THE HINDU EDITORIAL-19TH AUGUST 2017

i) Cause for caution, not gloom

The much debated Economic Survey II presents a mixed picture of the Indian economy. It highlights some obvious strengths but “optimism about the medium-term is moderated by a gathering anxiety about near term deflationary impulses”. How valid is this? This year’s Economic Survey is innovative in more ways than one. This is the first time that a second volume is being presented containing a “backward looking review” and “historical data tables”, and it subsumes the mid-term economic analysis usually presented in December. Some key chapters included in this volume on agriculture, industry, infrastructure should normally have come in Volume I itself. These were displaced by the dominance of more preferred themes like Universal Basic Income, and “India on the Move”. Over the years both the presentation and the format of the Economic Survey have under gone fundamental changes. For most of us, the Economic Survey was a document presented on the eve of the Annual Financial Statement. It was, by and large, an analytical underpinning and precursor of the Budget. There was a meaningful connection between the Economic Survey and the Budget proposals. For some time, this relationship has ceased. The Economic Surveys have come to increasingly reflect the predilections and preferences of its authors, raising the question whether Economic Surveys are designed to trigger intellectual debate and become incubators of nascent ideas. However, seeking a congruence and connect between the prognosis and prescriptions for the economy with the budgetary proposals would not be inappropriate. That said, this Economic Survey has transparency and candour. The Preface has a disclaimer to say that the update in the State of the Economy chapter in this volume “can be attributed to the CEA, with the Economic Division taking the lead for other chapters”. This can lead to contradictions and asymmetry between the different segments of the report.

Rate of growth

Leaving aside these issues, what are some key conclusions? One, on the growth rate, while adhering to the forecast in Volume 1 for real GDP growth of 6.75%-7.5% this year, it suggests that the balance of risk has shifted to the downward side of the range. In plain language, this means a sub-7% rate of growth. Just one day prior to the Economic Survey, the Finance Minister presented to Parliament the Medium-Term Expenditure Framework statement in pursuance of the Fiscal Responsibility and Budget Management Act, 2003. This was “essentially a vertical expansion of the aggregates of expenditure in the fiscal framework presented with the Annual Financial Statement to provide closer integration between Budget and FRBM Statements”. In this statement, some of the subsequent developments both on the revenue and expenditure side like the Goods and Services Tax (GST) and the Seventh Pay Commission have also been factored. This framework assumes that nominal GDP growth for the current (2017-18) and subsequent two years would be 11.75%, 12.3% and 12.3%, respectively. Assuming inflation to be in the acceptable range of about 4%, the expected growth would be 7% plus. No doubt, the savings and investment ratio has declined in recent years. To sustain the projected rates of growth, the savings-investment ratio would need to be increased, which is contingent on continuation of structural reforms, reducing public dis-savings through privatisations such as Air India and other measures to boost savings to earlier high figures in the mid-thirties. The demand boost inevitably comes from domestic consumption which accounted for about 96% of GDP growth in FY 2017. This is likely to continue. The projections also implicitly accept the fiscal deficit of 3.2% in the current year and 3% for the subsequent two years.

