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From oil price uncertainty to stock market bubble: Key challenges highlighted in Economic Survey 2018

The Economic Survey tabled in Parliament on Monday highlights several major challenges India is facing. | January 29, 2018 | Updated 19:27 IST
From oil price uncertainty to stock market bubble: Key challenges highlighted in Economic Survey 2018

The Economic Survey tabled in Parliament on Monday highlights several major challenges India is facing. While the report underlines how the Goods and Services Tax (GST), Bankruptcy Code, bank recapitalization, and further liberalisation of the FDI has lifted the country's economic prospects, it also flags concerns over issues like hyper-globalisation, poor education standard, agricultural growth, oil price variation, among others. Here are the key challenges mentioned in the survey.

OIL-PRICE VARIATION: Chief Economist Adviser to the government, Arvind Subramanian said that every $10 per barrel increase in oil price brings down GDP by around 0.2-0.3 percentage points and worsens the CAD (Current Account Deficit) by about $9-10 billion dollars. The survey highlights that against the emerging macroeconomic concerns, policy vigilance will be necessary in the coming year, especially if high international oil prices persist or elevated stock prices correct sharply, provoking a 'sudden stall' in capital flows.

AGRICULTURAL GROWTH: Growth rates of agricultural productivity for richer countries have been consistently greater than for developing countries. The survey says that "for India agricultural productivity growth has been stagnant, averaging roughly 3% over the last 30 years. It is also vulnerable to temperature increase and still heavily dependent on precipitation. For late convergers, agricultural productivity is critical not just for feeding people but for ensuring human capital accumulation in those who move from agriculture to the modern sectors".

STOCK MARKET BUBBLE: Chief Economic Advisor (CEA) Arvind Subramanian has hinted at a bubble kind of situation in the stock market and called for heightened vigilance. "We have seen around the world that when asset prices go up very much, they always tend to come back and so we have to be watchful. The higher the prices go, I think our vigilance should increase correspondingly," says the CEA.  The survey also warns of the risks that the economy faces and therefore, asks for exercising caution.

India has failed to provide even the basic education necessary for structural transformation, says the survey. "This is reflected in the finding that in India, roughly 40 to 50% of rural children in grades 3 to 8 cannot meet the basic learning standards. This failure will prove increasingly costly because the human capital frontier for the new structural transformation will shift further away as technology will increasingly favour skilled human capital. There is, however, some consolation that the trend has started to improve since 2014."

POOR TAX COLLECTION IN RURAL AREAS: The survey points out that low level of tax collections by the local governments in rural areas is posing challenge in reconciling fiscal federalism and accountability. "Panchayats received 95 per cent of their revenues from the devolved funds from the centre/state while generating only 5 per cent from own resources. Panchayats in Kerala, Andhra Pradesh and Karnataka do collect some direct taxes while villages in states like Uttar Pradesh almost entirely depend on transfer funds," it says.

HYPER GLOBALISATION CAUSING FALL IN TRADE: The survey highlights how hyper globalisation has caused backlash against globalization, which has affected the growth of "late convergers like India". "Early convergers like Japan, South Korea and China were able to post average export growth rates of over 15 per cent for thirty years of their convergence periods. However, the trading environment has changed for late convergers like India. A backlash in advanced countries against rapid globalization has led to a fall in world trade GDP ratios since 2011. This means a decline in exporting opportunities, especially since politics in advanced countries is moving de facto in the direction of seeking and forcing lower trade GDP ratios".

CORRELATION BETWEEN OVERALL GROWTH, GOOD GROWTH: The country has faced difficulties in transferring resources from low productivity to higher productivity sectors, says the survey, adding that for successful development, resources need to shift from low to high productivity sectors. "Structural transformation gets thwarted if resources shift from informal, low productivity sectors to ones that are only marginally less informal or more productive. Studies in India show a weakening correlation between overall growth and good growth."

DOMESTIC PATENT SYSTEM: Patents reflect a country's standing in technology. According to the WIPO, India has the world's 7th largest Patent Filing Office with around 45,658 patents filed in 2015 as compared to 1,101,864 by China and 589,410 by the USA. "India produces fewer patents per capita. One major challenge in India has been the domestic patent system. Residential applications have increased substantially since India joined the international patent regime in 2005. However, the number of patents granted fell sharply post- 2008 and has remained low. While Indian residents were granted over 5000 patents in foreign offices in 2015, the number of resident filings in India was little over 800."


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