Focus of the Month: Union Budget 2017-18

1
FOREWORD
JAN-FEB 2017
Budget 2017-18 has unleashed multiple instruments to revive demand and encourage investments,
while also prioritizing the needs of vulnerable sections of society.
The Budget needs to be appreciated for maintaining a check on the fiscal deficit despite raising public
expenditure to boost growth. The fiscal deficit of 3.5 per cent of GDP for Budget 2016-17 will be lowered
to 3.2 per cent for the coming year. At the same time, it is commendable that the Budget reduces the
revenue deficit to 1.9 per cent of GDP, while increasing capital expenditure by over 25 per cent. Adher-
ence to fiscal prudence imperatives will lay the foundation for long term growth.
With the abolition of FIPB and move for time-bound listing of CPSEs, it is apparent that the economic
reform agenda continues at a rapid pace. The broad strategy of the Budget was to increase transpar-
ency, to put in place the mechanisms and institutions for the future of the country, including through
digitalization and formalization of the economy.
The key measure of slashing the corporate income tax for companies with a turnover of less than Rs 50
crores at one go from 30 per cent to 25 per cent covering 96 per cent of all companies is welcome. This
is in line with CII’s recommendation to bring down the corporate income tax rate to build the competi-
tiveness of the Indian economy as per comparator countries. However, a broader tax cut covering all
companies would have made India an attractive investment destination.
The significant increase in infrastructure investments by 16 per cent to Rs 3.96 lakh crores would create
demand for upstream and downstream sectors. It would also generate new employment opportunities,
especially through high spending in transport infrastructure pegged at Rs 2.4 lakh crores. For the first
time, the Railway Budget was merged with the General Budget, opening up the route for a coordinated
multi-modal transport strategy for the country.
Railway station re-development, operation and maintenance of airports in Tier-2 cities, and increase in
roads expenditure as announced in the Budget will also fast-track the infrastructure mission. The step
to address dispute resolution in public-private partnerships through amendment in the Arbitration and
Conciliation Act is right for both the infrastructure and financial sectors, which have been troubled by
stranded projects and consequent non-performing assets.
Overall, the Budget could be termed as realistic and pragmatic which was aimed at striking the right
chord with all segments of the society and successfully delivering on the nation’s expectations.
Chandrajit Banerjee
Director General, CII

EXECUTIVE SUMMARY
ECONOMY MATTERS 4
Focus of the Month: Union
Budget 2017-18
The Finance Minister has presented a realistic and prag-
matic Budget aimed at striking the right chord with all
segments of the society and successfully delivering on
the nation’s expectations. The Budget has attempted
the difficult task of deftly maintaining the fiscal deficit
within prudent levels, boosting consumption spend-
ing and investment demand while enhancing welfare
expenditure. The Finance Minister needs to be con-
gratulated for maintaining a check on the fiscal deficit
despite the overwhelming need to raise public expendi-
ture to boost growth. The fiscal deficit of 3.5 per cent of
GDP for Budget 2016-17 will be lowered to 3.2 per cent
for the coming year. At the same time, it is commend-
able that the Budget reduced the revenue deficit to 1.9
per cent of GDP, while increasing capital expenditure by
over 25 per cent. Adherence to the fiscal prudence im-
peratives will lay the foundation for long-term growth
and CII appreciates this commitment.
Domestic Trends
As per Central Statistical Organisation (CSO) advance
estimates, the GDP for 2016-17 is estimated at 7.1 per
cent as compared with a revised 7.9 per cent growth
in 2015-16. Gross Value Added (GVA) at basic prices
stood at 7.0 per cent as per the advance estimates for
2016-17 as compared to a revised 7.8 per cent in 2015-
16. However, the impact of demonetisation was not
incorporated in the estimate on account of paucity of
indicators. Nevertheless, just based on the weakness in
data in the first half, the second half GDP is also likely
to be lower. Reflecting the weakness in demand condi-
tions, industrial output contracted by 0.4 per cent in
December 2016. Additionally, the wholesale price index
(WPI) based inflation rate for the month of January 2017
came at 11-month high of 5.2 per cent compared to 3.4
per cent in the previous month. This significant increase
in inflation has come from a substantial increase in the
prices of fuel & power and a marginal rise in the prices
of manufactured goods (over the previous month). CPI
inflation meanwhile continued to tread downwards.
Policy Focus
Tabled in the Parliament by Honorable Union Finance
Minister, Shri Arun Jaitley, a day before the Union Budg-
et, the Economic Survey 2016-17 assessed Indian econ-
omy as having “sustained a macro-economic environ-
ment of relatively lower inflation, fiscal discipline and
moderate current account deficit coupled with broadly
stable rupee-dollar exchange rate”. According to the
Survey, GDP growth rate is poised to touch 6.75 -7.5
percent in the coming year. The Survey highlighted that
the impact of demonetisation on the GDP growth rate
will be temporary and that once remonetisation is ef-
fected, the growth rate would revert to over 7 per cent.
The Survey has also covered important issues like the
concept of Universal Basic Income (UBI) as an alterna-
tive to the various social welfare schemes in an effort to
reduce poverty, setting up of a centralised Public Sec-
tor Asset Rehabilitation Agency (PARA) to take care of
the mounting NPAs of banking system amongst other
measures. The Survey in a nutshell could be termed as
forward-looking, comprehensive which does objective
analysis of the economic problems at hand. The Policy
Focus section also covers the highlights of the Union
Budget 2017-18.
Global Trends
After a lacklustre outturn in 2016, economic activity is
projected to pick up pace in 2017 and 2018 – according
to the IMF – in its January 2017 update of the World
Economic Outlook report. The World Bank agrees – in
its Global Economic Prospects report released in Janu-
ary 2017 as well – that obstacles to economic activity
have receded among the commodity exporters in the
Emerging Market and Developing Economy (EMDE)
commodity exporters, while domestic demand remains
solid. The stable average growth rate for the world,
however, masks divergent developments in different
country groups. The outlook for advanced economies
has improved for 2017–18, since October 2016. There
has been a stronger-than-expected pickup in growth in
the advanced economies, due mostly to a reduced drag
from inventories and some recovery in manufacturing
output, as well as a projected fiscal stimulus in the US.
Growth prospects have marginally worsened for the
EMDEs, as financial conditions have generally tightened
and commodity prices are rising, according to the IMF.
Global growth for 2016 is now estimated at 3.1 per cent,
in line with the October 2016 forecast and projected to
be 3.4 per cent in 2017 and 3.6 per cent in 2018, respec-
tively, again unchanged from the October forecasts.
Economic activity in both advanced economies and EM-
DEs is forecast to accelerate in 2017–18.

5
FOCUS OF THE MONTH
Union Budget 2017-18
JAN-FEB 2017
peratives will lay the foundation for long-term growth
and CII appreciates this commitment.
Additionally, the most striking feature of the Budget
was that the Finance Minister recognized the impera-
tive of raising capital expenditure. This is the first Budg-
et to be presented after the end of the Five-Year plan
concept and it is hoped that this would be a precursor
for laying greater importance to capital spending in the
future as well.
The Budget has devised the right strategies to balance
growth with inclusion. The Finance Minister addressed
various challenges in the economy such as better man-
agement of the agro-based economy, infrastructure
building, financial sector reforms, access to education
and skills, spread of the digital economy, among others.
The Budget also includes far-reaching, comprehensive
measures for poor, farmers, women, SMEs and vulner-
able groups.
In this month’s ‘Focus of the month’, we provide a de-
tailed analysis of the Union Budget: 2017-18 from the
perspective of the experts.
T
he Finance Minister has presented a realistic and
pragmatic Budget aimed at striking the right
chord with all segments of the society and suc-
cessfully delivering on the nation’s expectations. The
Budget has attempted the difficult task of deftly main-
taining the fiscal deficit within prudent levels, boosting
consumption spending and investment demand while
enhancing welfare expenditure.
The Finance Minister needs to be congratulated for
maintaining a check on the fiscal deficit despite the
overwhelming need to raise public expenditure to
boost growth. The fiscal deficit of 3.5 per cent of GDP
for Budget 2016-17 will be lowered to 3.2 per cent for
the coming year. At the same time, it is commendable
that the Budget reduced the revenue deficit to 1.9 per
cent of GDP, while increasing capital expenditure by
over 25 per cent. Adherence to the fiscal prudence im-

ECONOMY MATTERS 6
FOCUS OF THE MONTH
Analysis of Fiscal Trends
F
iscal prudence received preference over growth
considerations as the government adhered to the
fiscal consolidation roadmap. It is heartening to
note that the Finance Minister has adhered to the com-
mitment to stay the course of fiscal consolidation by
containing fiscal deficit at 3.5 per cent of GDP in 2016-
17 as per revised estimate. This has been made possible
by containing the revenue deficit at 2.1 per cent of GDP
and the primary deficit at 0.3 per cent, implying that the
quality of consolidation has been good.
Government adheres to fiscal roadmap, defi-
cits continue to fall
Further, the Finance Minister maintained the fiscal defi-
Tax revenue (as % of GDP) expected to pick
up while Non-tax revenue (as % of GDP) ex-
pected to decline
Budget 2017-18 has projected a realistic nominal GDP
growth target of 11.75 per cent. The gross tax revenue-
to-GDP ratio for FY18 has been assumed at 11.2 per cent
-- same as that achieved in FY17, while non-tax revenue
to GDP ratio is budgeted to moderate to 1.7 in FY18 as
compared to 2.2 per cent in FY17. Gross tax revenue
cit target at 3.2 per cent of GDP for 2017-18, thereby
expressing his commitment to adhere to the precepts
of fiscal discipline. Concurrently, the Government also
stated that it would consider the suggestions made by
the FRBM review committee to amend the FRBM Act
which has provided for ‘escape clauses’ for deviations
up to a reasonable level of 0.5 per cent of GDP. Such a
policy stance is realistic and in sync with times, thereby
raising our credibility in the global marketplace. What
is more, the Budget has also succeeded in improving
the quality and efficiency of expenditure by reducing
revenue deficit to 1.9 per cent for 2017-18 against 2 per
cent in the FRBM Act. The borrowings have also been
restricted accordingly.
has been conservatively budgeted and direct taxes are
projected to grow at a faster pace as compared to in-
direct taxes. Within direct taxes, growth in income tax
is expected to be higher than that of corporation tax.
Meanwhile, indirect tax collection has been budgeted
conservatively, considering the fact that mid-year intro-
duction of Goods and Services Tax (GST) might result
in some slowdown in collections. Since direct taxes are
more equitable than indirect taxes, a rise in growth of
direct tax is desirable.

