India.

The Workshop is based on NCAER’s ongoing research being done in partnership with, and with support from, the National Food Security Mission, Ministry of Agriculture & Farmers Welfare, Government of India. This work is being done under a project on Agricultural Outlook and Situation Analysis that NCAER has been leading since 2011. The project comprises seasonal, half-yearly and annual reports. NCAER’s short-term reports for the Rabi and Kharif seasons, such as the one that will be presented on March 7, are based on detailed assessments of expected domestic output, prices, market functioning, and global developments.

For queris please contatct Ms Sudesh Bala at sbala@ncaer.org; 011-2345-2722

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