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: There's a game that’s played when the Economic Survey is released—clues to the Budget. This is not a very interesting game because (a) the Budget comes soon after (b) years of evidence show the link between the two documents is very tenuous. The Survey, as our columnist today points out, should be assessed by the quality of its analysis and here the current chief economic advisor has made a break with the past. There are some sections that positively bristle with interesting analysis. Take Section 2.50, which begins by saying that monetary policy is the first line of defence against volatility in an open economy and that monetary transmission in India is not uniform across financial sub-segments. It works better in the money and bond markets and sluggishly in credit markets. We have been arguing this repeatedly. It’s rather nice to see a government document putting this issue so clearly—and it’s an issue that’s crucial at the moment. RBI policy rates are down but bank lending rates are nowhere near as low as they should be. The problem is unsolved. Will small savings rates, fixed at high levels by the government, need to be freed, as the Survey argues, or is the problem a deeper one of poorly functioning markets for crucial financial instruments? Just because Lehman Brothers crashed doesn’t mean that this issue should not be addressed. Sometime early in its 5-year term UPA II should spent some energy on a few crucial, technical and therefore politically uncontroversial financial sector reforms.
The Survey and the Budget, respectively, are and will be concerned with 2009-10 growth prospects. There’s plenty of private sector analyses saying what the Survey does: that recovery may have begun. But all credit to the Survey in sharply making arguably the most important point: Section 2.23 shows that while this slowdown is not the sharpest of recent times (the other periods of slowdown were in 1991-92, 1997-98 and 2002-03), the fall in capital formation in this (2008-09) slowdown has been sharp. The Survey rightly argues this shows the effect of global uncertainty on Indian enterprise. But another equally important point should be made from this data: the crucial importance of private investment in the recent growth spurt. It’s the biggest growth driver now and to that extent what the Budget must do is clear. How successfully it attempts this should probably be the most crucial parameter on which...
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