India’s spending on R&D reduces against rising per capita income

CEA Subramanian bats for private push in research

Scientists find potential trigger to kill cancer

India’s spending on research and development as a percentage of gross domestic product fell against a rising per capita income in recent years, contrary to China and select advanced economies in comparison, the analysis presented in the economic survey has demonstrated.

India spent only 0.7% of its GDP on R&D in 2016-17, got only a fifth of its filed patents granted in 2016 and filed only six patents per million people.

Though R&D spending in India (% of GDP) grew faster than China at a time when their per capita incomes were comparable, China’s spending rate outpaced India’s when the former’s income levels rose.

This reinforces the direct relationship between improved incomes and scientific prowess when we consider this fact: private funding has contributed to scientific progress more than government efforts in advanced economies.

Comparing India with China, Israel, South Korea, Japan and the United States, the survey has found India as an outlier in the pattern of R&D funding: while R&D spend in India is led by the government, that in the countries in comparison has been led by private investment.

The economic survey for the financial year 2017-18 was tabled in the parliament by chief economic advisor Arvind Subramanian on January 29, 2017. While it proposed better private-government coordination, it also laid down potential missions on subjects like dark matter, genomics and cyber-physical systems.

Corporates in China spent $ 286 billion in 2015 on R&D, comparable to $ 341 billion by counterparts in the US. India corporates spent a mere $17 billion (Chart 1).

Though India ranks sixth in global scientific publications, the survey quotes a study to note that promotion in research jobs acts as an incentive rather than the research objective. It also notes India’s lag compared to China, specifically in the period that saw the economic boom.

“If journal publications reflect a country’s prowess in science, patents reflect its standing in technology”, the survey said.

In terms of patents applications filed, India and China were comparably negligible in front of the advanced economies prior to 1990. While China filed twice the number of patents as that of India, India led in the number of patents granted (Chart 2).

China eventually took the lead in the 1990s and India’s contribution became increasingly negligible in the 2000s and more so in recent years.


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Budget 2018: Revenue shortfall put corporate tax cuts on hold

Modi pledged in 2015 to bring down corporate taxes over four years, but businesses are still waiting for a roadmap on how that will happen

Budget 2018

Businesses waiting for Indian Prime Minister Narendra Modi to follow through on a pledge to cut corporate taxes may need to wait a bit longer.

In his last full budget before 2019 elections, Modi is facing a revenue squeeze that may make it difficult to deliver on a promise to lower the basic corporate tax rate over time to 25 percent from 30 percent. It’s a catch-22 situation for the premier, who is also trying to lure foreign investors at a time when the US, UK and other countries are lowering business taxes.

Here’s a look at Modi’s challenge ahead of the government’s budget 2018 on Thursday.

Why Cut?

Modi pledged in 2015 to bring down corporate taxes over four years, but businesses are still waiting for a roadmap on how that will happen. It’s part of his mission to improve India’s investment climate: he is also reducing red-tape, spurring the liquidation of assets to speed-up the recovery of bad loans, and introduced a national sales tax last year to cut down business costs. India is ranked 119 out of 190 countries when it comes to ease of paying taxes, according to the World Bank’s Doing Business index.

While those reforms have helped India win a credit rating upgrade and record foreign direct inflows last year, Modi needs to keep investment going to help support an economy that’s set to expand at its slowest pace in four years.

Tax competition around the world is heating up. The US lowered corporate taxes by 14 percentage points to 21 percent, with companies like Apple Inc, Wal-Mart Stores Inc and JPMorgan Chase & Co announcing plans to raise investment, hiring or wages.

“The US has made corporate tax rates competitive and India needs to respond,” said Jayesh Sanghvi, a tax partner at EY in Hyderabad. If it doesn’t, companies will examine arbitrage opportunities given the 10-15 percentage point difference, he said.

After reducing the rate last year to 25 percent for small companies with a turnover of up to 500 million rupees ($7.9 million), businesses are expecting Finance Minister Arun Jaitley to move again this week. Half of the 120 professionals surveyed by Deloitte expect the rate to be cut to 25 percent for all companies. Rakesh Nangia, head of tax advisory firm Nangia & Co, warned of a “flight of capital” if tax rates aren’t reduced.