7
FOCUS OF THE MONTH
JAN-FEB 2017
Government increases the disinvestment
target for FY18
As far as the non-tax revenue is concerned, the gov-
ernment has once again set an ambitious target from
disinvestment proceeds in FY18. While the government
expects to achieve 80 per cent of its disinvestment tar-
get of Rs 565 billion in FY17, actual proceeds from disin-
vestment so far this fiscal are only about 50 per cent of
the budgeted. Hence, a disinvestment target of Rs 725
billion (a 60 per cent rise as compared to FY17) for FY18
still appears huge. Going forward, the recent demoneti-
sation exercise and the introduction of GST should help
in improving the tax base and over the long-term help
in reducing dependence on non-tax sources of revenue.

ECONOMY MATTERS 8
FOCUS OF THE MONTH
Expenditure-GDP ratio remains stable, likely
to decline in upcoming fiscal
On the expenditure side, Union Budget 2017-18 has also
outlined a number of initiatives to increase the alloca-
tive efficiency of government expenditure and to im-
prove operational efficiency of expenditures through
a focus on utilization, targets and outcomes. The most
striking feature of the Budget is that the Finance Min-
ister has recognized the imperative of raising capital
expenditure. At a time when gross fixed capital forma-
tion as a proportion of GDP has gone down to 26.6 per
cent, lower than in any year since 2004-05, a rise in pub-
lic expenditure by 25.4 per cent is very much needed to
kick-start investment in the private sector and restart
the growth engine.
The government continued with its focus on infrastruc-
ture spending, which is budgeted at Rs 3.96 trillion in
fiscal 2018, an increase of 10.5 per cent over the previ-
ous fiscal. Within infrastructure, the sectors that re-
ceived the highest allocations were rail, road transport,
and rural development. Over the previous fiscal, budg-
etary allocations for power increased 51 per cent, road
transport 31 per cent, railways 19 per cent and shipping
16 per cent.
For its capital spending, the government continues
to seek support from public sector enterprises (PSEs)
through internal and extra budgetary resources (IEBR).
However, compared with fiscal 2017, the dependence
on IEBR in fiscal 2018 has been reduced marginally, in
favour of budgeted capital expenditure. The resources
planned to be raised by PSEs have also declined 5 per
cent in fiscal 2018 over fiscal 2017.

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FOCUS OF THE MONTH
JAN-FEB 2017
Food subsidy expected to increase while pe-
troleum subsidy to decline in FY18
At the same time, government’s subsidy burden rose
by 3.3 per cent to Rs 240.3 billion in FY18 from Rs 232.7
billion in FY17. Out of the various sub-heads of subsidy,
food subsidy bill is expected to be 7.5 per cent higher
in FY18 as compared to FY17 because the National Food
Security Act, under which the government provides
highly subsidised foodgrains to over 80 crore people,
has been rolled out across the country from November
2016. Fertiliser subsidy has been kept unchanged at Rs
700 billion for FY18, even as the domestic industry was
demanding higher allocation to clear subsidy arrears.
Petroleum subsidy has been reduced to Rs 250 billion
for FY18 from the estimated Rs 275 billion in this fiscal.
Of Rs 250 billion for next fiscal, Rs 160 billion has been
earmarked for LPG subsidy and the rest is for kerosene.

ECONOMY MATTERS 10
FOCUS OF THE MONTH
Budget 2017: A Step Forward
B
udget 2017-18, coming at a time of global un-
certainty, is a pragmatic, growth-oriented and
smart policy statement, taking forward the re-
form agenda in a convincing and progressive manner.
Its stand-out features are many and innovative.
Adhering to the path of fiscal prudence is a key message
reiterating the Government’s commitment to sound
macroeconomic management even when the situation
calls for enhanced public spending. The high emphasis
on infrastructure through big increase in government
expenditure, particularly transport facilities and afford-
able housing, is very welcome as it would kick-start a
new cycle of investment in downstream sectors.
Reduction of corporate tax for companies with less
than Rs 50 crore turnover is another pertinent measure
that can greatly boost their competitiveness and en-
courage more job creation.
Consumer demand can be expected to receive a fillip
with the higher allocation for rural and agricultural sec-
tors, as also halving of tax rates at the lower end. The
Budget has taken a step towards public asset monetisa-
tion with airport land in tier 2 cities, where the proceeds
can be used for upgradation of airports. This is an inno-
vative move, and will hopefully gain pace in other sec-
tors in time to come.
Institutional reform is evident in the abolition of FIPB
and listing of public sector enterprises. The FIPB was
rendered redundant after continued liberalisation of
FDI regime, and the Finance Minister has promised
further opening up to foreign investments. The listing
of PSEs is evidence of government’s effort to add ef-
ficiency to their operations, besides promising to raise
resources.
Demonetisation goes a step further with the stress on
digitalisation and formalisation of the economy, which
will have benefits for tax revenue and a better invest-
ment climate over the longer term. The Budget has also
come out with an innovative electoral bond to clean up
political funding, adding to the overall campaign against
black money.
Going forward, a few areas require closer attention
from the perspective of industry. While we greatly ap-
preciated the relief in corporate tax rates for smaller
companies, the larger ones too need remedies to be-
come globally competitive. These companies generate
significant employment and we look forward to lower
tax rates as exemptions are phased out.
Further, the National Innovation Fund was announced
earlier for boosting R&D. We would like to see a shift
in R&D spending towards higher education institutes to
bring it on par with the global average expenditure by
universities, currently about 0.4 per cent of GDP as com-
pared to India’s average of 0.04 per cent. This would
also help to incentivise private sector outlay on R&D to
make India a source of global innovation at a time when
Industry 4.0 is rapidly converging on us.

11
FOCUS OF THE MONTH
JAN-FEB 2017
There is one item in the Budget of introduction of 10 per
cent surcharge on the incomes between Rs 50 lakh and
Rs 1 crore which we feel is not in the spirit of rewarding
the honest taxpayer. The data on taxpayers mentioned
in the Budget speech was eye-opening and it is impor-
tant to expand the tax base.
Employment creation has been a central idea of the
Budget, and the inclusion of leather and footwear for
promotional attention at par with the apparel sector is
laudable.
CII would like to suggest that the provisions regarding
fixed term and flexible employment and incentives for
formal employment be replicated across other employ-
ment-elastic and employment-intensive sectors such as
automotive, food processing, and so on.
We also hope that the four labour codes would be
quickly actioned.
The Budget crucially reassures investors that the strate-
gic direction of the economy will remain on course. The
need of the hour is to revitalise the critical drivers of
growth of private consumption and investment, boost
employment generation, create new infrastructure and
stabilise the economy at a time of global turmoil.
The Budget delivers on all counts.
This article first appeared in The Hindu dated 3rd
February 2017. The online version can be accessed from the following
link: http://www.thehindu.com/business/budget/Reformist-Budget unveiled/article17182343.ece

ECONOMY MATTERS 12
FOCUS OF THE MONTH
Budget 2017: For India Inc, A Soothing Balm
I
n Budget 2017-18, finance minister Arun Jaitley has un-
dertaken a comprehensive exercise to accelerate the
Indian economy’s growth path. Major growth drivers
have been addressed in a strategy to stimulate domes-
tic consumption, raise public expenditure on infrastruc-
ture and encourage small and medium enterprises to
assume the reins of growth. For Indian industry, which
has been troubled by global economic developments,
the Budget comes as a soothing balm. The key point to
note about the Budget is that it reinforces the commit-
ment of the government to economic reforms.
Although the finance minister had announced lowering
of corporate income tax rates from 30 per cent to 25 per
cent two years ago, the Budget this year implemented
this historic reform measure by providing tax relief to
96 per cent of Indian companies. This one measure will
go a long way to revive sentiments of the large section
of smaller companies that are major creators of employ-
ment and wealth.
The action on the personal income-tax front was equal-
ly encouraging, lowering tax rates by as much as half
from 10 per cent to five per cent for taxpayers earning
between Rs 2.5 lakhs to Rs 5 lakhs. The outcome of this
measure can be expected to incentivise consumption,
expanding the market for consumer products and is to
be strongly welcomed. The government has also prom-
ised to build and modernise infrastructure through
a capex slated at 25.4 per cent higher than last year,
which would build further growth drivers. With the Rail-
way Budget now merged with the General Budget, the
transport sector was taken up in a multi-modal manner.
Affordable housing received high attention in the Budg-
et, recognising its vital role as an engine of growth. The
real estate sector in India contributes about five to six
per cent of the GDP, and it is important to increase this
share to provide housing for all and generate demand
for related sectors. Earlier, the Prime Minister, in his
address to the nation on December 31, had announced
interest rate subventions for housing loans, and the
Budget takes this further by allowing the sector the in-
frastructure status.
In addition to the infrastructure push, farmers and
the rural economy were prioritised in the Budget, ad-
dressing the sectors where about 70 per cent of India’s
population resides. Credit and insurance schemes will
be expanded in a bid to reinforce economic security
of farmers. A special fund is being created under NAB-
ARD for micro-irrigation programmes and the move to
deploy MGNREGA for “drought-proofing” panchayats
can add to this effort. The Budget also accorded high
priority to skill development, which will empower the
burgeoning youth workforce to contribute to economic
growth. “Sankalp”, for livelihood promotion, is a new
programme aimed at providing relevant training to 35
million youth.
Extending PM Kaushal Kendras to 600 districts will im-
ply wider outreach to youth across the country, while

13
FOCUS OF THE MONTH
JAN-FEB 2017
establishing 100 India international skill centres will
make them globally employable. For businesses, there
has been an emphasis on tax administration simplifica-
tion and rationalisation. The Minimum Alternate Tax
(MAT) is now permitted to be carried forward for 15
years, and startups may avail deduction for three out
of seven years, instead of five years as previously. Ease
of doing business received attention through various
measures such as transfer pricing changes, audit limit
enhancement and extension of time limit for tax return
revisions, a welcome series of measures for business. In
general, through strategies regarding political funding,
digitalisation of the economy and encouraging formali-
sation, the finance minister delivers on his promise of
“transform, energise, and clean” in Budget 2017-18.
This article first appeared in Deccan Chronicle dated 2nd
February 2017. The online version can be accessed from the
following link: http://www.deccanchronicle.com/opinion/op-ed/020217/budget-2017-for-india-inc-a-soothing-balm.
html

