Economic Advisory Council

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12th October, 2017: Another significant day in the ongoing speculations and corrections regarding the economic, GDP growth. The Economic Advisory Council (EAC) to the PM, met for the first time. PM Modi set up the Economic Advisory Council last month amid concerns over a slowdown as economic growth slumped to a three-year-low of 5.7 per cent in the June quarter.

The Advisory Council, headed by Mr. BibekDebroy and a team of economics stalwarts and experts in consultation with the PM, has chalked out a path for economic recovery and boost the growth to recover its lost steam.

The Council has acknowledged economic slowdown but disagrees with the cuts in the projected India’s growth rate. It has emphasized that accelerating growth and employment over the next six months would be the top priority of the Council.It has refrained from responding to demands for fiscal stimulus or cuts in interest rates.

However, the Council has picked up 10 key sectors of the Indian economy to be revived and to look deeper into issues in key sectors and explore solutions. The areas chosen are -economic growth, job creation, informal sector and integration, fiscal framework, monetary policy, public expenditure, institutions of economic governance, agriculture and animal husbandry, patterns of consumption and production, and social sector.

The Council will structure its report around these 10 key areas. The report will be prepared after consulting all key stakeholders. As also agreed by its members, the Council will also come out with Economy Track Monitor, using lead indicators and triggers for action.

The 10 key points worth considering are -

Economic growth – The economic growth has taken 2 major hits of Demonetization and GST. The aftermath impact was seen on the economy at 5.7% growth rate, which was below the expectations of 7%. Bleak global macroeconomic factors have resulted in sluggish exports, depreciation of rupee, slowing FDI inflows. The macroeconomic stability is under pressure and will be a key challenge to the economic growth.

Job Creation – This has been one of the root causes for the economic challenges. Rising trade protectionism, more stringent foreign employment, improper skill and vocational developments have been a laggard and a big drag on the economy. Further, automation and digitization have also reduced vacancies in the economy. It will be an uphill task in order to create more jobs and proper skill development in order to reclaim its low-cost skill manufacturing.

Informal sector and Integration – The growth in the informal sector is usually proxied or not captured by the formal sector indicators. Due to this, the production or supply side, the effect on economic activity will be underestimated.With the advent of GST, informal sector integration will be a key to obtain clearer picture of the economy.

Fiscal Framework - As the economic survey states, India is still afflicted by the twin balance sheet problem, which is holding back investment and credit growth and hence overall economic activity.So, this will be one of the key challenges in this area for a start.

Monetary Policy – Since the global financial crisis in 2008-09, the monetary policies have seen a paradigm shift. As of now, the council also has stressed on not going for fiscal stimulus, which makes the monetary policy more critical component to regulate the inflation and money movement, which will have a direct impact on the informal sector.

Public Expenditure - The government has already reached 96% of the limit of the 3.2% of the fiscal deficit, which would further restrain the government spending.

Institutions of economic governance – The institutions that support economic activity and economic transactions by protecting and providing physical and organizational infrastructure. These institutions, such as SEBI, MCA, CBDT,DIPP etc. have a direct impact on ease of doing business, and on creating a conducive environment for businesses to grow. Bringing changes in policies is the need of the hour as India still is at 130th position globally for ease of doing business. It was 116 in 2006.

Agriculture and animal husbandry – The uncertainties in agriculture emanate primarily from deficient rainfall. Till date, majority of Indian farmers rely on monsoon for availability of water. The small and marginal farmers have low bargaining power, since they have very little marketable surplus and are price takers in a market. The median agriculture incomes, valued at market rates, are still at around a meagre of Rs.2000 per month. (1600 in 2012-13)

Patterns of consumption and production – As per the United Nations report, “sustainable consumption and production is about promoting resource and energy efficiency, sustainable infrastructure, and providing access to basic services, green and decent jobs and a better quality of life for all. Its implementation helps to achieve overall development plans, reduce future economic, environmental and social costs, strengthen economic competitiveness and reduce poverty.” We are heading towards a massive strain on our resources due to increasing population. Sustainability is the key to the survival of the mankind.

Social Sector – The two major components of social sector are Education and Health. The government spending on social services has expenditure a proportion of GDP which remained stagnant 2011-12 to 2014-15, has seen marginal increase at 7.4% in 2016-17, but the picture is still gloomy. In education sector, the annual average drop-out rate in states like Odisha is as high as 30 per cent which require policy interventions. Similarly, the retention rates in secondary schools are less than 50 per cent in states with high populations. In health sector, in comparison to the major emerging economies, the average life expectancy in India is the lowest at 68.3years and has to significantly step up the efforts to reduce mortality and neo natal mortality rates.

The Council should focus or initiate the process by integrating the informal sector, so as to obtain more accurate data about the economic progress. This data further can be used as information for the fiscal consolidation required and will help them understand the required skill sets which will help push reforms in the social sector, mainly education.These builds are more cohesive and logical chain to bring and push reforms to streamline and develop a more sustainable economy.These are some of the key challenges that should be in focus for the advisory council for a proper assessment and solution to the changing economic scenarios.