Inflation targets

Two, on inflation, the Economic Survey seeks to demonstrate that for sustained 14 quarters the actual inflation (WPI-CPI) has undershot the projections made by the Reserve Bank (RBI). It argues that India has moved to a low inflation trajectory, given supply-side elasticity in agriculture and long-term softening of global oil prices due to alternatives such as shale and increasing competitiveness of renewable fuels, particularly solar. It concludes that in the Indian context real neutral interest rates hover around 1.25-1.75% and that the present rate is about 25-75 basis points above the neutral rate. In short, a deeper cut in the interest rates would be warranted, given that current inflation at 1.5% is running well below the 4% target. On monetary policy, the central bankers have all over made calculations (based on conservative assumptions) and undershot inflation targets. It is equally ironic that the data in the last two days suggest that both the consumer price index (CPI) and the whole-sale price index (WPI) have risen quickly in July primarily led by food inflation and the housing index reflecting the 7th Pay Commission recommendations, and so did the core index. Analysts now expect the underlying inflation to rest at the 4% ballpark figure, which also happens to be the RBI target. It is said that in politics a week is too long a time. This could be equally said in economics, for events in the last one week have questioned the inflationary projections made in the Survey. At any rate, monetary policy cannot be on a roller-coaster ride. Prudence would prompt adherence to the analysis of the Monetary Policy Committee and judgment on interest rate calibration. Besides, multiplier benefits from low interest rate regimes are contingent on deeper structural reforms. Three, regarding the exchange rate, real effective interest rates have appreciated significantly. The RBI has the unenviable challenge of managing significant inward capital flows with exchange rates which do not penalise domestic industry through a premium on cheaper imports. However, export competitiveness needs interventions which go beyond dependence on the exchange rate by way of improved logistics, infrastructure and altering the mix of commodities and destinations to meet new demand preferences. Four, fiscal tightening by States due to Ujwal DISCOM Assurance Yojana (UDAY), farm loan waivers, declining profitability of some key sectors like power and telecom, the shadow of unresolved twin balance sheet problems and transitional issues of the GST are contributory to deflationary pressures. Normally understood, farm loan waivers, by reducing the indebtedness of farmers, enhance their income with a positive impact on consumption and demand. The constriction of capital expenditure for adherence to fiscal limits is somewhat mitigated by past experience. The quantum of actual farm loan waivers inevitably turns out to be somewhat smaller than the initial estimate; but more importantly, their impact on State finances is spread over a typical three-year cycle. Equally, UDAY is designed to clean up the balance sheets of electricity boards in the short run and is expected to improve management of electricity boards. Appropriate action on tariff fixation, regular billing cycles, monitoring timely collection by distribution companies is an integral part of the UDAY package. This would also benefit States’ finances. In a complex federal polity, States in financial distress may need hand-holding. Cooperative federalism entails amelioration of the transient financial distress experienced by States. While these issues would need to be holistically addressed by the 15th Finance Commission, their recommendations are two years away. Short-term State-specific measures would need to be innovatively conceived. The recent initiatives to improve the fertilizer mix through extensive soil-testing along with the Pradhan Mantri Fasal Bima Yojana will prove beneficial to stabilise farm incomes. Nonetheless, the prescriptions contained in the chapter on agriculture by way of extending assured irrigation benefits, better market linkages for producers to prolong the shelf life of perishable commodities, improving the sale of commodities deserve priority action.

Rekindling investment

The Economic Survey II cautions policymakers of a possible deflationary cycle. Faster resolution of the twin balance sheets is critical to rekindling private investment. Equally, accelerating the pace of agricultural reforms, targeted capital expenditure, improving ease of doing business and the multiple infrastructure initiatives, particularly in roads and power, are integral to any coherent action. Similarly, stressed sectors like telecom and power need speedier resolution. Macroeconomic stability has been a hard-won battle. The centrepiece lies in continued fiscal rectitude and inflation targeting. No doubt, macroeconomic stability must also spur growth and the two objectives need constant recalibration. It has been famously said, “the basic prescription of preventing deflation is not to get into it in the first place.” These lurking dangers and the cautionary note of the Economic Survey II are a valuable contribution.