Can India Afford It?

Modi is in a fiscal bind. Revenue collection remains under pressure following the chaotic roll-out of a national sales tax, and with an eye on next year’s election, his spending priorities may turn to the distressed rural sector, putting pressure on the budget deficit.

The government signaled on Monday it may slow the pace of fiscal consolidation after pledging to narrow the budget gap to 3 percent of gross domestic product in the year beginning April 1 from an estimated 3.2 percent this year. Chief Economic Adviser Arvind Subramanian told lawmakers that setting “overly ambitious targets” may undermine the credibility of fiscal policy.

Abhishek Gupta, a Mumbai-based analyst with Bloomberg Economics, expects the budget deficit to come in at 3.4 percent of GDP this year. The median estimate in a Bloomberg survey of 18 economists is for 3.5 percent this year and 3.2 percent next year.

Political considerations may also prevent Modi from reducing corporate taxes now, said Shailesh Kumar, a senior analyst at Eurasia Group in Washington.

“In addition to concerns that a reduction will further widen the deficit, a move by Modi to cut corporate rates ahead of next year’s election would expose him to opposition criticism that he is a crony capitalist who only wants to help friends in the business sector,” he said.

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No tax relief, spending spree due in last budget before elections: Poll

The median forecast from over 40 economists polled Jan 24-29 was for India’s government to borrow 3.2 percent of gross domestic product (GDP) in fiscal 2018-19.

Arun Jaitley, Budget

India is expected to unveil only modest stimulus at this week’s budget, a Reuters poll of analysts showed, despite it being the last before the next election, with government spending likely limited by longer-term efforts to trim the fiscal deficit.

Fiscal consolidation was first proposed by Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) government in its maiden budget in fiscal 2014/15, aiming to break a long line of Indian governments that preferred to borrow and spend.

But in following budgets, the timeframe for reaching a reduction to a 3.0 percent fiscal deficit target was pushed back.

The latest Reuters poll shows the government is expected to delay the timeframe for hitting that target by another year, for the third year in a row, due to setbacks in the economic outlook.

The median forecast from over 40 economists polled Jan 24-29 was for India’s government to borrow 3.2 percent of gross domestic product (GDP) in fiscal 2018-19.

“As the current government will present its last full-year budget before the 2019 general elections, many in the market expect a heavier dose of populism. However, the government has limited financial resources to propose any targeted scheme for the poor,” wrote Gautam Duggad, head of research at Motilal Oswal Securities, in a research note.

“We also do not expect much relief on the tax front, except some reduction in the corporate tax rate for medium-sized companies.”

The government’s own economic survey presented to parliament on Monday suggested that pushing further out the fiscal deficit target would give the economy some momentum.

For the current fiscal year, the target is 3.2 percent and the government is unlikely to meet that as it has already overshot its full-year goal. With less than one quarter of the fiscal year left, the government is unlikely to meet its deficit target.

Three-quarters of the 40 economists polled, based in India, Singapore and Europe, said that fiscal consolidation is likely to be Finance Minister Arun Jaitley’s dominant theme when he unveils his budget on Thursday.

Just under 10 percent of survey respondents said he will focus on boosting subsidies while about 18 percent expect a significant increase in borrowing and spending.

Among those expecting a more populist budget are economists that say the government will announce new subsidies, such as loan waivers for farmers, an increase in healthcare spending, a cut to taxes on fuel and a ramp up in rural housing schemes.

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Economic Survey sounds a note of caution on the high equity valuations

Domestic equities have risen sharply on expectations of strong corporate earnings

Eco Survey 2018: Real estate, construction to create 15-mn jobs by 2022

The Economic Survey 2018 sounded a note of caution on the high equity valuations and hasn’t ruled out a possibility of a correction. After a sharp 23 per cent rally this financial year, the benchmark Sensex is trading at 27 times its trailing 12-month earnings. The broader-market BSE Midcap and Smallcap indices, which have outperformed the benchmark in FY18, are trading at even higher valuations of 47 and 105 times, respectively.

“Sustaining these valuations will require future growth in the economy and earnings in line with current expectations, and require the portfolio re-allocation to be semi-permanent. Otherwise, the possibility of a correction in them cannot be ruled out,” the Survey said.