ECONOMY MATTERS 14
FOCUS OF THE MONTH
Budget 2017 –Prudent, Focused and Steadfast
B
udget 2017 displays a steadfast resolve to stay
on course despite turbulent external factors.
The emerging trends of increased protectionism
and tax competitiveness from developed economies,
hardening crude prices and a dynamic global interest
rate environment are just some of the external factors
that the FM had to contend with, resisting any tempta-
tions to mend course. It is heartening that incremental
steps in successive budgets have followed a consistent
theme as originally envisaged – widening the tax base,
addressing the menace of the parallel economy, bring-
ing transparency to political funding, boosting startups,
enhancing ease of doing business, rationalizing the tax
administration, strengthening anti abuse provisions,
spending on the growth areas of infrastructure and
creating jobs and achieving inclusive growth, all while
staying within the broad parameters of fiscal prudence.
It is noticeable that the Budget estimates on the tax
revenue front project a very conservative scenario. Af-
ter nearly 17 per cent growth in gross tax revenues over
the last two years the FY18 Budget estimates only 12.2
per cent. This leaves room for improvement in the af-
termath of demonetization, which can yield dividends
directly from RBI’s balance sheet readjustments and
indirectly from bank deposits, with the potential of for-
malisation of a part of the parallel economy.
Further, the overall 6.6 per cent increase in overall ex-
penditure is being financed by a nominal growth of 11
per cent and tax buoyancy of 1.1 per cent compared to
1.9 per cent and 1.4 per cent respectively in FY16 and
FY17.
The limited give away on the tax front i.e. marginal re-
lief to low income group between Rs 2.5 lakhs to Rs 5
lakhs and 5 per cent tax reduction to MSMEs is also well
targeted reaching out to the segment that has been the
most impacted due to demonetisation.
The government has showcased disciplined execution
of its expenditure plan in FY17 contributing considerably
to GDP growth. It is expected that such discipline will
continue. Despite the fact that total spending and rev-
enue expenditure as percentages of GDP are estimated
to be at a record low, the mix of revenue and capex has
been tweaked as also aligned with the government’s
resolve to check inflation. RBI may then be encouraged
to reduce rates – yielding cheaper credit access to the
private sector, an imperative for sustainable growth.
The Budget remains bold in re-emphasising its resolve
to address the menace of black money, with landmark
proposals for transparency in electoral funding by re-
stricting cash funding and institutionalising anonymous
funding through introduction of bonds.
It is heartening to note that many proposals that were
part of the Justice Easwar Committee on Income Tax
Simplification, have been addressed – reassuring tax-
payers of a consultative approach which has become a
hallmark of tax legislative process recently.
The anti-abuse proposal on the tax front remain bold
and direct. The proposal to curb the Long Term Capital
Gains (LTCG) tax exemption post introduction of the
Securities Transaction Tax (STT) in 2004 only to cases
where both the legs of acquisition and disposal have

15
FOCUS OF THE MONTH
JAN-FEB 2017
suffered such STT is well intentioned. Supplemental
notification, exempting genuine transactions from the
clutches of any unintended consequences of this pro-
posal, that is, acquisition of shares through initial public
offering, follow-on public offering, bonus or right issue,
etc will be eagerly awaited to ensure it is broad-based
enough to carve out transactions of succession, contri-
butions to trusts and many more.
Further, proposals such as the retrospective clarifica-
tions provided on applicability of the indirect trans-
fer taxation provisions to Foreign Portfolio Investors
(FPIs), further foreign direct investment (FDI) liberalisa-
tion and abolishing of the Foreign Investment Promo-
tion Board are significant messages to attract foreign
capital.
Much-needed clarity on Minimum Alternate Tax (MAT)
applicability post Ind AS adoption has been provided,
building largely on the recommendation of the Commit-
tee constituted in this regard. The proposals are prem-
ised on the basis that existing adjustments provided in
MAT computation shall be made to net profits before
other comprehensive income. The resultant will be fur-
ther adjusted as now proposed-for items in other com-
prehensive income as also the transition adjustments.
What may need some clarification is with regard to fair-
value adjustments that are mandated through the profit
and loss account in Ind AS. Such adjustments, both loss-
es and profits should be treated similarly if the same are
considered eligible adjustments to distributable profits.
This may have been an inadvertent miss considering the
matter rests between the Central Board of Direct Taxes
and the Ministry of Corporate Affairs.
Continued commitment to spend on infrastructure
development was evident in the budget with Rs 3.96
lakh crore spending in 2017-18. The thrust on affordable
housing, stepped up investments in road, highways and
railway infrastructure are expected to spur economic
activity and job creation. Further, measures providing
income security to farmers, improving skill develop-
ment and job creation at the rural level, in addition to
affordable housing are crucial for inclusive growth. Leg-
islative reforms are also being contemplated for con-
solidation of labour laws to foster a conducive labour
environment.
The FM has performed commendably to table proposals
which address the needs of India’s economy in today’s
global and domestic environment. The Budget sends
out certain key messages on continuity in the policy of
fiscal prudence and resisting counter-cyclical measures
to artificially boost the economy, consistency of pur-
pose, drawing unshakably from the economic agenda
set out in the manifesto, boldness of reforms resist-
ing all socio-political hostility, pushing India towards a
more digital and cashless economy and certainty in tax
through a collaborative approach. The FM’s implicit
message cannot be missed by any serious foreign inves-
tor seeking to place bets on the most promising of de-
veloping economies.
This article first appeared in Business Standard dated 3rd
February 2017. The online version can be accessed from
the following link: http://www.business-standard.com/budget/article/rajiv-memani-a-focused-and-steadfast-budg-
et-117020201283_1.html

17
DOMESTIC TRENDS
GDP Growth Expected to Moderate in FY17
JAN-FEB 2017
A
s per Central Statistical Organisation (CSO) ad-
vance estimates, the GDP for 2016-17 is estimat-
ed at 7.1 per cent as compared with a revised
7.9 per cent growth in 2015-16. Gross Value Added (GVA)
at basic prices stood at 7.0 per cent as per the advance
estimates for 2016-17 as compared to a revised 7.8 per
cent in 2015-16. However, the impact of demonetisa-
tion was not incorporated in the estimate on account
of paucity of indicators. Nevertheless, just based on the
weakness in data in the first half, the second half GDP is
also likely to be lower.
As per the advance estimates, from the supply-side,
agriculture growth is estimated to accelerate to 4.1
per cent in 2016-17 as compared to revised 2.6 per cent
growth in 2015-16. Farm growth picked up in line with
good kharif harvest thanks to bountiful monsoon re-
ceived this year. The rabi sowing so far has also been
encouraging. The next estimate will have the benefit
of the second advance estimate of crop production. In
contrast, industrial growth is estimated to moderate
to 5.2 per cent in 2016-17 from 7.8 per cent posted in
the previous fiscal. Within industry, all sectors are esti-
mated to witness lower growth in 2016-17 as compared
to the previous year. The sharpest deceleration is seen
in the mining & quarrying sector, which is expected to
post contraction in 2016-17 as per CSO’s advance esti-
mates. Though, services sector growth is estimated to
decelerate to 8.8 per cent in 2016-17 as compared to 9.8
per cent in 2015-16, it has continued to remain relatively
healthy helped by robust government spending.

ECONOMY MATTERS 18
DOMESTIC TRENDS
is estimated to increase by a robust 23.8 per cent in
2016-17 as compared to revised 2.9 per cent in 2015-16.
The worrying aspect on the expenditure front is the fact
that the contraction in gross fixed capital formation is
estimated to intensify in 2016-17 to -0.2 per cent from
revised 6.1 per cent growth in 2015-16. Exports growth is
estimated to marginally improve in 2016-17 from a con-
traction seen in 2015-16.
vance estimate print as this is just an extrapolation of
available data and is likely to be used as an indicator for
Union budget purpose.
As per the advance estimates, at market prices, private
consumption expenditure is expected to moderate to
6.5 per cent in 2016-17 as compared to revised 7.3 per
cent in the previous fiscal. The final numbers for this
segment are expected to head further downwards due
to the note ban hurting the consumption power of the
consumers. In contrast, government spending growth
The second advance estimates for the GDP print which
will be released on 28th February, 2017 would be more
useful in judging actual impact rather than the first ad-
Outlook
GDP print, as indicated in the advance estimates, is expected to show a moderation in 2016-17 as compared to
last year which is in line with expectations. Even so, this is the third successive year that the economy has clocked
above 7 per cent growth indicating that the underlying fundamentals are strong. No doubt, the demonetisation
drive is anticipated to result in a downward bias to GDP growth in the next one or two quarters, but this is likely
to be a blip in the growth momentum as demand has only been deferred and will re-emerge once the situation
becomes normal. The CII commends the Union Budget 2017-18 for sticking to fiscal prudence which in turn will help
in boosting GDP growth in the near to medium-term.

