Economic survey: Optimism tinged with caution

The Survey also outlined Indian economy’s resilience and inherent strength emanating from many key sectors to face any global challenges. It also prescribed series of reform measures to boost growth momentum.

On one hand, the survey has acknowledge rising inflation as a major concern facing the economy, it has acknowledged global events like volatility in commodity prices, particularly crude oil-aggravated by the political turmoil in the Middle East.

Taking into account probable adverse impact of global factors on the Indian economy, the survey has cautioned that general inflation in the country may remain high. Similarly, the fiscal situation and level of sovereign debt in a large number of industrialised countries are in a somewhat tenuous situation.

However, the government hopes that there will not be a serious downturn in developed countries, or more accurately a second dip recession is a very low probability.
Why bullish?

There are two main reasons for the optimism. Given the momentum in the savings and investment rates and also the fact that India’s relatively young population will generate more savings, the capital needed for investment and creating assets will be on the rise.
Besides, the fraction of investment that is going towards building up infrastructure has been rising. All these are going to help India achieve high profile growth on a sustainable basis.

Even the current fiscal’s 8.6 per cent growth rate reflects optimism about ongoing growth momentum due to broad-based rebound in agriculture and “continued momentum” in manufacturing and private services.

While industrial growth has been pegged at 8.6 per cent in the current fiscal with the key manufacturing segment posting 9.1 per cent growth rate, the key agro sector is expected to grow around 5.4 per cent as opposed to almost zero in the previous fiscal.

Price pain

Pointing out high price rise acts as a road block for the growth, the survey warned inflation was expected to be 1.5 per cent higher than projected earlier. Food inflation, in particular, has come as a major challenge for the economy.

On the other hand the government as well as the Prime Minister’s Economic Advisory Council have projected that overall inflation would come down to 7 per cent by March end from more than eight per cent now.

Obliquely hinting that there is lurking fear of rising inflation round the corner, the survey has cautioned that inflation outlook in coming months would be shaped by the food price situation and demand side pressure from the economy. It has even warned that domestic food price situation could worsen if global food prices rise due to the dependence on import of food items such as edible oils. Against this backdrop, the survey prescribed current growth and inflation trends warrant persistence with an anti-inflationary monetary stance.

Understanding the challenge of the Finance Minister in curbing inflation without hampering growth prospects the Chief Economic Adviser Kauhsik Basu has cautioned that ongoing spiraling rise in global crude oil price could fuel overall inflation, which in turn could derail the growth prospects in short term.

He has cautioned that if the global crude oil price continued to rise and go beyond $160 per barrel, it would be impossible to achieve 9 per cent GDP growth rate. The global crude oil price has already breached the $100 mark and is likely to go up if the Middle East crisis worsens further.    

Wise financial management

Significantly, in a bid to keep the economy in good health the Survey has rightly stressed the need for fiscal consolidation. “Food inflation, higher commodity prices and volatility in global commodity markets have been a cause of concern underscoring the need of fiscal consolidation..,” it said.

Prescribing measures like reforms in expenditure pattern to keep fiscal deficit-the net difference between the government’s expenditure and income- strongly recommended “going forward and deepening reform   process would hold key to sustaining fiscal consolidation process”.

But the key question is: Can government really push forward drastic reforms in expenditure front?

Given the fact that five major states are heading for Assembly elections in May this year, the Congress-led UPA government will find it tough to prune public expenditure as it will be under tremendous political compulsion to step up outlay in the forthcoming Budget 2011-12 on several flagship socio-economic welfare schemes.

Revisiting reforms

The other highlight of the survey is that in a bid to accelerate the growth momentum, it has suggested slew of reform measures in wide range of economic areas.

The 12-point reform agenda outlined by the survey included measures like streamlining environment clearance for infrastructure projects, early introduction of Good and Service Tax and second Green Revolution with technological break-through in the agro sector.
Significantly, the survey expressed concern over project delays due to tussle between various ministries like Coal and Power on one hand and the Ministry of Environment and Forests on the other.

In fact, it has hit the Bull’s eye by pointing out that the challenge for the government is proper balancing of the climate challenge and the growth challenge. It has even gone to extent of pointing out that careful planning and customized policies are needed to ensure that the green growth strategies do not result in a slow growth strategy.  

To step up infrastructure development, the survey has suggested reform for exploring avenues for increasing investment in infrastructure through Public Private Partnerships and allowing exclusive private investment wherever possible.

In the sensitive retail sector, the survey recommended for allowing Foreign Direct Investment (FDI) in the multi-brand retailing saying consumers could benefit with prices coming down and farmers getting a better deal for their produce.

All these reform measures suggested by the Survey are in tune with pressing need to boost growth. But the key question is: Will government overcome political compulsion to implement these?