Domestic equities have risen sharply on expectations of strong corporate earnings. However, the earnings growth has been elusive so far, only to belie analysts’ expectations.

“Expectations of earnings growth are much higher in India. Indeed, it was such expectations that lie at the origin of the stock market boom. In early 2016-17, signs emerged that the long slide in the corporate profits-to-GDP ratio might finally be coming to an end. Investors reacted to this news with alacrity, bidding up share prices in anticipation of a recovery they hoped lay just ahead. Accordingly, the ratio of prices-to-current earnings rose sharply,” said the report.

The lackluster earnings trajectory has been largely on account of policy disruptions such as implementation of the goods and services tax (GST) and demonetisation. The Street is expecting a turnaround in earnings.

“There is exuberance in broader market valuations, largely on account of earnings revival expectations. Therefore, if earnings disappoint or if there is a drop in incremental flows, we could see a sharp correction,” said Gautam Duggad, head of research, Motilal Oswal Institutional Equities. What has kept stock prices afloat despite lack of earnings momentum, is the availability of abundant liquidity — both globally and domestically.

According to the Survey, low interest rates, globally have resulted in a fall in the equity risk premium (ERP). Low ERPs have led to a shift in portfolio allocations from debt to equity.

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Economic Survey 2018 may not shape Budget, but it is a treasure of insights

Since demonetisation, 10.1 mn new taxpayers have filed returns, versus an average of 6.2 mn in the prior 13 months

Economic survey, Arvind Subramanian, eco survey

The Economic Survey (ES) is not really a precursor to the Union Budget; that is, its projections and recommendations might not shape the Budget. However, it has become a treasure trove of insights about the economy, based on data sets not generally available to those outside the government. The themes it explores are novel, relevant and well researched. This year’s document is no different.The analysis of trends under the goods and services tax (GST) is the most important and timely. Given the prevailing confusion outside (and even inside) the government, it is comforting to see the 50 per cent improvement in number of indirect tax assessees. Now, 9.8 million enterprises are registered: Though only 13 per cent of total non-agricultural enterprises in India, they account for 93 per cent of revenues. Less than 10 per cent of GST filers (revenues more than Rs 50 million) contribute to 85 per cent of GST collected.Interestingly, the GST tax base (excluding exports), at around Rs 70 trillion, is close to that estimated by the Revenue Neutral Rate (RNR) committee, which had recommended a GST rate of 15 per cent. The first few months of data suggests a weighted average rate of 15.6 per cent, implying GST is already helping tax collections, and should comfort those worried about near-term fiscal health.

In fact, it estimates revenue from GST in FY18 should be 12 per cent higher than indirect tax growth last year.The ES uses GST data for some other useful insights as well: Inter-state trade is as high as 60 per cent of GDP (last year’s ES used other metrics to arrive at 54 per cent). That Maharashtra, Gujarat, Haryana and Tamil Nadu are large “net exporter” states is not surprising, but 26 per cent of Maharashtra’s GDP and 20 per cent of Gujarat’s being net exports is remarkable. Similarly, it finds GST registered enterprises employ 51 per cent of the non-agricultural workforce, and combining this data with pension fund data could be useful in assessing and then expanding the breadth of India’s social security net.

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Economic Survey 2018: Indians go on producing children till they have sons

There may be a meta-preference manifesting itself in fertility-stopping rules, contingent on the sex of the last child, which notionally creates ‘unwanted’ girls, estimated at 21 mn, the Survey says

Economic Survey 2018

The Economic Survey 2017-18 reveals that Indian parents, still keen to have more and more male children, continue producing “until they have the desired number of sons”. The survey calls this phenomenon the son meta-preference, which involves parents adopting “fertility-stopping rules”, or having children until the desired number of sons are born.

The country’s sex ratio, skewed in favour of males, has led to the identification of “missing” women. But there may be a meta-preference manifesting itself in fertility-stopping rules, contingent on the sex of the last child, which notionally creates “unwanted” girls, estimated at about 21 million, the Survey adds. “Consigning these odious categories to history soon should be society’s objective,” notes the Survey.

mong the startling facts revealed by the Survey is that the sex ratio of last birth (females per 100 births) has come down by 40 basis points from 39.4 per cent in 2005-06 to 39 per cent in 2015-16. The Survey suggests that women making their own income has seen no change in 10 years between 2005-06 and 20015-16. Only 13 per cent more women are getting educated – up from 59.4 per cent 10 years ago, to 72.5 per cent now.