19
DOMESTIC TRENDS
JAN-FEB 2017
the first negative growth in 19 months. Manufacturing
and capital goods sectors too witnessed a sharp decline
during the month, thus contributing to the downtick in
the headline data print. On a cumulative basis, factory
output for the period April- December 2016 grew by 0.3
per cent compared to 3.2 per cent growth in the same
period over a year ago.
According to use-based classification, capital goods con-
tinued to remain a key laggard for the overall growth
in industrial output during the month. Capital goods
registered a 3.0 per cent contraction in December 2016
as compared to 15 per cent growth in November 2016.
For the April-December 2016 period, the sector’s output
contracted by 17.3 per cent, as against a growth of 1.9
per cent in the same period a year ago.
Consumer goods growth continues to con-
tract
Consumer goods witnessed a decline of 6.8 per cent
in December 2016. Within this category, consumer du-
rables witnessed a sharp slowdown by printing a first
negative growth in 19 months at 10.3 per cent as com-
pared to a growth of 9.4 per cent in November 2016.
Consumer non-durables contracted by 5.0 per cent dur-
ing the month as compared to 2.5 per cent growth evi-
denced in the previous month.
In contrast to the November 2016 print, wherein indus-
trial output had shown an escalation of 5.4 per cent, the
same for December 2016 contracted by 0.4 per cent.
The decline clearly suggests the impact of demonetisa-
tion on industrial activity. However, the fall remained
limited owing to the weak base of the previous year.
The consumer goods segment has been a key drag for
the overall growth in industrial output, which printed
Manufacturing sector growth once again
slips into negative territory
The manufacturing sector, which has the highest weight
among all the industrial output sub-sectors, once again
slipped into the negative territory, registering a 2.4 per
cent decline in December 2016 as compared to 5.5 per
cent growth in the previous month. In terms of indus-
tries, 17 out of the 22 industry groups (as per 2- digit NIC-
2004) in the manufacturing sector showed negative
growth during December 2016 as compared to the cor-
responding month of the previous year. For the April-
December 2016 period, the sector’s output contracted
by 0.5 per cent, as against a growth of 3.2 per cent in the
same period a year ago. Meanwhile, mining and electric-
ity sectors registered a steady growth of 5.2 and 6.3 per
cent respectively.
Capital goods continue to remain a key drag
on the overall IIP
Industrial Output in Negative Territory

ECONOMY MATTERS 20
DOMESTIC TRENDS
In contrast to overall IIP, core sector output
improves in December 2016
The output of eight core infrastructure industries im-
proved to 5.6 per cent in December 2016 on a year-on-
year basis as compared to 4.9 per cent in the previous
month. The cumulative output rose to 4.9 per cent in
April-December 2016 over the corresponding period of
last year. The index measures the output in eight infra-
structure sectors – steel, cement, coal, refinery prod-
ucts, natural gas, crude oil, fertilisers and electricity
generation. It has a 38 per cent weight in the Index of
Industrial Production (IIP).
Cement output slipped down to 8.7 per cent in Decem-
ber 2016 compared with a 0.5 per cent rise in November
2016. Refinery products output expanded sharply to 6.4
per cent in December 2016 as compared to 2.0 per cent
in the previous month. While sectors like crude oil and
natural gas grew steadily, output of coal declined to 4.4
per cent, as against a growth of 6.4 per cent in Novem-
ber 2016.

21
DOMESTIC TRENDS
JAN-FEB 2017
Outlook
The contraction in industrial output in December 2016 is a matter of concern. However, going forward, the lagged
impact of interest rate reductions and 7th
pay commission handouts are expected to cushion demand in future and
boost industrial activity. There may be short-term disruptions on account of government’s recent demonetisation
move as it impacts the cash based transactions, which are a large part of the Indian economy. However, in the
medium-term the impact of this demonetisation will be largely positive for economic growth.
The wholesale price index (WPI) based inflation rate for
the month of January 2017 came at a 11-month high of
5.2 per cent compared to 3.4 per cent in the previous
month. This significant increase in inflation has come
from a substantial increase in the prices of fuel & power
and a marginal rise in the prices of manufactured goods
(over the previous month). Meanwhile, CPI inflation sof-
tened by 20 basis points to 3.2 per cent in January 2017
from 3.4 per cent in the previous month. The key reason
for the fall remained food inflation as core inflation con-
tinued to remain sticky. CPI food inflation cooled fur-
ther to 1.3 per cent from 2.0 per cent posted previously.
Within this segment, vegetables inflation and pulses
showed the steepest fall. Within food category, pulses
Primary articles inflation accelerates on rise
in non-food and minerals sub-category
Amongst the WPI sub-categories, inflation in primary
articles increased to 1.3 per cent in January 2017 as com-
pared to a contraction in the previous month mainly on
inflation fell a steep 6.6 per cent as compared to 1.6 per
cent in the previous month. A similar trend of cooling
was seen in other protein segments. Meat & fish, eggs
and milk prices inflation witnessed reduced price pres-
sures during the month. CPI fuel inflation edged lower
to 3.4 per cent in January 2017 from 3.8 per cent in De-
cember 2016.
Retail inflation for January 2017 is currently within the
RBI’s comfort zone wherein CPI is within the 4 per cent
level with a two-percentage point-band on either side.
CII expects the WPI inflation for February 2017 to also
follow the trail of CPI inflation so that the overall infla-
tion trajectory continues to remain benign.
the back of rising inflation in primary articles sub-group
of minerals and non-food articles. Within primary arti-
cles, inflation in food sub category remained stable at
-0.6 per cent in the reporting month as compared to
-0.7 per cent in the previous month. This is attributed
to a decline in prices of pulses, potato, rice and wheat.
CPI Inflation on a Downward Trail

ECONOMY MATTERS 22
DOMESTIC TRENDS
The inflation rates of pulses declined significantly from
18.12 per cent in December 2016 to 6.21 per cent in Janu-
ary 2017. The inflation rate of vegetables continued to
remain in the negative territory and stood at -32.32 per
cent in January 2017 as compared to -33.11 per cent in
December 2016.
Fuel inflation increases sharply; further up-
ward risks in sight
In contrast, inflation in the fuel group of WPI acceler-
ated sharply to 18.1 per cent in January 2017 from 8.7
per cent in the previous month owing to an increase in
prices of petrol and high speed diesel. Inflation in both,
petrol and diesel group, quickened to 15.7 per cent
(from 8.5 per cent in December 2016) and 31.1 per cent
(20.3 per cent in December 2016) respectively in Janu-
ary 2017. Going forward, with the Organisation of the
Petroleum Exporting Countries (OPEC) announcing an
agreement in November 2016 to cut back on output in
an attempt to lift global prices back up, we can expect
some upward pressure on global crude oil prices. This in
turn will push up domestic fuel inflation further.
Non-food manufacturing inflation acceler-
ates sharply
Similarly, Inflation in the manufactured group quick-
ened further to 4.0 per cent in January 2017 as com-
pared to 3.3 per cent posted in the previous month.
Manufacturing food inflation, which had moved to dou-
ble-digits in July 2016 marginally decelerated to 10.1 per
cent in the reporting month from 10.7 per cent in the
previous month. Meanwhile, manufacturing non-food
inflation (popularly called as core inflation and a proxy
for demand-side pressures in the economy) quickened
to its highest reading since September 2014, standing at
2.7 per cent in January 2017 as compared to average 0.5
per cent between April-December 2016. This is a clear
indicator that demand is returning to the economy.
Outlook
CPI inflation moderated, while WPI inflation accelerated in January 2017. The softening of CPI inflation was attrib-
uted essentially to downward drift in the momentum of food prices assisted by favourable monsoon which has
led to record food-grain output in the kharif season and robust expansion under rabi acreage. The fall in CPI prices
could also be partly reflective of the demonetisation impact, which has led to lower demand in the economy due
to a cash crunch.

23
DOMESTIC TRENDS
JAN-FEB 2017
The Reserve Bank of India (RBI) maintained a status-
quo and kept all the policy rates unchanged in its sixth
bi-monthly monetary policy review held on February
8th
, 2017. The committee decided to change the stance
from accommodative to neutral while keeping the pol-
icy rate on hold to assess how the transitory effects of
demonetization on inflation and the output gap play
out. However, the decision of the Monetary Policy Com-
RBI takes notes of a gradual but steady
growth recovery
The Central Statistics Office (CSO) released its advance
estimates for 2016-17 on January 6th
, 2017, placing In-
dia’s real GVA growth at 7.1 per cent for 2016-17, down
from 7.9 per cent in 2015-16. Agriculture & allied activi-
ties are expected to post a strong pick-up – benefiting
from monsoon, robust expansion in rabi acreage, fa-
vorable base effects and resilient allied activities. The in-
dustrial sector is expected to experience a sharp decel-
eration, due to slowdown in manufacturing and mining
& quarrying. Service sector activity is also estimated to
lose pace especially in trade, hotels, transport, commu-
nication and construction, cushioned to some extent by
public administration and defense.
As per RBI, growth is expected to recover sharply in
2017-18 on account of several factors – (i) discretion-
ary consumer demand held back by demonetisation is
expected to bounce back; (ii) economic activity in cash-
mittee (MPC) was in consonance with the objective of
containing consumer price index (CPI) inflation at 5 per
cent by Q4FY17 and the medium-term target of 4 per
cent within a band of +/- 2 per cent, while supporting
growth. The repo rate remains unchanged at 6.25 per
cent while reverse repo rate and Marginal Standing Fa-
cility (MSF) rate currently stand unchanged at 5.75 per
cent and 6.75 per cent respectively.
intensive sectors (retail trade, hotels & restaurants,
transportation, unorganized sector) is expected to be
rapidly restored; (iii) demonetisation-induced ease in
bank funding conditions should spur a pick-up in both
consumption and investment demand; (iv) emphasis in
the latest budget on stepping up capital expenditure,
boosting rural economy and affordable housing should
contribute to growth. Accordingly, GVA growth for
2017-18 is projected by the RBI at 7.4 per cent, with risks
evenly balanced.
However, the Central Bank sounds a cau-
tious note on inflation
Marking the 5th
consecutive month of softening, the
headline Consumer Price Index (CPI) turned down
sharper than expected in December 2016 in its lowest
reading since November 2014, driven by lower food in-
flation. Headline CPI inflation in Q4FY17 is likely to be
below 5 per cent. As per RBI, CPI inflation is projected to
lie in a 4.0 to 4.5 per cent range in H1FY18, on the back
RBI Keeps Policy Rates Unchanged, Maintains a
Neutral Stance

