Highlights of Budget

Transcription

1 Highlights of Budget Finance Minister Shri Arun Jaitley presents the Union Budget in Parliament on February 1, 2018 Budget guided by mission to strengthen agriculture, rural development, health, education, employment, MSME and infrastructure sectors. A series of structural reforms will propel India among the fastest growing economies of the world. Country firmly on course to achieve over 8% growth as manufacturing, services and exports back on good growth path. MSP for all unannounced kharif crops will be one and half times of their production cost like majority of rabi crops: Institutional Farm Credit raised to `11 lakh crore in from `8.50 lakh crore in ,000 rural haats to be developed and upgraded into Gramin Agricultural Markets to protect the interests of 86% small and marginal farmers. Operation Greens launched to address price fluctuations in potato, tomato and onion for benefit of farmers and consumers. Two New Funds of `10,000 crore announced for Fisheries and Animal Husbandary sectors; Restructured National Bamboo Mission gets `1290 crore. Loans to Women Self Help Groups will increase to `75,000 crore in 2019 from `42,500 crore last year. Higher targets for Ujjwala, Saubhagya and Swachh Mission to cater to lower and middle class in providing free LPG connections, electricity and toilets. Outlay on health, education and social protection will be `1.38 lakh crore. Tribal students to get Ekalavya Residential School in each tribal block by Welfare fund for SCs gets a boost. World's largest Health Protection Scheme covering over 10 crore poor and vulnerable families launched with a family limit upto `5 lakh for secondary and tertiary treatment (Actuals) Budget Snapshot Figures in ` Crore (Budget Estimates) (Revised Estimates) (Budget Estimates) Revenue Receipts Capital Receipts* Total Receipts Tota l Expenditure Revenue Defecit Effective Revenue Defecit Fiscal Defecit Primary Defecit

2 Deficit Trend (%) (BE) (RE) (BE) Primary Deficit Revenue Deficit Effective Revenue Deficit Fiscal Deficit Fiscal Deficit pegged at 3.50%, projected at 3.30% for `5.97 lakh crore allocation for infrastructure. Ten prominent sites to be developed as iconic tourist destinations. NITI Aayog to initiate a national programme on Artificial Intelligence(AI). Centres of excellence to be set up on robotics, AI, Internet of things etc. Disinvestment crossed target of `72,500 crore to reach `1,00,000 crore. Comprehensive Gold Policy on the anvil to develop yellow metal as an asset class. 100 percent deduction proposed to companies registered as Farmer Producer Companies with an annual turnover upto `100 crore on profit derived from such activities, for five years from Deduction of 30 percent on emoluments paid to new employees Under Section 80-JJAA to be relaxed to 150 days for footwear and leather industry, to create more employment. No adjustment in respect of transactions in immovable property where Circle Rate value does not exceed 5 percent of consideration. Proposal to extend reduced rate of 25 percent currently available for companies with turnover of less than `50 crore (in Financial Year ), to companies reporting turnover up to `250 crore in Financial Year , to benefit micro, small and medium enterprises. Standard Deduction of `40,000 in place of present exemption for transport allowance and reimbursement of miscellaneous medical expenses crore salaried employees and pensioners to benefit. Relief to Senior Citizens proposed:- Exemption of interest income on deposits with banks and post offices to be increased from `10,000 to `50,

3 Trends in Tax Receipts (BE) (RE) (BE) Gross Tax Receipts Direct Tax Indirect Tax TDS not required to be deducted under section 194A. Benefit also available for interest from all fixed deposit schemes and recurring deposit schemes. Hike in deduction limit for health insurance premium and/ or medical expenditure from `30,000 to `50,000 under section 80D. Increase in deduction limit for medical expenditure for certain critical illness from `60,000 (in case of senior citizens) and from `80,000 (in case of very senior citizens) to `1 lakh for all senior citizens, under section 80DDB. Proposed to extend Pradhan Mantri Vaya Vandana Yojana up to March, Current investment limit proposed to be increased to `15 lakh from the existing limit of `7.50 lakh per senior citizen. More concessions for International Financial Services Centre (IFSC), to promote trade in stock exchanges located in IFSC. To control cash economy, payments exceeding `10,000 in cash made by trusts and institutions to be disallowed and would be subject to tax. Tax on Long Term Capital Gains exceeding `1 lakh at the rate of 10 percent, without allowing any indexation benefit. However, all gains up to January 31, 2018 will be grand fathered. Proposal to introduce tax on distributed income by equity oriented mutual funds at the rate of 10 percent. Proposal to increase cess on personal income tax and corporation tax to 4 percent from present 3 percent. Proposal to roll out E-assessment across the country to almost eliminate person to person contact leading to greater efficiency and transparency in direct tax collection. Proposed changes in customs duty to promote creation of more jobs in the country and also to incentivise domestic value addition and Make in India in sectors such as food processing, electronics, auto components, footwear and furniture. 23