Another startling observation in the Survey is that fewer women are now involved in decisions related to contraception.

Also noted is the fact that women’s employment has declined over time. “Another such area is in the use of female contraception: nearly 47 per cent of women do not use any contraception, and of those who do, less than a third use female-controlled reversible contraception. These outcomes can be disempowering, especially if they are the consequence of restrictions on reproductive agency”, noted the survey.

Poonam Mutreja from the Population Foundation of India (PFI), It is no surprise given that we are still focussing on sterilisation. Supply of care healthcare to provide sterilisation is dismal. It is ridiculous that we have not used 40 per cent of the budget for family planning remains unutilised. Making contraceptives available is very important and not yet available fully.

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Some Populist Steps Expected for Various Sectors in Budget 2018

Although keeping in mind the fiscal compulsions and recent statements made by FM Arun Jaitley and also PM Narendra Modi himself it is given that the Budget 2018-19 is not going to be overly populist

Arun Jaitley

The Budget 2018-19 will be the last full Budget before the Lok Sabha elections in 2019. Also before the said elections there will be assembly election in eight states in 2018 namely Meghalaya, Tripura, Nagaland, Karnataka, Mizoram, Chhattisgarh, Madhya Pradesh and Rajasthan. As a result both Political compulsions and opportunism is expected to play out in the Budget 2018-19. Although keeping in mind the fiscal compulsions and recent statements made by Finance Minister Arun Jaitley and also Prime Minister Narendra Modi himself it is given that the Budget 2018-19 is not going to be overly populist in nature. During a recent media interaction Prime Minister Narendra Modi has stated that the common man doesn’t want freebies and sops and that his government is committed to reforms, fiscal targets and prudence. Elsewhere he has also stated that he isn’t sure whether corporate India will like him after the Budget 2018 or not. Having said that the results of the recent Gujarat assembly elections indicated electoral losses for the government due to rural distress; thus to address the said issue and to reward people for shouldering the pain of demonetization and other reforms some populistic measures are expected in the Budget 2018. Some expected measures are listed below.

Cut in Personal and Corporate Tax Rates – It is widely expected that there would a revision in the tax slabs and an increase of exemption limit for personal income tax in the Budget 2018. Tax exemption limit which is currently 2.5 Lakhs is all but expected to be made 3 Lakhs. Industry leaders from various sectors and bodies such as CII and FICCI have also recommended that said step to the FM to increase disposable income of the middle class to fuel demand and growth. Other that raising the tax exemption limit existing tax slabs may also be tweaked to provide relief to tax payers. Corporate India is also optimistic that the corporate tax rate may see a cut from the current 30% to 25%. But given the recent statements by the FM and fiscal challenges the said move may or may not be made by the government in the Budget 2018. Some corporates may receive some tax relief and incentives though.

Other Tax Sops – Some other tax sops for individual tax payers are also expected in the Budget 2018. At present a maximum tax benefits of 1.5 Lakhs is allowed under Section 80C on various tax saving schemes such as PPF, EPF, ELSS, NSCs, life insurance and more. This said is also expected to be raised by 50000 so that individuals can avail deduction of a maximum of 2 Lakh rupees. An increase in the limit of deduction for medical insurance and health checkups under Section 80D is also expected. Additional tax benefits on insurance policies and investments in to mutual funds has also been desired by the insurance and finance sector but will the FM heed to their demands is something we have to wait and see.

Pensioners and Senior Citizens – Pensioners and senior citizens have emerged as a big block of voters and it is quite likely that the government will try and woo them with sops. In the Budget 2018 the Government is expected to make retirement benefits as tax free. Higher tax exemption for pensioners and senior citizens is also on the cards in the Budget 2018. It is believed that the government is seriously considering a proposal made by MP Shashi Tharoor that pension up to Rs 5 Lakhs should be made tax free. In the Budget 2018 there also may be sops for early retirees between the age of 55 and 60. Easier tax compliance through separate process and grievance redressal system is also believed to be under review.

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