Rising crude prices, sinking human capital pose challenge

Rising crude prices, sinking human capital pose challenge

by January 30, 2018 0 comments

The Economic Survey for 2017-18 tabled in Parliament on Monday has flagged several major concerns that could impact the growth scenario.These include threats to agricultural growth due to climate change, spurt in oil prices, emerging risk to global trade, and poor standard of education among others. The Survey also feels that the euphoria that has driven the stock market to an all-time high may not last for long.

Oil prices impact

Taking note of the rising crude prices, the Chief Economist Adviser to the Government, Arvind Subramanian, pointed out that every $10 per barrel increase in oil price leads to a 0.2-0.3 percentage decline in the GDP and impact the Current Account Deficit by about $9- 10 billion dollars. The Survey fears that in case high inter- national oil prices persist and stock market sees sharp correction, the capital flows could be adversely impacted.

Climate for agriculture

On the agricultural growth front, the Survey warned that climate change could adversely affect farmers’ income by up to 20-25 per cent in the medium term. The Survey called for “dramatic” improvement in irrigation, use of new technologies and better targeting of power and fertiliser subsidies.

“Climate change – whose imprint on Indian agriculture is already visible – might reduce farm incomes by up to 20-25 per cent in the medium term,” the Survey for 2017-18 said. Climate change could reduce annual farm incomes in the range of 15-18 percent on average, and up to 20-25 per cent for areas not irrigated, it said. At current level of farm income that translates into more than ~3,600 per year for the median farm household, the Survey estimated.

Sinking human capital

The Survey also talked about risk to growth coming from poor standard of education. “This is reflected in the finding that in India, roughly 40 to 50 per cent 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.”

Stock market correction

The Survey has also cautioned that the stock market might see a significant correction depending on a host of factors. The Survey said that growth in the economy as well as corporate earnings is required to sustain the current stock market valuations, otherwise the possibility of a correction cannot be ruled out. The higher valuation in the stock markets could be due to fall in the equity risk premium (ERP) reflected in a massive portfolio re-allocation by savers towards equity in the wake of policy-induced reductions in the return on other assets.

ERP, in market parlance, refers to the extra return required on shares compared with other assets. “But sustainlng these valuations will require future growth in the economy and earnings in line with current expectations, and require the portfolio reallocation to be semi-permanent. Otherwise, the possibility of a correction in them cannot be ruled out,” the Survey noted.

Rural revenue

The Survey sees unsatisfactory tax collection in rural areas also as a threat to growth. “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,” the Survey said. The survey also sees emergence of threat to the country’s export from backlash against globalisation of trade in many countries.

It said that many trade restrictive measures, including several types of non-tariff barriers (NTBs), restrictions on visas and risk of backlash against movement of persons add to a situation that is of growing concern. Stating that India’s share in global exports has stagnated at 1.7 per cent from 2011 to 2016 with intermittent falls to 1.6 per cent, the Survey said there is a need for a well thought-out strategy for the country to reach a “respectable share of at least 5 per cent”. In the April-June period in 2017-18, India’s trade deficit increased by 108.2 per cent with high import growth while export growth was moderate, it said. However, the Survey pointed out that the trade deficit has seen continuous decline since 2014-15, reaching a level of $108 billion in 2016-17. The trade deficit had increased steadily from 2004-05 and reached the highest level of $190.3 billion in 2012-13. “Some green shoots have started to appear on the trade horizon with world trade growth projected at 3.8 per cent and 3.9 per cent in 2017 and 2018, “India’s exports continuing to be in positive territory for the fourth consecutive month in May 2017 and in double digits in April-May 2017,” it said.

Courtesy – The Pioneer

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