4 ECONOMIC SURVEY Economic Survey : State of the Economy The past year has been marked with some major transformational economic reforms, such as the implementation of the GST regime, which adversely affected the informal sector initially, addressing the twin balance sheet problem through recognition, resolution, recapitalization and reforms-directed at the banking as well as the corporate sector, by way of the new Indian Bankruptcy Code (IBC). To the same effect, a bank recapitalization package, amounting to roughly 1.2% of GDP was also unfurled by the Government. Due to these developments, and other factors such as rising real interest rates, declining agricultural incomes etc., the first half of the fiscal was marred by the decoupling effect-growth lagged while it accelerated in the developed nations around the world. However, the second half of the fiscal year witnessed a revival of sorts as global recovery boosted exports. India jumped 30 places on the Ease of Doing Business rankings also received a sovereign ratings upgrade for the first time in 14 years, validating the reforms. According to the Survey, India has two economic vulnerabilities, namely fiscal and current accounts, susceptible to global crude price volatility. Fiscal account has to break through the tax-gdp ratio barrier, which has been stagnant since the 1980s, despite an annual average GDP growth of 6.5%. GST could help solve this conundrum, with however, spillover effect to macroeconomic stability. In contrast, GST coupled with demonetisation has significantly added to the country's tax base. Fiscal vulnerability also has to overcome the steady conversion of contingent liabilities into actual ones, such as the debt burden overhang of the state electricity distribution companies (DISCOMs) and recapitalization of PSBs.A second step to address the current account vulnerability would be to raise the export competitiveness of Indian goods. Make in India and Ease of Business schemes are important tools to that end. The Survey observed that addressing corruption and weak governance has entailed challenges. Demonetization had impacted the informal sector, which is cash intensive; while the decision to ban promoters of debt ridden firms from the bankruptcy auctions to avoid moral hazard might entail fewer bidders and lower prices for such assets. The introduction of technology and the JAM (Jan Dhan-Aadhaar-Mobile) architecture, now enhanced by the Unified Payments Interface (UPI), holds the potential for significant improvements in state delivery of essential services such as health and education. The global economy is experiencing a nearsynchronous recovery for the first time since One of the key reasons is that world trade has grown by 4.7% by real volume in 2017, against 2.5% in Monetary policies in key developed economies have remained accommodative, resulting in booming stock as well as bond markets, forecast to sustain themselves through 2018, along with corporate resurgence. Downside include geopolitical risks in the Korean Peninsula, aggressive output cuts by one or more of the OPEC nations, unravelling of the debt boom in China, and trade skirmishes that might spiral out of control. The primary risks lie on the macroeconomic front in the advanced economies in the form of unrealistic asset valuation, and unusually low interest rates, which might go up 24

5 ultimately, pricking the bubble formed in the asset markets. On its outlook for , the survey points out that a robust recovery is taking hold as reflected in a variety of indicators, including overall GVA, manufacturing GVA, the IIP, gross capital formation and exports. Real non-food credit growth has rebounded to 4% in November 2017 on a year-on-year basis, while the squeeze on real credit to industry is abating. The flow of non-bank resources to the corporate sector, such as bond market borrowing and lending by NBFCs, has increased by 43% (April-December 2017 compared to the same period a year ago), substituting in part for weak bank credit. The re-acceleration of export growth to 13.6% in the third quarter of FY2018 and deceleration of import growth to 13.1%, in line with global trends, suggest that the demonetization and GST effects are receding. On the flip side, real credit growth to industry is still in negative territory and corporates have not raised commensurate amounts of capital, suggesting that their investment plans remain modest. The acreage for kharif and rabi crops for is estimated to have declined by 6.1% and 0.5%, respectively. Pulses and oilseeds have seen an increase in sowing, but this has translated into unusually low wholesale prices, affecting farm revenue. Accordingly, real GDP growth for as a whole is expected to be close to 6.75%. Average CPI inflation is projected to reach 3.7% for the year as a whole. The recent upswing in inflation stems from rising global oil prices, unseasonal increases in the prices of fruits and vegetables, and the 7th Pay Commission housing rent allowances, which mechanically increase inflation. The fiscal deficit for the first eight months of reached 112% of the total for the year, largely because of a shortfall in non-tax revenue, reflecting reduced dividends from government agencies and enterprises. Expenditure also progressed at a fast pace, reflecting the advancing of the budget cycle by a month. Government measures to curb black money and encourage tax formalization, including demonetization and the GST, have increased personal income tax collections substantially, which are likely to rise to 2.3% of GDP in , a historic high. Considering the components of demand influencing the growth outlook, the Economic Survey points out that rapid global growth might provide a boost to Indian exports. Secondly, private investment appears to be on the rebound, contingent on the success and efficiency of the public sector bank recapitalization plan. Consumption demand might remain volatile, depending upon the interaction between global crude prices, inflation rate and their impact on the policy rate decision making. Considering all this, the Survey expects growth to hover between 7% - 7.5% in An Overview of India's Economic Performance in As per the first Advance Estimates (1st AE), released by Central Statistics Office (CSO), growth rate of Gross Value of Added (GVA) at constant basic prices is estimated at 6.1% in , as compared to 6.6% in This is on account of lower growth in 'Agriculture & allied', and 'Industry' sector, which are expected to grow at 2.1% and 4.4% respectively. In , service sector is expected to grow at 8.3%, as compared to 7.7% in GVA growth in H1 of was 5.8%, with the two quarters depicting different picture. The declining trend seen in the previous few quarters in GVA growth was arrested in Q1 of This was basically led by the industry sector. The growth of 25