ii) Barcelona horror

A vehicular attack to maximise casualties and spread panic is now a well-tested terrorist strategy in European cities. Barcelona became the latest urban centre to be so hit when a van ploughed into pedestrians on a busy street, leaving at least 14 dead and more than 100 injured. This is Spain’s worst terrorist incident since the Madrid train bombings of 2004. The Islamic State has, expectedly, claimed responsibility. The plot appeared to be multi-site and involved numerous actors, not just a “lone wolf”. This hints at meticulous planning. The police have linked the van attack in Barcelona’s Las Ramblas area to an explosion the previous evening that ripped through a home and killed one person in a town 200 km south of Barcelona. Authorities also saw connections to a second vehicle attack that occurred in the resort town of Cambrils, south of Barcelona. With at least one attacker, the driver of the van, said to be at large, the Spanish government is likely to be grappling with the same question as its counterparts elsewhere in Europe: what options are available to law enforcement to thwart attacks using easy-to-obtain vehicles to grab the headlines? Over the past year, the weaponisation of vehicles has increasingly become the tactic of choice for extremists: it was used in London (March and June 2017, at least12 killed), Stockholm (April 2017, five killed), Berlin (December 2016, 12 killed), and Nice ( July 2016, 86 killed). If indeed it is established that the IS was behind the Barcelona attack, even if only as an “inspiration” and not in terms of planning or execution, this would call for a renewed focus on containing the jihadist group’s recruitment agenda in Europe. There is a real risk that with the steady erosion of the IS’s territorial control in Iraq and Syria, recently highlighted by its defeat in Mosul, foreign fighters may return from those battlefields to their home countries and focus on carrying out attacks there. European intelligence and security services that were beefed up after a multitude of al-Qaedalinked attacks through the decade of the 2000s are still fumbling to gain control of this new paradigm of individualised, low-tech terror. Until now it was believed that Spanish intelligence had performed better on this score than France, and perhaps even the U.K. Strained by a lack of resources and suboptimal intra-Europe coordination, France’s intelligence seemed no match for the 2015 IS terror campaign on its soil, which in the death of 130 people in the Paris attacks in November. Spanish authorities, on the other hand, are said to have foiled several major plots in 2008, and “at least 10 separate conspiracies” in 2016, not to mention additional networks reportedly uncovered this year. Notwithstanding these variations, law enforcement agencies across the continent, and elsewhere, now face the unenviable challenge of adapting to the evolving terror tactics of a dispersed, determined enemy.

Vocabulary:

1) Obvious

Meaning: Easily perceived or understood; clear, self-evident, or apparent.

Example: Unemployment has been the most obvious cost of the recession.

Synonyms: Clear, Plain and evident

Antonyms: Imperceptible, Inconspicuous

2) Optimism

Meaning: Hopefulness and confidence about the future or the success of something.

Example: The talks had been amicable and there were grounds for optimism.

Synonyms: Hope, Confidence

Antonyms: Pessimism

3) Deflationary

Meaning: Characterized by or tending to cause economic deflation.

Example: The deflationary effect of higher taxes.

4) Impulses

Meaning: A sudden strong and unreflective urge or desire to act.

Example: I had an almost irresistible impulse to giggle.

Synonyms: Urge, Instinct

5) Subsumes

Meaning: include or absorb (something) in something else.

Example: Most of these phenomena can be subsumed under two broad categories.

6) Underpinning

Meaning: A set of ideas, motives, or devices which justify or form the basis for something.

Example: The theoretical underpinning for free-market economics.

7) Precursor

Meaning: A person or thing that comes before another of the same kind; a forerunner.

Example: A three-stringed precursor of the violin.

Synonyms: Forerunner, Predecessor

8) Predilections

Meaning: A preference or special liking for something; a bias in favour of something.

Example: Your predilection for pretty girls.

Synonyms: Liking, Fondness

Antonyms: Dislike, Disinclination

9) Incubators

Meaning: An organization or place that aids the development of new business ventures especially by providing low-cost commercial space, management assistance, or shared services

Example: An incubator project

10) Nascent

Meaning: (especially of a process or organization) just coming into existence and beginning to display signs of future potential.

Example: The nascent space industry.

11) Congruence

Meaning: Agreement or harmony; compatibility.

Example: The results show quite good congruence with recent studies.

Synonyms: Compatibility, Consistency

Antonyms: Conflict

12) Prognosis

Meaning: A forecast of the likely outcome of a situation.

Example: Gloomy prognoses about overpopulation.

Synonyms: Forecast, Prediction

13) Candour

Meaning: The quality of being open and honest; frankness.

Example: A man of refreshing candour.

Synonyms: Frankness, Openness

Antonyms: Insincerity

14) Asymmetry

Meaning: Lack of equality or equivalence between parts or aspects of something; lack of symmetry.

Example: There was an asymmetry between the right and left ears.

15) Pursuance

Meaning: Engagement in an activity or course of action.

Example: You have a right to use public areas in the pursuance of your lawful hobby.

