The government presented on Friday a sanguine survey of the Indian economy in Parliament, forecasting that a further rise in the already shored-up savings and investments would push real gross domestic product (GDP) growth to above 9% in 2011-12, the same level at which the GDP grew in the three years prior to the global crisis. The authors of the survey did not seem too worried about the high fiscal and current account deficits which, they felt, are being tackled, but mentioned upfront the downside risk of the unrest in the Middle East on India?s hefty oil import bill and growth itself.
Addressing the media later, chief economic advisor Kaushik Basu, who led the team that authored the survey, said India, being already into a growth sprint, would have to live with an additional inflation of 1.5 percentage points. What the country is looking at is an yearly growth of 7.5% in per capita income over the next 20-30 years, he said.
The Economic Survey 2010-11 pointed to the stickiness of non-food manufacturing inflation, but took heart from the fact that unlike last year, food inflation this year is driven by demand factors. The survey did warn that the high global commodity prices and easy money policy in most developed countries could add to domestic inflationary pressures and inflate the government?s subsidy bill (which touched an all-time high of 2.33% of GDP in 2008-09, the year of global price shock).
Thanks to the spurt in global commodity prices, the total expenditure on food, fuel and fertiliser subsidies this fiscal is expected to overshoot the budget estimate of Rs 1.08 lakh crore, which was pegged at 12% lower than last year?s figure. The survey expressed concern over core inflation rising in the current fiscal, which indicates food inflation spilling over to general inflation, but sought to take comfort from the moderation in the build-up from March 2010.
The survey called for a slew of reform measures in the financial services sector with the overall objective of promoting inclusive growth and ensuring financial stability. The prescriptions include: new banking licences under stringent eligibility norms; two types of banking licences: one for basic banking (for NBFCs and MFIs) which is meant only for financial inclusion and the other for full banking (for corporate houses and NBFCs with a provision to avoid conflict of interest) and allowing foreign promoters in banks to benefit from their experience subject to their meeting the fitness criteria.
It also calls for grading of minimum capital requirements of banks and targetted macro-prudential regulations aimed at financial stability in sectors like housing. Content that a double-dip recession in the global economy was a ?very low probability event,? the government said in the survey that the economic expansion, which is already broad-based with the rebound in agriculture (5.4% growth) and spurt in some services which had languished in the last two years, would ?pick up even more? in the medium to long term. Going forward, the demographic dividend and the elevated levels of investments to come from the working-age population, particularly in the infrastructure sector, would drive the economy, rather than savings, the utility of which as a growth impulse would wane. Given the perceived risks from high inflation, the need for a continuance of the tight monetary stance and its likely impact on demand in the economy, and, of course, the inadequacy of domestic savings to propel such a high growth, the survey?s projection of 9% plus/minus 0.2% expansion of the economy appears a tall order. The authors of the survey have highlighted that the services sector, which accounts for 57% of GDP, would be a potential growth engine, with a high share of FDI equity inflows. (Expansion in the services sector is estimated at 9.6% for this fiscal). The survey called the recent slowdown (and volatility) in industrial output growth (1.6% in December last and 2.7% in the previous month) a ?road bump? rather than a long-term problem. ?On the demand-side, a rise in savings and investment and pick-up in private consumption have resulted in strong growth of the GDP at constant market prices at 9.7% in 2010-11,? it said. The survey underscored the utility of the fiscal stimulus packages by saying that this was attested by the demand-side aggregates, but endorsed their sequenced and gradual withdrawal, as the economy has emerged from the slowdown with remarkable rapidity. The real impact of fiscal stimulus was felt more in 2009-10 than the year before, with government consumption which grew at 16.4%, facilitating a rebound in demand-side GDP. The survey saw an urgent need to streamline land acquisition and environmental clearances to give a boost to investment in infrastructure which accounted for 46% of the total Plan outlay of Rs. 3.73 lakh crore in the last Budget. It also pitched for ?another round of multifaceted reforms? to have a sustained double-digit output in industrial output. On the balance of payments front, the economic survey seemed to agree with the Prime Minister?s economic advisory council, which estimated the current account deficit at 3% of GDP for 2010-11 and 2.8% for 2011-12. The council, headed by C Rangarajan, hinted in its recent review that a pick-up in software exports ? which saw a decline in 2009-10 ? would help push the net invisibles to $81.3 billion or 4.8% of GDP in 10-11 and to $95.7 billion or 4.8% of GDP in 2011-12. Private remittances which stagnated this fiscal is expected to rise next fiscal and help offset the increased outflow of investment income. Coupled with a moderation in trade deficit enabled by recovery in exports and slowing of the import growth, the surge in net invisibles would help stabilise the current account deficit at 2-2.5% of GDP, the council had said. The authors of the economic survey and the council endorse the need to create conditions for foreign capital inflows, especially non-debt flows to finance the current account deficit. The dependence on fickle short-term capital inflows, too, concerned both. As far as the health of the fisc is concerned, the survey estimated the Centre?s fiscal deficit to be 4.8% of GDP as against the budgeted 5.5% thanks to revenue buoyancy (revenue growth stood at 63% in April-december this fiscal) and the combined fiscal deficit of the Centre and states to be 7.3%. Referring to the Thirteenth Finance Commission?s proposal to limit the combined public debt to GDOP ratio to 68% by 2014-15 from 80% in 2009-10, the survey said this process would need to be driven by subsidy reforms ? fertiliser and petroleum ? and public expenditure management, besides tax reforms like the Goods and Services Tax.
Stating that India has been able to generate employment since July 2009, the survey said: ?Unlike the developed countries where the measures to counter job losses were ad hoc and contained elements of protectionism, in the Indian case, the programmes of employment generation were planned with a long-term outlook free of any elements of protectionism.?
It called for extending the employment guarantee scheme to urban population with a focus on building of permanent assets. To realise the demographic dividend of the country and address the demand-supply mismatch in the job market, it is imperative to bridge the financing deficit in education and health through ?public-social private partnerships,? the authors of the survey said.