6 manufacturing sector is expected to improve from 4.0% in H1 to 5.1% in H2 of 'Trade, transport, hotels, storage, communications and services relating to broadcasting', which is a part of services sector is the only sector that is likely to register a decline in growth in H2 vis-à-vis H1 of The contribution of agriculture sector to GVA growth reverted to the mean of the period between and The contribution of industry sector to GVA growth declined in , primarily on account of lower growth in this sector in H1 and particularly in Q1. Based on the firm footing provided by the discernible improvements in most fiscal indicators, viz. revenue buoyancy, expenditure quality, tax devolution and deficits, the Government, in partnership with the States, ushered in the longawaited Goods and Service Tax (GST) with effect from July The growth in direct tax collections of the Centre kept pace with the previous year, with a growth of 13.7%. The budgeted growth for indirect taxes for the full year is 7.6%; the actual growth till November is 18.3%. The eventual outcome in indirect taxes during this year will depend on the final settlement of GST accounts between the Centre and the States and the likelihood that only taxes for eleven months (excluding IGST on imports) will be realized. The States' share in taxes grew by about 25% during (Apr-Nov), much higher than the growth in centre's net tax revenue at 12.6% and of gross tax revenue at 16.5%. The total expenditure of the Government increased by 14.9% during (Apr-Nov), as compared to 12.6% in the same period of the previous year. The revenue expenditure grew by 13.1% and capital expenditure by 29.3% during the first eight months of the current year. The front-loading of some expenditure and increased interest outgo, exerted pressure on fiscal deficit which stood at 112% of budget. The total expenditure of the Government increased by 14.9% during (Apr-Nov), as compared to 12.6% in the same period of the previous year. The revenue expenditure grew by 13.1% and capital expenditure by 29.3% during the first eight months of the current year. Headline inflation as per Consumer Price Index Combined (CPI-C) declined to 3.3% in (Apr-Dec) from 4.8% in the corresponding period of Food inflation in terms of the Consumer Food Price Index (CFPI) declined to 1.2% during (Apr-Dec) from 5.1% in Average inflation based on the Wholesale Price Index (WPI) stood at 2.9% in (Apr-Dec) as compared to 0.7% in (Apr-Dec). WPI based food inflation declined to 2.3% in (Apr- Dec) from 6.3% in the corresponding period of WPI fuel & power inflation increased to 9.7% (Apr-Dec) from (-) 6.5% in the corresponding period of the previous year. In tandem with the re-monetisation process, from November 17, 2017, as a favourable base effect set in, the Year on Year (YoY) growth of both 'Currency in circulation' and 'Reserve money' (M0) turned sharply positive and higher than their respective growth rates in the previous year. The gross nonperforming advances (GNPA) ratio of Scheduled Commercial Banks increased from 9.6% to 10.2% between March 2017 and September Non Food Credit (NFC) grew at 8.9% in November 2017, as compared to 4.8% in November Two important developments in the trade policy during the year are the mid-term review of Foreign Trade Policy (FTP) and the recent multilateral negotiations of WTO in December There were some developments on the trade logistics front and anti-dumping measures. MEIS (Merchandise Exports from India Scheme) incentives for two sub- 26