ECONOMY MATTERS 24
DOMESTIC TRENDS
of favorable base effects and lagged effects of demand
compression, and between 4.5 to 5.0 per cent range in
H2FY18, driven by pickup in momentum, narrow output
gap and adverse base effects. International crude pric-
es, volatility in exchange rate and effects of the house
rent allowances under 7th
Central Pay Commission im-
part some uncertainty to baseline inflation path. The
focus of the Union budget on growth revival without
compromising on fiscal prudence should bode well for
limiting upside risks to inflation.
Excluding food and fuel, CPI inflation has been unyield-
ing at 4.9 per cent since September 2016. Apart from the
turnaround in international crude prices since October
2016, a broad-based stickiness is discernible in inflation
in housing, health, education, personal care (excluding
gold and silver) and miscellaneous goods & services
consumed by households. The MPC remains committed
to bringing headline inflation closer to 4.0 per cent on a
durable basis and in a calibrated manner. This requires
further significant decline in inflation expectations, es-
pecially since the services component of inflation that is
sensitive to wage movements has been sticky.
Demonetisation impact felt on liquidity con-
ditions
From January 2017, rebalancing has been underway,
post demonetisation-induced liquidity overhang, and
throughout, RBI’s market operations have been in li-
quidity absorption mode. With the abolition of incre-
mental Cash Reserve Ratio (CRR) from December 10th,
2016, liquidity management operations have consisted
of variable rate reverse repos under the LAF of ten-
ors ranging from overnight to 91 days and auctions of
cash management bills under the Market Stabilisation
Scheme (MSS) of tenors ranging from 14 to 63 days. The
average daily net absorption under the LAF was Rs 1.6
trillion in December 2016, Rs 2.0 trillion in January 2017
and Rs 3.7 trillion in February 2017 (up to February 7th)
while under the MSS, it was Rs 3.8 trillion, Rs 5.0 trillion
and Rs 2.9 trillion, respectively. Money market rates re-
mained aligned with the policy repo rate albeit with a
soft bias, with the Weighted Average Call Money Rate
(WACR) averaging 18 basis points below the policy rate
during December 2016 and January 2017.
RBI has conducted market liquidity operations consist-
ent with the liquidity management framework put in
place in April 2016, progressively moving the system
level ex-ante liquidity condition close to neutrality. This
stance is expected to continue as per RBI. Nonetheless,
the currently abundant liquidity with banks is likely to
persist into the early months of 2017-18. RBI is commit-
ted to ensuring efficient and appropriate liquidity man-
agement with all the instruments at its command to en-
sure close alignment of the WACR with the policy rate,
improved transmission of policy impulses to lending
rates and adequate flow of credit to productive sectors
of the economy.
Outlook
RBI’s decision to maintain a status-quo in policy rates is reflective of the primacy given to restraining inflationary
expectations in the monetary policy discourse which has induced the RBI to maintain a neutral stance. The recent
global developments have also persuaded the RBI to maintain the status-quo. With banks now flush with liquidity
post de-monetisation, CII hopes that lending activity can be facilitated at a time when credit to industry is at a six-
year low. Employment-intensive sectors such as the auto, consumer durables and housing industry and the SME
sector, which are presently facing cash crunch, need to be revived quickly.
The CII Business Confidence Index (CII- BCI) for Octo-
ber-December 2016 quarter declined to 56.5 as against
58.0 recorded in the previous quarter. Though there has
been a decline of 1.5 points, business confidence still re-
mains high as indicated by the current BCI of 56.5 which
is higher than the BCIs recorded across quarters in
FY2015-16. Encouragingly, a resounding two-third of the
respondents (66.7 per cent) believe that the govern-
ment’s demonetization move will help in formalisation
of the economy. Further, deficient demand and lack of
political consensus on economic reforms emerged as
the top two concerns of the respondents of the survey.
Disruption in demand due to demonetisation and per-
ceived uncertainty around impending reforms such as
CII-Business Confidence Index Declines in Q3FY17

25
DOMESTIC TRENDS
JAN-FEB 2017
GST have led these factors to be ranked higher amongst
listed concerns by the respondents.
The respondents in the survey were asked to provide a
view on the performance of their firm, sector and the
economy based on their perceptions for the previous
and current quarter on a scale of 0 to 100. The CII-BCI
was then constructed as a weighted average of the Cur-
rent Situations Index (CSI) and the Expectation Index
(EI). A score above 50 indicates positive confidence
while a score above 75 would indicate strong positive
confidence. On the contrary, a score of less than 50 indi-
cates a weak confidence index.
More than 50 per cent respondents expect
the economy to grow between 6.5 per cent-
7.5 per cent
Nearly two-fifth of the respondents (40.2 per cent), ex-
pect the economy to grow in the 6.5 per cent-7.0 per
cent growth band in 2016-17 (18 per cent in previous sur-
vey). Cumulatively nearly eighty percent respondents
expect the economy to grow at or below the 7.0 per
cent mark. This marks a sharp readjustment in expecta-
tions compared to the last quarter where close to two-
third (65.6 per cent) respondents expect the growth
rate to be in 7.0 per cent-8.0 per cent band which has
declined to just 15.8 per cent in the current survey.
Nearly four out of five respondents expect
CPI inflation to be at or below 5.0 per cent
mark
Consistent decline in retail inflation since July 2016,
where the headline inflation has touched a twelve
month low of 3.63 per cent in November 2016, coupled
with easing of food inflation for a fourth straight month
has led to realignment in inflation expectations. A signif-
icant majority (57.4 per cent) of the respondents expect
CPI inflation to hover between 4.0 per cent-5.0 per cent
in 2016-17 (45 per cent in previous survey). Importantly,
one fifth (21.3 per cent) of respondents expect inflation
to be below the 4.0 per cent mark (4 per cent in previ-
ous survey).
Expectation of additional capacity creation
by private sector is scattered around the
timeline from Q3FY17 to post Q4FY18
More than half (57.4 per cent) of respondents expect
new capacity creation to take place by December 2018.
Yet nearly a fifth (19.1 per cent) of respondents expect
capacity creation to happen post March-2019. With new
norms allowing foreign ownership of asset reconstruc-
tion companies announced in 2016 and with new bank-
ruptcy code, NPA in banking system nearing Rs 4 trillion
could see many deals which could free up bank’s books
allowing more space for fresh lending and investments
provided sufficient demand for credit exists.
Total sales as well as new orders are expect-
ed to register an improvement
More than forty three percent of the respondents ex-
pect an improvement in sales compared to just 26.5 per
cent in previous quarter. A significant thirty nine per-

ECONOMY MATTERS 26
DOMESTIC TRENDS
cent respondents expect an increase in new orders for
October-December quarter compared to just 31.1 per
cent in previous quarter.
While 36.5 per cent expect an increase in PAT (32.1 per
cent in previous quarter), only 18.9 per cent expect a
decline in PAT (28.2 per cent in previous quarter). With
demonetization, more economic activity is expected to
enter the tax net, rolling out of GST is likely to improve
it further. In such a scenario, CII has recommended low-
ering of corporate tax to 18.0 per cent (19.5 per cent
currently) including all cess and surcharge and no ex-
emptions. This will likely improve PAT further going into
FY18.
Expectations across exports and imports
have improved where larger percentages of
respondents expect an increase in both ex-
ports and imports vis-à-vis previous quarter
while lower percentages expect them to de-
cline
On the external trade front, the outlook is positive with
improved expectations on both exports and imports
from the respondents. With expectation on increased
capacity utilization, sales and new orders for Q3FY17,
the respondents expecting a positive trend in external
trade bodes well for the economy.

27
POLICY FOCUS
POLICY FOCUS
JAN-FEB 2017
1. Highlights of Economic Survey
2016-17
Tabled in the Parliament by Honorable Union Finance
Minister, Shri Arun Jaitley, a day before the Union Budg-
et, following are the key highlights of the Economic Sur-
vey 2016-17.
On Growth & Inflation
• As per the advance estimates released by the Cen-
tral Statistics Office, the growth rate of GDP at
constant prices for the year 2016-17 is placed at 7.1
per cent, as against 7.6 per cent in 2015-16. This es-
timate is based mainly on information for the first
seven to eight months of the financial year. Govern-
ment final consumption expenditure is the major
driver of GDP growth in the current year.
• Fixed investment (gross fixed capital formation) to
GDP ratio (at current prices) is estimated to be 26.6
per cent in 2016-17, vis-à-vis 29.3 per cent in 2015-16.
• For 2017-18, it is expected that growth would return
to normal as the new currency notes in required
quantities come back into circulation and as follow-
up actions to demonetisation are taken. Therefore
the real GDP growth in 2017-18 is projected to be in
the range of 6.75 – 7.5 per cent.
• On inflation front, the Survey noted that FY 2017-18
witnessed a sharp fall in CPI July onwards aided by
expectations of good agricultural production. The
significant decline in food prices especially pulses
helped this trend and CPI is likely to stay below
RBI’s near term target of 5 per cent also aided in
part by demonetization. It also noted that WPI infla-
tion reversed sharply over the year.
• Inflation based on Wholesale Price Index (WPI) de-
clined to (-) 2.5 per cent in 2015-16 from 2.0 per cent
in 2014-15 and averaged 2.9 per cent during April-
December 2016.
• Inflation is repeatedly being driven by narrow group
of food items, of these pulses continued to be the
major contributor of food inflation.
• The CPI based core inflation has remained sticky in
the current fiscal year averaging around 5 per cent.

ECONOMY MATTERS 28
POLICY FOCUS
On Demonetisation
• The Economic Survey points out that demonetisa-
tion will have both short-term costs and long-term
benefits. The costs include a contraction in cash
money supply and a subsequent, albeit temporary,
slowdown in GDP growth; and benefits include
greater tax compliance and a reduction in real es-
tate prices, which could increase long-run tax rev-
enue collections and GDP growth.
• Additionally, the Survey adds that remonetisation
will ensure that the cash squeeze is eliminated by
April 2017. The cash squeeze in the meantime will
have significant implications for GDP, reducing
2016-17 growth by ¼ to ½ percentage points com-
pared to the baseline of 7 per cent.
• These contractionary effects will dissipate by year-
end when currency in circulation should once again
be in line with estimated demand, which would also
allow growth to converge to a trend by FY 2017-18.
Economic Survey Raises Several Critical
Issues
• The Economic Survey 2016-17 has advocated the
concept of Universal Basic Income (UBI) as an al-
ternative to the various social welfare schemes in
an effort to reduce poverty.
• The Survey says the UBI, based on the principles of
universality, unconditionality and agency, is a con-
ceptually appealing idea but with a number of im-
plementation challenges lying ahead especially the
risk that it would become an add-on to, rather than
a replacement of, current anti-poverty and social
programmes, which would make it fiscally unafford-
able.
• Exploring the principles and prerequisites for suc-
cessful implementation of UBI, the Survey points
out that the two prerequisites for a successful UBI
are:
- Functional JAM (Jan Dhan, Aadhar and Mo-
bile) system as it ensures that the cash transfer
goes directly into the account of a beneficiary,
and
- Centre-State negotiations on cost sharing for
the programme.
• The Survey concludes that the UBI is a powerful
idea whose time even if not ripe for implementa-
tion, is ripe for serious discussion.
• An evaluation of the measures used to gauge India’s
competitiveness is necessary. Excessive weight to
currencies such as the Euro (even though it is really
Asian countries, not Europe, that are India’s main
competitors) may overstate the Rupee’s apprecia-
tion (due to weakness in the Euro). Tracking com-
petitiveness requires monitoring a more appropri-
ate exchange rate index.
• As per the Survey, gross NPAs of banks has climbed
to almost 12 per cent of gross advances for public
sector banks at end-September 2016. At this level,
India’s NPA ratio is higher than any other major
emerging market, with the exception of Russia.
The consequent squeeze of banks has led them to
slow credit growth to crucial sectors-especially to
industry and medium and small scale enterprises
(MSMEs)-to levels unseen over the past two dec-
ades. As this has occurred, growth in private and
overall investment has turned negative. A decisive
resolution is urgently needed before the “Twin-Bal-
ance Sheet” (TBS) problem becomes a serious drag
on growth.
• Economic Survey 2016-17 suggests setting up of a
centralised Public Sector Asset Rehabilitation Agen-
cy (PARA) as the Non-Performing Assets (NPAs) of
the banking system (and especially public sector
banks) have kept increasing, while credit and in-
vestment has kept falling.
• The Survey reaches to the conclusion that a PARA
may be necessary because of the following reasons:
- Public discussion of the bad loan problem has
focused on bank capital. But far more problem-
atic is finding a way to resolve the bad debts in
the first place.
- Some debt repayment problems have been
caused by diversion of funds. But the vast ma-
jority has been caused by unexpected changes
in the economic environment after the Global