Synonyms: Execution, Discharge

16) Contingent

Meaning: Subject to chance.

Example: The contingent nature of the job.

Synonyms: Chance, Accidental

Antonyms: Predictable

17) Dissavings

Meaning: The excess amount spent;The action of spending more than one has earned in a given period.

Example: Dissaving results when consumption is greater than income and is essentially the opposite of saving.

18) Inevitably

Meaning: As is certain to happen; unavoidably.

Example: Inevitably some details are already out of date.

Synonyms: Naturally, Automatically

19) Undershot

Meaning: To fail to achieve a particular result.

Example: The finance minister undershot his forecast by €3 billion.

20) Ballpark

Meaning: An area or range within which an amount or estimate is likely to be correct ;(of a price or cost) approximate.

Example: We can make a pretty good guess that this figure’s in the ballpark.

21) Prudence

Meaning: The quality of being prudent; cautiousness.

Example: We need to exercise prudence in such important matters.

Synonyms: Wisdom, Judgement

Antonyms: Folly, Recklessness

22) Adherence

Meaning: The quality or process of sticking fast to an object or surface.

Example: Observing the adherence of the seeds to clothing prompted the development of Velcro.

23) Calibration

Meaning: Carefully assess, set, or adjust (something abstract).

Example: The regulators cannot properly calibrate the risks involved.

24) Unenviable

Meaning: Difficult, undesirable, or unpleasant.

Example: An unenviable reputation for drunkenness.

Synonyms: Disagreeable, Unpleasant

Antonyms: Enviable, Desirable

25) Amelioration

Meaning: The act of making something better; improvement.

Example: Progress brings with it the amelioration of the human condition.

26) Perishable

Meaning: (especially of food) likely to decay or go bad quickly.

Example: The storage of perishable foods.

Synonyms: Easily spoilt, Biodegradable

27) Rekindling

Meaning: Revive (something lost or lapsed).

Example: He tried to rekindle their friendship”

Synonyms: Restoring, Reviving

28) Rectitude

Meaning: Morally correct behaviour or thinking; righteousness.

Example: Mattie is a model of rectitude.

Synonyms: Righteousness, Goodness

Antonyms: Infamy, Dishonesty

29) Spur

Meaning: A thing that prompts or encourages someone; an incentive.

Example: Wars act as a spur to practical invention.

Synonyms: Stimulus, Incentive

Antonyms: Disincentive, Discouragement

30) Recalibration

Meaning: To change the way you do or think about something.

Example: The sensors had to be recalibrated.

31) Lurking

Meaning: Be or remain hidden so as to wait in ambush for someone or something.

Example: A ruthless killer still lurked in the darkness.

Synonyms: Skulk, Loiter

32) Ploughed

Meaning: (especially of a vehicle) move in a fast and uncontrolled manner.

Example: The car ploughed into the side of a van.

Synonyms: Career, Plunge

33) Lone wolf

Meaning: A person who prefers to act alone.

Example: He’s a lone wolf; that’s what made him a successful foreign correspondent.

34) Meticulous

Meaning: Showing great attention to detail; very careful and precise.

Example: The designs are hand-glazed with meticulous care.

Synonyms: Careful, Conscientious

Antonyms: Careless, Sloppy

35) Ripped

Meaning: Move forcefully and rapidly.

Example: Fire ripped through her bungalow.

36) Thwart

Meaning: Prevent (someone) from accomplishing something; oppose (a plan, attempt, or ambition) successfully.

Example: The government had been able to thwart all attempts by opposition leaders to form new parties.

Synonyms: Foil, Frustrate

Antonyms: Assist, Facilitate

37) Beefed

Meaning: A complaint.

Example: My main beef about the job is that I have to work on Saturdays.

38) Multitude

Meaning: The state of being numerous.

Example: They would swarm over the river in their multitude.

39) Fumbling

Meaning: do (or) handle something clumsily.

Example: She fumbled with the lock.

Synonyms: Botch, Bungle

40) Suboptimal

Meaning: Of less than the highest standard or quality.

Example: Suboptimal working conditions.

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