7 sectors of textiles and SEIS (Service Exports from India Scheme) for notified services have been increased by 2%. Besides this, in December 2017, a special package for employment generation in leather and footwear sector was approved by the Government which is likely to help exports from these sectors. GDP growth during could be higher than 6.5% estimated by the Central Statistical Organization (CSO), depending on a number of factors. On the positive side, as per IMF's World Economic Outlook released in October 2017, the global growth is expected to accelerate to 3.7% in 2018 from 3.6% in This can be expected to provide a further boost to India's exports, which have already shown acceleration in the current financial year. Remittances have shown signs of revival in the first half of current year and can be expected to pick up, particularly if oil prices maintain their rising trend witnessed in the current year. There are signs of revival of investment activity in the economy and the recent pick up in the growth of fixed investment can be expected to maintain momentum in the coming year. The policy rates can be expected to remain fairly stable if the inflation rate does not deviate much from its current levels. Downside risk to higher growth emanate from higher crude oil prices, which can be expected to increase by about 10-15% over and above the likely average price of around US$ per barrel (for Indian basket) for Protectionist tendencies in some of the countries could have an impact on exports growth, while the possibility of tightening of monetary conditions in the developed countries could lead to lower capital inflows. This monetary tightening could also lead to the possibility of financial stress and therefore can be a downside risk. On balance, there is a strong possibility of growth in to be higher than what it is expected to be in Growth of GDP in could be in the range of 7.0 to 7.5%. India has leapt 30 ranks over its previous rank of 130 in the World Bank's latest Doing Business Report Moody's Investors Service has also raised India's rating from the lowest investment grade of Baa3 to Baa2. This has been made possible due to a host of measures undertaken by the Government including implementation of GST, Insolvency and Bankruptcy Code, and announcement of bank recapitalization. A number of reforms were undertaken to boost industrial growth including Make in India programme, Startup India and Intellectual Rights Policy. In the infrastructure sector, the new umbrella program 'Bharatmala Pariyojana' aims to achieve optimal resource allocation for a holistic highway development. Under the Sagarmala Programme which aims to promote port-led development along Indian coast line, 289 projects worth `2.17 lakh crore are under various stages of implementation and development. The Ujjawal DISCOM Assurance Yojana (UDAY) has focused on enhancing the financial health of state electricity distribution companies (DISCOMs) by reducing interest burden, cost of power and aggregated technical and commercial losses. A new scheme, Saubhagya (Pradhan Mantri Sahaj Bijli Har Ghar Yojana), was launched in September 2017 to ensure electrification of all remaining willing households in the country in rural and urban areas. FDI equity inflows to the services sector (top 10 sectors including construction) grew by 15.0% during April-October in , as compared to 0.8% growth in total FDI equity inflows, mainly due to higher FDI in two sectors i.e. telecommunications and computer software and hardware. Services exports recorded a robust growth of 16.2% during April-September 2017, with turnaround observed in some major sectors 27

8 like travel and software services. India's service sector imports also exhibited a much higher growth of 17.4% in April-September Bird's-Eye View of the Indian Economy Through the GST As an information repository, the Goods and Services Tax (GST) embodies and heralds a radical alteration and enlargement in the understanding of the Indian economy. Preliminary analysis of this information unveils some long-elusive and basic facts about the Indian economy. Some exciting new findings include: Adjusting the base for double and triple counting, the GST has increased the number of unique indirect taxpayers by more than 50%- a substantial 3.40 million; and a large increase in voluntary registrations, especially by small enterprises that buy from large enterprises and want to avail themselves of input tax credits. Maharashtra, UP, Tamil Nadu and Gujarat are the states with the greatest number of GST registrants. The distribution of the GST base among the states is closely linked to their Gross State Domestic Product (GSDP), allaying fears of major producing states that the shift to the new system would undermine their tax collections. New data on the international exports of states suggests a strong correlation between export performance and states' standard of living. Five states - Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Telangana - in that order account for 70% of India's exports. Internal trade is about 60% of GDP, even greater than estimated in last year's Survey and comparing very favorably with other large countries. o The five largest exporting states are Maharashtra, Gujarat, Haryana, Tamil Nadu and Karnataka; o The five largest importing states are Maharashtra, Tamil Nadu, Uttar Pradesh, Karnataka and Gujarat; o The states with the largest internal trade surpluses are Gujarat, Haryana, Maharashtra, Odisha and Tamil Nadu. India's exports are unusual in that the largest firms account for a much smaller share than in other comparable countries. There is one caveat which could help explain the atypical Indian distribution: unlike in other countries, Indian data includes exports of services, where concentration ratios tend to be much lower than in manufacturing. India's formal sector non-farm payroll is substantially greater than currently believed. Formality defined in terms of social security provision yields an estimate of formal sector payroll of about 31% of the non-agricultural work force; formality defined in terms of being part of the GST net suggests a formal sector payroll of 53%. Similarly, the size of the formal sector (defined here as being either in the social security or GST net) is 13% of total firms in the private non-agriculture sector but 93% of their total turnover. Investment and Saving Slowdowns and Recoveries: Cross-Country Insights for India Since 2010, discussions of India's growth have centred on one simple question: how soon will the economy revert to 8-10 % growth? The question is at 28