29
POLICY FOCUS
JAN-FEB 2017
CII’s Statement on Economic Survey
“CII is in agreement with the Economic Survey that the impact of demonetisation on the GDP growth rate will be
temporary and that once remonetisation is effected, the growth rate would revert to over 7 per cent,” stated Mr
Chandrajit Banerjee, Director General, CII. “The Economic Survey’s estimate of growth at 6.75-7.5 per cent is on
expected lines, and CII believes that this will be achieved.”
“As mentioned by the Chief Economic Adviser, Dr Arvind Subramanian, the Survey is a forward-looking, compre-
hensive and objective analysis, and CII congratulates him on a productive and interesting perspective on the Indian
economy”, Mr Banerjee said. Highlighting the strong macroeconomic fundamentals brought out in the Economic
Survey, Mr Banerjee commended the Government for its sound management of the economy during challenging
global developments.
On demonetisation, the Economic Survey has undertaken a deep analysis on economic impact, costs and ben-
efits, and future economic policy. Mr Banerjee said that “CII concurs that there are significant long term benefits
to demonetisation, including enhanced digitalization, lowering of real estate prices, and higher tax revenues. CII
has been calling for rapid remonetisation, faster digitalization, and reducing tax rates and stamp duties as also a
universal Goods and Services Tax that would include real estate and land, as mentioned in the Economic Survey.”
Financial Crisis, which caused timetables, ex-
change rates, and growth rate assumptions to
go seriously wrong.
- This concentration creates a challenge since
large cases are difficult to resolve, but also an
opportunity since TBS could be overcome by
solving a relatively small number of cases.
- Restoring them to financial health will require
large write-downs.
- Among other issues, they face severe coor-
dination problems, since large debtors have
many creditors, with different interests. And
they find it hard –financially and politically—to
grant them sizeable debt reductions, or to take
them over and sell them.
- It increases the costs to the government since
bad debts of the state banks keep rising, and
increases the costs to the economy, by hinder-
ing credit, investment, and therefore growth.
- Since private run Asset Reconstruction Compa-
nies (ARCs) have not been successful either in
resolving bad debts, though international ex-
perience (especially that of East Asian econo-
mies) shows that a professionally run central
agency with the government backing could
overcome the coordination and political is-
sues that have impeded progress over the past
eight years.
• The Survey noted that the growth boost from the
demographic dividend is likely to peak within the
next five years, as India’s share of working age pop-
ulation plateaus. However, the sharp demographic
differences between peninsular India and hinter-
land India will generate wide differences in the tim-
ing of the peak, as well as opportunities to attenu-
ate demographic imbalances via greater labour
mobility. It remains critical to implement reforms to
capture this dividend.
The Survey also suggests some additional
measures
• GST with broad coverage to include activities that
are sources of black money creation—land and oth-
er immovable property—should be implemented.
• Individual income tax rates and real estate stamp
duties could be reduced.
• The income tax net could be widened gradually
and, consistent with constitutional arrangements,
could progressively encompass all high incomes.
• The timetable for reducing the corporate tax rate
could be accelerated.
• Tax administration could be improved to reduce
discretion and improve accountability.

ECONOMY MATTERS 30
POLICY FOCUS
2. Highlights of Union Budget 2017-18
Following are the key features of Union Budget 2017-
18, which was presented in the Lok Sabha on 1st Feb-
ruary, 2017. For the first time, the Railway Budget was
not presented separately and provisions for improving
the railway infrastructure were presented in the Union
Budget only.
Fiscal Discipline
• The Fiscal Responsibility and Budget Management
(FRBM) Committee has favoured Debt to GDP of
60 per cent for the General Government by 2023,
consisting of 40 per cent for Central Government
and 20 per cent for State Governments. Within this
framework, the Committee has derived and recom-
mended 3 per cent fiscal deficit for the next three
years. The Committee has also provided for ‘Escape
Clauses’, for deviations upto 0.5 per cent of GDP,
from the stipulated fiscal deficit target.
• Considering the need for higher public expenditure
in the context of sluggish private sector investment
and slow global growth, the fiscal deficit for FY2018
is pegged at 3.2 per cent of GDP, and will be pared
to 3.0 per cent of GDP in FY2019.
• The Revenue Deficit stands at 2.1 per cent in the
FY2017 RE, to be curtailed to 1.9 per cent in FY18 BE.
• Net market borrowing of Government restricted to
Rs 3.48 lakh crores after buyback in 2017-18, which
is much lower than the figure of Rs 4.25 lakh crores
in the previous year.
Agriculture and Farmers’ Welfare
• Target for agricultural credit in 2017-18 has been
fixed at a record level of Rs. 10 lakh crores
• Farmers will also benefit from 60 days interest
waiver announced on 31st Dec 2016.
• To ensure flow of credit to small farmers, Govern-
ment to support NABARD for computerisation and
integration of all 63,000 functional Primary Agricul-
ture Credit Societies with the Core Banking System
of District Central Cooperative Banks. This will be
done in 3 years at an estimated cost of Rs 19 billion.
• Coverage under Fasal Bima Yojana Yojana scheme
will be increased from 30 per cent of cropped area
in 2016-17 to 40 per cent in 2017-18 and 50 per cent
in 2018-19 for which a budget provision of Rs 90 bil-
lion has been made.
• The Budget envisages creation of new mini labs in
the form of Krishi Vigyan Kendras (KVKs) and en-
sure 100 per cent coverage of all 648 KVKs in the
country for soil sample testing.
• National agriculture markets (NAM) are to be ex-
panded to 585 markets, and allocation of Rs 7.5 mil-
lion to each APMC under e-NAM is proposed.
• States would be urged to de-notify perishables
from the APMC Act.
Rural Sector
• Budget aims to bring one crore households out of
poverty and to make 50,000 Gram Panchayats pov-
erty free by 2019, the 150th
birth anniversary of Ma-
hatma Gandhi.
• Allocation for MGNREGA is raised to Rs 480 billion
in FY18 from the current expenditure of Rs 470 bil-
lion.
• Against target of 5 lakh farm ponds under MGN-
REGA, 10 lakh farm ponds would be completed by
March 2017. During 2017-18, another 5 lakh farm
ponds will be taken up.
• The Budget allocates Rs 190 billion in FY2018 for the
Pradhan Mantri Gram Sadak Yojana (PMGSY). The
pace of construction of PMGSY roads has acceler-
ated to 133 km roads per day in FY2017, as against
an average of 73 km during the period 2011-2014.
• The allocation for the Pradhan Mantri Awaas Yo-
jana – Gramin has been stepped up to Rs 230 billion
in FY2018 (from Rs 160 billion in FY2017 RE).
Education, Skills and Job Creation
• A National Testing Agency will be established as an
autonomous and self-sustained premier testing or-
ganization to conduct all entrance examinations for
higher education institutions.

31
POLICY FOCUS
JAN-FEB 2017
• Pradhan Mantri Kaushal Kendras (PMKK) will be ex-
tended to more than 600 districts across the coun-
try.
• 100 India International Skills Centres will be estab-
lished across the country.
• In FY2018, the Skill Acquisition and Knowledge
Awareness for Livelihood Promotion Programme
(SANKALP) will be launched at a cost of Rs 40 bil-
lion to provide market relevant training to 3.5 crore
youth.
• A special scheme for creating employment in the
textile sector has already been launched. A similar
scheme will be implemented for the leather and
footwear industries.
• SWAYAM platform, leveraging IT, to be launched
with at least 350 online courses. This would enable
students to virtually attend courses taught by the
best faculty.
• Next phase of Skill Strengthening for Industrial Val-
ue Enhancement (STRIVE) will also be launched in
2017-18 at a cost of Rs 22 billion.
Infrastructure
• The Railways will focus on four major areas, name-
ly: (i) passenger safety; (ii) capital and development
works; (iii) cleanliness; and (iv) finance and account-
ing reforms.
• For transportation sector as a whole, including rail,
roads, shipping, provision of Rs 2413.8 billion have
been made in 2017-18.
• For 2017-18, the total capital and development ex-
penditure of Railways has been pegged at Rs 1310
billion. This includes Rs 550 billion provided by the
Government.
• Railway lines of 3,500 kms will be commissioned in
2017-18. During 2017-18, at least 25 stations are ex-
pected to be awarded for station redevelopment.
• For passenger safety, a Rashtriya Rail Sanraksha
Kosh will be created with a corpus of Rs 1 lakh
crores over a period of 5 years.
• The Government has decided to set up Strategic
Crude Oil Reserves in the states of Odisha and Ra-
jasthan, taking the strategic reserve capacity to
15.33 MMT
Financial Sector Reforms
• Foreign Investment Promotion Board to be abol-
ished in 2017-18 and further liberalisation of FDI
policy is under consideration.
• An amendment Bill for the Arbitration and Concili-
ation Act 1996 will be introduced for resolution of
disputes in infrastructure related construction con-
tracts, PPP and public utility contracts.
• The Government will put in place a revised mecha-
nism and procedure to ensure time bound listing of
identified CPSEs on stock exchanges. The disinvest-
ment policy announced in the last budget will con-
tinue.
• A new ETF with diversified CPSE stocks and other
Government holdings will be launched in FY2018.
• In line with the ‘Indradhanush’ roadmap, Rs 100 bil-
lion is allocated for recapitalisation of Public Sector
Banks in FY2018. Additional allocation will be pro-
vided, as may be required.
• The lending target for Pradhan Mantri Mudra Yo-
jana is set at Rs 2.44 trillion, double the target for
FY2016.
• Propose to create an integrated public sector ‘oil
major’ which will be able to match the performance
of international and domestic private sector oil and
gas companies.
Digital Economy
• 125 lakh people have adopted the BHIM app so far.
The Government will launch two new schemes to
promote the usage of BHIM; these are, Referral Bo-
nus Scheme for individuals and a Cashback Scheme
for merchants.
• Aadhar Pay, a merchant version of Aadhar Enabled
Payment System, will be launched shortly.
• A Mission will be set up with a target of 2,500 crore

ECONOMY MATTERS 32
POLICY FOCUS
digital transactions for 2017-18 through UPI, USSD,
Aadhar Pay, IMPS and debit cards.
• A proposal to mandate all Government receipts
through digital means, beyond a prescribed limit, is
under consideration.
• Banks have targeted to introduce additional 10 lakh
new POS terminals by March 2017. They will be en-
couraged to introduce 20 lakh Aadhar based POS by
September 2017.
• It is proposed to create a Payments Regulatory
Board in the RBI by replacing the existing Board for
Regulation and Supervision of Payment and Set-
tlement Systems. Necessary amendments are pro-
posed to this effect in the Finance Bill 2017.
Summary – Direct Taxes
• Existing rate of taxation for individual assesses be-
tween incomes of Rs 2.5 lakhs to Rs 5 lakhs reduced
to 5 per cent from the present rate of 10 per cent.
• Surcharge of 10 per cent of tax payable on catego-
ries of individuals whose annual taxable income is
between Rs 50 lakhs and Rs 1 crore.
• Simple one-page form to be filed as Income Tax
Return for the category of individuals having tax-
able income up to Rs 5 lakhs other than business
income.
• Appeal to all citizens of India to contribute to Na-
tion Building by making a small payment of 5 per
cent tax if their income is falling in the lowest slab
of Rs 2.5 lakhs to Rs 5 lakhs.
• For the purpose of carry forward of losses in respect
of start-ups, the condition of continuous holding of
51 per cenr of voting rights has been relaxed subject
to the condition that the holding of the original pro-
moter/promoters continues. Also the profit (linked
deduction) exemption available to the start-ups for
3 years out of 5 years is changed to 3 years out of 7
years.
• MAT credit is allowed to be carried forward up to a
period of 15 years instead of 10 years at present.
• In order to make MSME companies more viable, in-
come tax for companies with annual turnover up to
Rs 50 crores are reduced to 25 per cent.
• Allowable provision for Non-Performing Asset of
Banks increased from 7.5 per cent to 8.5 per cent.
Interest taxable on actual receipt instead of accrual
basis in respect of NPA accounts of all non-sched-
uled cooperative banks also to be treated at par
with scheduled banks.
• Under scheme of presumptive income for small
and medium tax payers whose turnover is up to Rs
2 crores, the present, 8 per cent of their turnover
which is counted as presumptive income is reduced
to 6 per cent in respect of turnover which is by non-
cash means.
• Cash expenditure allowable to be reduced to Rs
10,000 from the existing Rs 20,000.
• No transaction above Rs 3 lakhs would be permit-
ted in cash subject to certain exceptions.
• Maximum amount of cash donation, a political par-
ty can receive, will be Rs 2000/- from one person.
• Political parties will be entitled to receive donations
by cheque or digital mode from their donors.
• Threshold limit for audit of business entities who
opt for presumptive income scheme increased
from Rs 1 crore to Rs 2 crore. Similarly, the thresh-
old for maintenance of books for individuals and
HUF increased from turnover of Rs 10 lakhs to Rs 25
lakhs or income from Rs 1.2 lakhs to Rs 2.5 lakhs.
• Reduction in the holding period for computing long
term capital gains from transfer of immovable prop-
erty from 3 years to 2 years. Also, the base year for
indexation is proposed to be shifted from 1.4.1981
to 1.4.2001 for all classes of assets including immov-
able property.
Summary – Indirect Taxes
• Basic customs duty on LNG reduced from 5 per cent
to 2.5 per cent.
• The GST Council has finalised its recommendations
on almost all the issues based on consensus on the
basis of 9 meetings held.

33
POLICY FOCUS
JAN-FEB 2017
• Preparation of IT system for GST is also on sched-
ule.
• The extensive reach-out efforts to trade and indus-
try for GST will start from 1st April, 2017 to make
them aware of the new taxation system.
• Excise duty hiked on pan masala (to 9 per cent from
6 per cent), unmanufactured tobacco (to 8.3 per
cent from 4.2 per cent), handmade paper-rolled
bidi (Rs 21 per thousand bidis to Rs 28 per thou-
sand bidis ), machine made paper-roll bidi (Rs 21 per
1,000 bidis to Rs 78 per 1,000 bidis ). Additional ex-
cise duty was raised on some cigarette categories,
gutkha, chewing tobacco (to 12 per cent).
• Excise duty was reduced on raw material for solar-
tempered glass, while 6 per cent excise duty was
levied on solar-tempered glass.
• Customs duty on cashew nuts was hiked to 45 per
cent from 30 per cent, while customs duty on nickel
was scrapped.
CII’s Statement on Union Budget 2017-18
Budget 2017-18 unleashed multiple instruments to revive demand and encourage investments, while also prioritiz-
ing the needs of vulnerable sections of society, said Confederation of Indian Industry (CII).
“The Finance Minister is to be complimented for delivering a prudent and pragmatic Budget that caters to most
sectors of the economy,” stated Dr Naushad Forbes, President, CII. “Industry welcomes the cut in personal and
corporate income tax rates. The economic reform agenda continues at a rapid pace, with abolishing of FIPB and
move for time-bound listing of CPSEs. The Budget focused on measures to increase transparency with a broad
strategy to put in place the mechanisms and institutions for the future of the country, including through digitaliza-
tion and formalization of the economy.”
The CII President congratulated the Finance Minister for maintaining a check on the fiscal deficit despite the over-
whelming need to raise public expenditure to boost growth. The fiscal deficit of 3.5 per cent of GDP for Budget
2016-17 will be lowered to 3.2 per cent for the coming year. At the same time, it is commendable that the Budget
reduced the Revenue Deficit to 1.9 per cent of GDP, while increasing capital expenditure by over 25 per cent. “Ad-
herence to the fiscal prudence imperatives will lay the foundation for long term growth and CII appreciates this
commitment,” noted Dr Forbes.
Further, it was heartening to note that the GST implementation is on track through strong efforts and commitment
of the Finance Ministry and the state governments. CII looks forward to its rollout which will be a key step in the
transformation of the economy.
The CII President also welcomed the move to clean up funding systems for elections. CII had recommended bring-
ing down the cash donation limits and the Budget has curtailed such donations to Rs 2,000. This along with other
steps such as the innovative electoral bonds would go a long way towards enhancing transparency in cash transac-
tions.
Dr Forbes appreciated the notable measures for digitalization of the economy through extension of the BHIM app,
two more schemes for merchants, and expansion of POS by banks. The Prime Minister had earlier announced cut
in presumptive tax rates for traders with turnover of less than Rs 2 crores and this was reiterated in the Budget.

ECONOMY MATTERS 34
GLOBAL TRENDS
A Shifting Global Economic Landscape
A
fter a lacklustre outturn in 2016, economic activ-
ity is projected to pick up pace in 2017 and 2018
– according to the IMF – in its January 2017 up-
date of the World Economic Outlook report. The World
Bank agrees – in its Global Economic Prospects report
released in January 2017 as well – that obstacles to ac-
tivity have receded among the commodity exporters in
the Emerging Market and Developing Economy (EMDE)
while domestic demand remains solid.
The stable average growth rate for the world, howev-
er, masks divergent developments in different country
groups. The outlook for advanced economies has im-
proved for 2017–18, since October 2016. There has been
a stronger-than-expected pickup in growth in advanced
economies, due mostly to a reduced drag from inven-
tories and some recovery in manufacturing output, as
well as a projected fiscal stimulus in the US. Growth
prospects have marginally worsened for the EMDEs, as
financial conditions have generally tightened and com-
modity prices are rising, according to the IMF.
Developments in the second half of 2016
Among advanced economies, activity rebounded
strongly in the US after a weak first half of 2016, and
the economy is approaching full employment. Output
remains below potential in a number of other advanced
economies, notably in the euro area. Preliminary third-
quarter growth figures were somewhat stronger than
previously forecast in some economies, such as Spain
and the UK, where domestic demand held up better
than expected in the aftermath of the Brexit vote. His-
torical growth revisions indicate that Japan’s growth
rate in 2016 and in preceding years was stronger than
previously estimated. The picture for EMDEs remains
much more diverse. The growth rate in China was a bit
stronger than expected, supported by continued poli-
cy stimulus. But activity was weaker-than-expected in
some Latin American countries currently in recession.
Activity in Russia was slightly better than expected,
in part reflecting firmer oil prices. Oil prices have in-
creased in recent weeks, following the OPEC agree-
ment to trim supply. With strong infrastructure and real
estate investment in China as well as expectations of
fiscal easing in the US, prices for base metals have also
strengthened.

35
GLOBAL TRENDS
JAN-FEB 2017
Forecast
Global growth for 2016 is now estimated at 3.1 per cent,
in line with the October 2016 forecast and projected to
be 3.4 per cent in 2017 and 3.6 per cent in 2018, respec-
tively, again unchanged from the October forecasts.
Economic activity in both advanced economies and EM-
DEs is forecast to accelerate in 2017–18.
Advanced economies are now projected to grow by
1.9 per cent in 2017 (+0.1 percentage points over Octo-
ber forecast) and 2.0 per cent in 2018 (+0.2 percentage
points over October forecast). The projection for the
US assumes a fiscal stimulus that leads growth to rise
to 2.3 per cent in 2017 and 2.5 per cent in 2018. Growth
projections for 2017 have also been revised upward for
Germany, Japan, Spain, and the UK, mostly on account
of a stronger-than-expected performance during the
latter part of 2016. These upward revisions more than
offset the downward revisions to the outlook for Italy
and Korea.
The primary factor underlying the strengthening global
outlook over 2017–18 is the projected pickup in EMDEs’
growth. This reflects a gradual normalization of macro-
economic strains. EMDE growth is currently estimated
at 4.1 per cent in 2016, and is projected to reach 4.5 per
cent for 2017, around 0.1 percentage point weaker than
the October forecast. A further pickup in growth to 4.8
per cent is projected for 2018.