9 times posed as if such a reversion is a fait accompli, a phenomenon just waiting to occur. Perhaps it is even just round the corner, given all the structural reforms the government has implemented in recent years. Underlying this expectation is the firm belief that domestic saving and investment will soon start to accelerate. But this cannot be taken for granted. Neither saving nor investment is unduly depressed. Investment (gross fixed capital formation) rate and gross domestic saving rates are actually above levels that prevailed throughout the 1990s. In fact, it was the boom of the 2000s that was exceptional, as India's climb to about 10% real GDP growth was accompanied by an unprecedented 9 percentage point pick-up in domestic saving and investment rates. The subsequent slide in investment and saving (as a % of GDP) has merely brought these rates back towards normal levels. Specifically: needs to be prioritized at present? The standard solution that is often prescribed is that both problems need to be tackled simultaneously. Rodrik (2000) provides evidence that a simultaneous push may not be necessaryarguing that successful economic performance is not explained by saving transition episodes. He presents evidence to show that countries experiencing positive saving transitions do not necessarily experience sustained growth increases. Rather, causality seems to flow in the opposite direction: countries that experience growth transitions eventually see sustained higher rates of saving. Based on these findings, Rodrik (2000) proposes that policies should focus on encouraging investment, rather than saving, to boost growth. Minsky also accorded primacy to the role of investment over saving (profits) in his analysis of macro-financial developments. The ratio of gross fixed capital formation to GDP climbed from 26.5% in 2003, reached a peak of 35.6% in 2007, and then slid back to 26.4% in The ratio of domestic saving to GDP has registered a similar evolution, rising from 29.2% in 2003 to a peak of 38.3% in 2007, before falling back to 29% in The cumulative fall over 2007 and 2016 has been milder for investment than saving, but investment has fallen to a lower level. The simultaneous slump in saving and investment gives rise to a question. Should policies that boost investment (viz. substantial infrastructure push, reforms to facilitate the ease of doing business or the 'Make in India' program) be given greater priority over those that boost saving? The issue is about relative importance and urgency. Both set of policies are crucial in the long run but which one The notion that growth is constrained by saving has a long and illustrious pedigree. But the evidence presented here points in a different direction, albeit subtly. First, it is clear that investment slowdowns are more detrimental to growth than saving slowdowns, a conclusion that was reached by Rodrik (2000). So, policy priorities over the shortrun must focus on reviving investment. Mobilizing saving, for example via attempts to unearth black money and encouraging the conversion of gold into financial saving or even courting foreign saving are, to paraphrase John Maynard Keynes, important but perhaps not as urgent as reviving investment. In any case, the share of financial saving is already rising in aggregate household saving-with a clear shift visible towards market instruments-a phenomenon that has been helped by demonetization. Second, India's investment slowdown is not yet over although it has unfolded much more gradually than in other countries, 29

10 keeping the cumulative magnitude of the loss and the impact on growth at moderate levels so far. But this leads to the third question: how will the investment slowdown reverse, so that India can regain 8-10 % growth? There is both a bleak and a hopeful pointer from similar episodes in other countries. India's investment decline seems particularly difficult to reverse, partly because it stems from balance sheet stress and partly because it has been usually large. Cross -country evidence indicates a notable absence of automatic bouncebacks from investment slowdowns. The deeper the slowdown, the slower and shallower the recovery. At the same time, it remains true that some countries in similar circumstances have had fairly strong recoveries, suggesting that policy action can decisively improve the outlook. Taken together, the results suggest a clear-andurgent-policy agenda which the government has launched; first with the step-up in public investment since ; and now, given the constraints on public investment with policies to decisively resolve the Twin Balance Sheet challenge. These steps will have to be followed up, along with complementary measures: easing the costs of doing business further, and creating a clear, transparent, and stable tax and regulatory environment. Is there a Late Converger Stall in Economic Development? Can India Escape it? Convergence is the process of lower middle income countries attempting to make the transition to middle income status, while late convergence refers to those attempting to do so after the watershed event of the global financial crisis (GFC). The Economic Survey tries to address the issue of whether some of the global trends adversely affect countries such as India that joined the convergence club later in the process or could there be "late converger stall" that could derail the growth narrative for India. The four headwinds are: the h y p e r - g l o b a l i z a t i o n r e p u d i a t i o n, thwarted/impeded structural transformation, human capital regression induced by technological progress, and climate change-induced agricultural stress. The early convergers benefited from the process of rapid globalization or hyper-globalization, reflected in the dramatic increases in the world trade GDP ratio. However, since 2011, there has been a rising backlash against the globalization process and this could mean that rapid growth in exports may no longer be available as more and more countries join the bandwagon of global trade. The potential impact of the hyperglobalization repudiation is to seek recourse to the gravity model of trade, which suggests that if there is convergence, there will also be increased trade. However, what remains a question is what further convergence would imply for world trade and whether there will be political carrying capacity not just in advanced economies but also in other countries to sustain such globalization. Thwarted structural transformation is the process of development wherein the resources shift from low productivity to marginally more productive sectors. Although, manufacturing is the most critical sector for ensuring successful structural transformation, the Survey identifies other dynamic sectors in the Indian context like, finance, telecommunications, and professional services. In early convergence, it was the alignment of human capital endowment (educated but relatively unskilled labour) with the manufacturing, which allowed for the percolation and spread of dynamism to the rest of the economy. But for late convergers like India, there appears to be a twin challenge. These countries have not been able to 30

11 provide basic education of the quality that is necessary for some structural transformation and to add to that, the required levels of human skill and capital have shifted further ahead because of rapid technological development. A final factor impeding late convergence relates to agriculture. It is imperative to ensure rapid growth in agricultural labor productivity in order to produce enough food to a growing population. In India, agricultural productivity growth has been stagnant, and agriculture is vulnerable to temperature increase and still heavily dependent on precipitation. For the late convergers, agricultural productivity is critical not just for feeding people but for ensuring human capital accumulation for moving from agriculture to the modern sectors. India has been rapidly catching up, posting an average per capita GDP growth rate of 4.5%, although growth has occurred with limited transfer of labour resources from low productivity to high productivity and dynamic sectors, and despite relatively modest agricultural growth. Rapidly improving human capital, healthy individuals, including all women, with the basic education to continually learn and adapt, and improving agricultural productivity against the headwinds of climate change and water scarcity would be key to sustaining India's dynamic growth trajectory. However, the movements of resources especially labour, from low productivity, informal sectors to other sectors that are marginally less formal and only marginally more productive, are the late converger stall that India must avoid. Transforming Science and Technology in India As India emerges as one of the world's largest economies, it needs to gradually move from being a net consumer of knowledge to becoming a net producer. Investments in Indian science, measured in terms of Gross Expenditure on R&D (GERD), have shown a consistently increasing trend over the years. GERD has tripled in the last decade in nominal terms from `24,117 crore in to `85,326 crore in and an estimated `1,04,864 crore in About three-fifths of the public investment is spread over the key government science funding agencies like Atomic Energy, Space, Earth Sciences, Science and Technology and Biotechnology. India's spending on R&D (about 0.6% of GDP) is well below that in major nations such as the US (2.8), China (2.1), Israel (4.3) and Korea (4.2). In most countries, the private sector carries out the bulk of research and development even if government must play an import funding role. However, in India, the government is not just the primary source of R&D funding but also the primary user of these funds. Even more, government expenditure on R&D is undertaken almost entirely by the central government. Private investments in research have severely lagged public investments in India. According to the WIPO, India is the 7th largest Patent Filing Office in the World. In 2015, India registered 45,658 patents in comparison to China (1,101,864), USA (589,410), Japan (318,721), Republic of Korea (213,694), and Germany (91,726). However, India produces fewer patents per capita. One major challenge in India has been the domestic patent system. While India's patent applications and grants have grown rapidly in foreign jurisdictions, the same is not true at home. Indian residents were granted over 5000 patents in foreign offices in 2015, the number for resident filings in India was little over

12 Ease of Doing Business' Next Frontier: Timely Justice 25 percent increase in the size of unresolved cases. The average age of pending cases across these tribunals is 3.8 years. The total backlog in High India jumped thirty places to break into the top 100 Courts by the end of 2017 as per the National for the first time in the World Bank's Ease of Doing Judicial Data Grid was close to 3.5 million cases. Business Report (EODB), The rankings While the volume of economic cases is smaller than reflect the government's reform measures on a wide other case categories, their average duration of range of indicators. India leaped 53 and 33 spots in pendency is arguably the worst of most cases, nearly the taxation and insolvency indices, respectively, 4.3 years for 5 major High Courts. on the back of administrative reforms in taxation and passage of the Insolvency and Bankruptcy Code (IBC), It also made strides on protecting minority investors and obtaining credit, and retained a high rank on getting electricity, after a 70 spot rise in EODB, 2017 due to the government's electricity reforms. It is difficult to estimate the costs of pendency and delays. The project costs (stocks) of stayed projectsat the time they were originally stayed-amounted close to `52,000 crores. The Ministries of Power, Roads and Railways have been the hardest hit. Since project costs were predominantly debt-financed, it is likely that project costs have increased by close to The government has taken a number of actions to 60 percent given the average duration of stay. expedite and improve the contract enforcement regime. The government scrapped over 1000 Total spending on Administration of Justice by redundant legislations; rationalized tribunals; States and the Centre constitutes approximately amended The Arbitration and Conciliation Act, 2015; passed The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015; reduced intra-government % of GDP which is low when compared to other countries. Review of Fiscal Developments litigation; and expanded the LokAdalat The three distinct patterns on the revenue front till Programme to reduce the burden on the judiciary. November 2017 the gross tax collections are reasonably on track, the non-tax revenues have Analysis of six prominent appellate tribunals that visibly under-performed and non-debt capital deal exclusively with high stakes commercial receipts, mainly proceeds from disinvestment, are matters reveal two patterns. First, there is a high doing well. On the disinvestment front, `52, level of pendency across the six tribunals, estimated crore was realized during April-November 2018, at about 1.8 lakh cases. Second, pendency has risen sharply over time. Compared to 2012, there is now a out of which `30,867 crore through minority stake Central Government's Deficit Indicators during April-November (` in lakh crore) Per cent of BE Revenue Deficit Fiscal Deficit Source: CGA, Government of India 32