ECONOMY MATTERS 36
GLOBAL TRENDS
The growth forecast for 2017 was revised up for China
(to 6.5 per cent, +0.3 percentage point over October
2016 forecast) on expectations of continued policy
support. However, continued reliance on policy stimu-
lus measures, not hardening the budget constraints of
state-owned enterprises and capital outflow pressures
raises the risk of a sharper slowdown.
In India, the growth forecast for the current (2016–17)
and next fiscal year were trimmed by one percentage
point and 0.4 percentage point, respectively. This was
due to the temporary negative consumption shock in-
duced by cash shortages and payment disruptions fol-
lowing demonetization. According to the World Bank,
India is expected to post a 7.6 per cent growth rate in
FY2018 as reforms loosen domestic supply bottlenecks
and increase productivity.
Public investment can bring private invest-
ment off the sidelines
“After years of disappointing global growth, we are en-
couraged to see stronger economic prospects on the
horizon,” World Bank Group President Jim Yong Kim
said in the Global Economic Prospects (GEP) report of
January. “Now is the time to take advantage of this mo-
mentum and increase investments in infrastructure and
people. This is vital to accelerating the sustainable and
inclusive economic growth required to end extreme
poverty.”
The GEP report analyses the worrisome weakening of
investment growth in EMDEs, which account for 1/3rd
of global GDP and 3/4th of the world’s population. In-
vestment growth fell to 3.4 per cent in 2015 from 10 per
cent in 2010, and likely declined another half percentage
point last year. Slowing investment growth is partly a
correction from high pre-crisis levels, but also reflects
obstacles to growth that EMDEs have faced, including
low oil prices (for oil exporters), slowing FDI (for com-
modity importers), and more broadly, private debt bur-
dens and political risk.
“We can help governments offer the private sector
more opportunities to invest with confidence that the
new capital it produces can plug into the infrastructure
of global connectivity,” said World Bank Chief Econo-
mist Paul Romer, in the GEP report. “Without new
streets, the private sector has no incentive to invest in
the physical capital of new buildings. Without new work
space connected to new living space, the billions of
people who want to join the modern economy will lose
the chance to invest in the human capital that comes
from learning on the job.”
Going forward: Policies
In the advanced economies where output gaps are still
negative (actual output falls short of potential output)
and wage pressures muted, the risk of persistent low
inflation remains. Monetary policy must remain accom-
modative and unconventional. Fiscal support remains
essential for generating momentum whose pace and
composition should be calibrated to minimize the drag
on output. In advanced economies without substan-
tially negative output gaps, any fiscal support should
be targeted towards strengthening safety nets and
increasing longer-term potential output. Structural re-
forms—boosting labour force participation, investing
in skills, improving matching process in labour markets,
increasing dynamism and innovation in product and
service markets, and promoting R&D investment – can
counteract waning potential growth
EMDEs face starkly diverse cyclical positions and struc-
tural challenges. Enhancing financial resilience can
reduce the vulnerability to tightening of global finan-
cial conditions, sharp currency movements and risk of
capital flow reversals. Economies with large and rising
non-financial debt, unhedged foreign liabilities or heavy
reliance on short-term borrowing to fund longer-term
investments must adopt stronger risk management
practices and contain balance sheet mismatches. In
low-income countries, the priority is to restore deplet-
ing fiscal buffers while continuing to spend efficiently
on critical capital needs and social outlays, strengthen
debt management, improve domestic revenue mobili-
zation, and implement structural reforms—including in
education—that pave the way for economic diversifica-
tion and higher productivity.
With growth weak and policy space limited in many
countries, continued multilateral effort is required in
several areas to minimize risks to financial stability and
sustain global improvements in living standards.

37
GLOBAL TRENDS
JAN-FEB 2017
US Treads on a Steady Road, With the World on
Tenterhooks
No upheavals by the FOMC: Status-quo de-
spite expectations of stimulus
Information received since the Federal Open Market
Committee (FOMC) met in December 2016 indicates
continued expansion of economic activity at a moder-
ate pace. Job gains have remained solid and the un-
employment rate has stayed near its recent low. The
economy has seen household spending continuing to
rise moderately despite soft business fixed investment.
Inflation has increased in recent quarters but is still be-
low the Committee’s 2 per cent longer-run objective.
In view of realized and expected labor market condi-
tions and inflation, the Committee decided to maintain
the target range for the federal funds rate at 0.5 to 0.75
per cent. The stance of monetary policy remains accom-
modative, thereby supporting some further strength-
ening in labor market conditions and a return to 2 per
cent inflation.
In determining the timing and size of future adjust-
ments to the target range for the federal funds rate,
the Committee has planned to assess realized and ex-
pected economic conditions with respect to its objec-
Economic activity in the US continued to expand at a
moderate pace. The GDP growth stood at 1.6 per cent in
2016, as per the first estimate released by the Bureau of
Economic Analysis in January-end, 2017. Though lower
tives of maximum employment and 2 per cent inflation.
The Committee expects that economic conditions will
evolve in a manner that will warrant only gradual in-
creases in the federal funds rate. The federal funds rate
is likely to remain, for some time, below levels that are
expected to prevail in the longer run.
Economic scenario during 2016: Sustained
growth rate on the back of household spend-
ing
Both the World Economic Update released by the IMF
and Global Economic Prospects report released by the
World Bank in January 2017 had kept a watch on im-
pending US policy and had listed it as a major risk to the
outlook, upside risk for an accommodative stance, and
downside risk in an adverse case. “Because of the out-
size role the US plays in the world economy, changes
in policy direction may have global ripple effects. More
expansionary U.S. fiscal policies could lead to stronger
growth in the US and abroad over the near-term, but
changes to trade or other policies could offset those
gains,” said World Bank Development Economics Pros-
pects Director Ayhan Kose in the Global Economic Pros-
pects report.
than GDP growth rates of 2.4 per cent in 2014 and 2.6
per cent in 2015, a sustained growth rate was a positive
sign as the advanced economies in the world are strug-
gling with boosting economic activity.

ECONOMY MATTERS 38
GLOBAL TRENDS
Growthinpersonalconsumptionexpendituressoftened
marginally to 2.7 per cent as compared to 3.2 per cent in
2015, but majorly in line with the growth of 2.9 per cent
in 2014. This decline was nearly homogeneously attrib-
utable to durables, non-durables and services. Growth
in gross private domestic investment slipped into nega-
tive territory and saw a sharp contraction to the tune
of 1.5 per cent as compared to a positive growth of 5.0
per cent in 2015. Investment in non-residential fixed in-
vestment contracted due to contraction in investment
in equipment. Residential fixed investment also saw a
steep fall.
Exports grew by 0.4 per cent in 2016 as compared to 0.1
per cent in 2014, though both substantially lower than
the trend till 2014. This was on the back of exports of
goods which recovered from contraction witnessed last
year and made up for flat growth in exports of services.
Imports – which are a subtraction in GDP–fell, growing
only by 1.1 per cent in 2016 as compared to 4.6 per cent
in 2015 as growth in imports of goods fell even as that
of services remained constant. Government consump-
tion expenditures and gross investment softened and
grew only by 0.9 per cent as compared to 1.8 per cent in
2015, though both positive as compared to contractions
in prior years. Growth in federal spending improved
marginally, mostly in defense area, but that in state and
local spending saw a downturn.

39
GLOBAL TRENDS
JAN-FEB 2017
Solid job gains on the back of private sector
US non-farm payrolls (NFP) witnessed a rise to the tune
of 227,000 in January 2017, reaching its peak in the last
six months, far and wide beating the expectations of
180,000. As many as 237,000 jobs were added in the
private sector in January 2017 as against 165,000 in De-
cember 2016. The government sector saw sharper job
losses of 10,000 in January 2017 as compared to 8,000
job losses in December 2016.
Within the private sector, private service-providing seg-
ment added 192,000 jobs in January 2017 as compared
to 150,000 in December 2016. The new jobs in the pri-
vate service-providing segment were attributable to
a step up in job gains for retail trade (46,000 jobs in
January 2017), financial activities (32,000 jobs in January
2017) and leisure and hospitality (34,000 jobs in January
2017).
The private goods-producing segment, saw a three-
fold increase and added 45,000 jobs in January 2017, as
compared to 15,000 jobs in December 2016. Within the
goods-producing sector, the construction (36,000 jobs
in January 2017 as compared to 2,000 jobs in December
2016) and mining & logging (4,000 jobs in January 2017
as compared to 2,000 jobs in December 2016) segments
saw more job additions. Manufacturing saw a drop in
the same (5,000 jobs in January 2017 as compared to
11,000 jobs in December 2016).
The December 2016 data was marginally revised up-
wards by 1,000 to 157,000. The less volatile 3-month
average NFP remained below its psychological 200,000
mark, standing at 183,000 as compared to 148,000 in
December 2016. Average hourly earnings witnessed an
upturn by 2.5 per cent y-o-y in January 2017, which was
a slight dip from the revised 2.8 per cent y-o-y growth
witnessed in December 2016.
Going forward
“President Donald Trump is likely to be good for the
U.S. economy. Trump’s plan for additional investment
in U.S. infrastructure and tax reforms would underpin
economic growth”, IMF Managing Director, Christine
Lagarde said at the annual World Government Sum-
mit in Dubai on 13th February 2017. “But rising interest
rates and strengthening of dollar could challenge global
economies. A tightening will be difficult on the global
economy and for which economies have to prepare”,
said Lagarde.
All world leaders and economists are keeping a close
watch on the US actions in a similar vein. The World
Economic Outlook in its January update, has mentioned
that the US dollar has appreciated in real effective terms
by over 6 per cent since August 2016, and the economy
is approaching full employment. Assuming a fiscal stim-
ulus, the GDP growth in US is projected to rise to 2.3 per
cent in 2017 and 2.5 per cent in 2018. While uncertainties
abound in the new Trump administration, the Federal
Reserve has steered clear of either extreme hawkish or
dovish approach.

ECONOMY MONITOR
ECONOMY MATTERS 40

41
ECONOMY MONITOR
JAN-FEB 2017

Focus of the Month: Union Budget 2017-18

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