13 sale in CPSEs, `4, crore through disinvestment of strategic holdings in SUUTI and `17,357.5 crore through listing of insurance companies. The share of States in taxes grew by 25.2% during April-November 2017, much higher than the growth in non-tax revenue to the centre. With the budgeted growth for indirect taxes for the full year of is 7.6%; the growth so far is 18.3%. The current year marked the change in the budget cycle, with its advancement giving considerable leeway to spending agencies to plan in advance and start implementation early in the financial year. Therefore, the expenditure trends in the current year at any midpoint are not comparable with those of the previous years. In addition to this, the fiscal deficit overshooting the budgetary target during April-November 2017 has also been due to the front loading of expenditure undertaken a part of prudent expenditure management. The 16.2% increase in interest payment during the current fiscal (April-November 2017) is possibly due to the outgo on account of servicing the market stabilisation bonds issued to reduce excess liquidity post demonetisation, while the petroleum subsidy has increased (13.3%) on account of the firming of global crude oil prices. The position of 21 State Governments that account for about 86% of the total GSDP of all states and for which comparable data are available shows that their revenue receipts have kept pace with the previous year in terms of growth and in relation to the corresponding budget estimates for the full year. Further, data on 23 States shows that both revenue and fiscal deficits as percentage of the corresponding budget estimates is lower in the current year, compared to the previous year. The net market borrowings of State Governments during April-December 2017 were `2493 billion compared to ` billion during the previous year. The following section broadly outlines the salient measures under indirect taxes which were undertaken during , including the rolling out of GST and the various rationalisation measures including substantive revision in tax rate which were later implemented. 1. Customs duty changes to incentivize 'Make in India' 2. Rollout of GST In a historic tax reform, the goods and services tax was rolled out on 1st July, 2017, subsuming almost all major indirect taxes like Central Excise Duty, Service Tax, VAT, CST, entertainment tax, Octroi, luxury tax, a large number of cesses/surcharges and various other state and central levies on goods and services. a. To address concerns under GST, the GST Council took specific measures to address concern expeditiously like significant rationalization of taxes, streamlining tax administration etc. b. The facilitation measures taken in GST include: i. Ease of doing business for small traders. Increase in taxable turnover threshold for GST entry increased to `20 lakh, for MSMEs threshold for composition increased to `1 crore, registration exemption (turnover less than `20 lacs). SMEs with turnover upto `1.5 crore to file quarterly return, suspension of reverse charge mechanism upto , minimum slab for 33

14 requirement for tax paying on advances set at `1.5 crore. ii. The rationalization of GST rate structure for goods was undertaken in November 10, 2017, with the pruning of GST tax slabs on many items. iii. A rationalization of GST rate structure for services was also implemented. consequence of measures such as issuance of Treasury Bills under the Market Stabilisation Scheme (MSS) and OMO sales, net liquidity declined from an excess of `3.10 lakh crores as on March 31, 2017 to `47,800 crores as on January 11, For the first half of , the Weighted Average Call Rate (WACR) was closer to the Reverse Repo Rate. However, in recent months it has drifted to the middle of the policy corridor. th iv. The 25 meeting of the GST Council on January 18, 2018 also recommended relief measures in tax rates for goods and services and taxability of certain goods and services. Monetary Management and Financial Intermediation During (till January), monetary policy - conducted under the revised statutory framework, remained steady with only one policy repo rate cut by 25 basis points to 6.0% in August. As the y-o-y effect of demonetisation wore off, the growth rate of both Currency in Circulation and Reserve Money (M0) turned sharply positive. From the sources side, expansion in M0 during was driven by the decline in LAF reverse repo (net) and increase in RBI's net foreign assets. However, net RBI credit to government declined owing to net open market sales as well as an increase in government deposits. The y-o-y growth of broad money (M3) began picking up distinctly from end- September From the sources side, the expansion, albeit gradual, in credit from Scheduled Commercial Banks (SCBs) to the commercial sector, primarily contributed to M3 growth during so far. Liquidity conditions remain in surplus mode even as its magnitude moderated gradually with progressive remonetisation. As a During (up to January 11, 2018), the direction of movement of the 10-year generic G-sec yield altered significantly. G-secs traded with a moderate hardening bias, after the release of the minutes of the Monetary Policy Committee meeting on April 20, 2017, which enunciated upside risks to inflation. However, the G-sec yield softened sharply after May 12, 2017 mainly on account of auction of a new benchmark security coupled with lower than expected inflation for April Between May 2017 and July 2017, G- secs traded with a softening bias on account of better than expected economic data viz., lower inflation, positive monsoon forecast and dovish stance of monetary policy in June The softening of yield was further supported by robust FPI inflows. Later, from mid-july to November 17, 2017, the yield movement was mainly guided by global factors and reflected a hardening bias in the US. Furthermore, domestic factors such as, higher CPI inflation, additional supply of securities through OMO sales, rise in oil prices leading to concerns of higher inflation, and higher government borrowings, exerted upward pressure on yields. India's sovereign rating upgrade by Moody's, however, briefly led to a decline of the 10- year G-sec yield to 7.10% on November 20, 2017, but it went back up later. The G-sec yield as on January 11, 2018 stands at 7.26%. 34

15 The performance of the banking sector, Public Sector Banks (PSBs) in particular, continued to be subdued in The Gross Non-Performing Advances (GNPA) ratio of Scheduled Commercial Banks (SCBs) increased from 9.6% to 10.2% between March 2017 and September 2017, whereas, their Restructured Standard Advances (RSA) ratio declined from 2.5% to 2.0%. GNPA ratio of PSBs increased from 12.5% to 13.5% between March and September Capital to Risk-weighted Asset Ratio (CRAR) of SCBs increased from 13.6% to 13.9% between March 2017 and September 2017 largely due to an improvement for private sector banks (PVBs). SCBs' Return on Assets (RoA) remained unchanged at 0.4% between March 2017 and September 2017, while their Return on Equity (RoE) declined from 4.3% to 4.2%. Many PSBs have continued to record negative profitability ratios since March Bank credit lending to Services and Personal Loans (PL) segments continue to be the major contributor to overall Non Food Credit growth. Credit growth finally picked up in industrial sector after remaining persistently negative from October 2016 to October However, growth of credit to medium scale industries has remained negative since June An ecosystem for the new insolvency and bankruptcy process took shape in The IBC mechanism is being used actively to resolve the NPA problem of the banking sector. To further financial inclusion through direct interaction between small lenders and small borrowers and to address the associated consumer protection issues, RBI introduced a new category of Non-Banking Financial Company (NBFC) called NBFC-P2P (NBFC- Peer to Peer Lending Platform) with light touch regulation and emphasis on adequate disclosures. The NBFC sector, as a whole, accounted for 17% of bank assets and 0.26% of bank deposits as on September 30, The consolidated balance sheet size of the NBFC sector grew to `20.70 lakh crores as at end-september NBFCs depended largely on public funds for funding their balance sheets. The year (April-November) witnessed a steady increase in resource mobilisation in the primary market segment as 134 companies accessed primary market and raised `70,316 crores. The stock markets also hit record highs this financial year. The Indian mutual fund industry registered a robust growth. The AUM of Mutual Funds industry witnessed a constant growth in terms of new investment and increase in value of the existing investments as result of overall good market conditions. Resource mobilisation through issuance of corporate bonds (public issuance and private placement) rose rapidly during with an amount of `4.23 lakh crores raised. Private placements continued to dominate the corporate bond market. Prices and Inflation The economy witnessed a gradual transition from a period of high and variable inflation to more stable prices in the last four years. Headline inflation measured by the Consumer Price Index (CPI) has remained under control for the fourth successive year. Financial year (FY) began with an annual inflation rate of 3.0%. In the first two quarters of FY , there was a moderate increase in prices, resulting in a low level of inflation of 2.2% in quarter one and 3.0% in quarter two. Headline inflation rate reached its series low of 1.5% in the month of June Food inflation measured by the Consumer Food Price Index (CFPI) declined to a low of 1.2% during the FY (April-December). The average CPI-combined (CPI-C) inflation 35

16 declined to 4.5% in from 4.9% in and 5.9% in Average inflation for FY (Apr-Dec) stood at 3.3%, below the threshold of 4%. The decline in the inflation in the first half of the current fiscal year was indicative of a benign food inflation which ranged between (-) 2.1 to 1.5%. The moderate inflation rate of less than 4% was maintained for straight 12 months up to the end of October The CPI-C inflation for the month of December, 2017 stood at 5.2% as compared to 4.9% in November, 2017 and 3.4% in December, Good agricultural production coupled with regular price monitoring by the Government helped to contain inflation, especially food inflation. CFPI declined to 4.2% in from 4.9% in and 6.4% in Average food inflation for the financial year (Apr- Dec) declined to a low of 1.2% and stood at 5.0% in December, The rise in food inflation in recent months is mainly due to factors driving prices of vegetables and fruits. Though decline in food inflation is broadbased, major drivers are meat & fish, oil & fats, spices and pulses & products. Pulses & products sub-group with a weight of 2.4 in CPI-C has recorded inflation of (-) 22.1% in FY (Apr- Dec) as compared to 16.2% during the same period last year. Vegetables accounting for 6.04 weight in overall CPI-C recorded inflation of 2.4% during (Apr- Dec). While significant moderation has been witnessed in headline and food inflation, the CPI based core inflation has remained above 4% during the last four financial years. However, it has declined from 4.8% in FY (Apr-Dec) to 4.5% in FY (Apr- Dec) and was 5.2% in December, Refined core is moving very close to core since the beginning of FY , it declined to 4.4% in FY (Apr- Dec) from 5.0% in FY (Apr- Dec). Movements of refined core (excluding housing)track the refined core. However, during the current financial year, the wedge between the two has grown following the implementation of the revised house rent allowance for central government employees based on the recommendation of the 7th Central Pay Commission. While food was the main driver of CPI (Rural) inflation in (Apr- Dec), miscellaneous category contributed the most to inflation in rural areas during April-December of the current financial year. The contribution of fuel and light, clothing and footwear and pan, tobacco and intoxicants categories in CPI (Rural) inflation has risen during April to December, 2017 over the same period last year. In urban areas, while food was the main driver of inflation during April-December last year, housing sector has contributed the most to CPI (Urban) inflation during April-December in the current financial year, followed by miscellaneous category. Central Government monitors the price situation on a regular basis as controlling inflation is a priority area. It has taken a number of measures to control inflation especially food inflation which, inter alia, include the following: Advisories are being issued, as and when required, to State Governments to take strict action against hoarding & black marketing. Regular review meeting on price and availability situation is being held at the highest level. Higher MSP has been announced so as to incentivize production and thereby enhance availability of food items which may help moderate prices. 36