When conventional thinkers across the globe were focusing on quick-fix solutions based on demand management, it was Rajan who emphasized on the supply-side issues and suggested a progressive policy to create long-term sustainable growth for the stressed nations.
The latest Economic survey, too, offers a strong supply-side package for Indias economic revival, as the nations investment is significantly hit due to several supply bottlenecks. Hence, the survey says, The way out lies in shifting national spending from consumption to investment; removing the bottlenecks to investment, growth and job creation in part through structural reforms, combating inflation both through monetary and supply side measures. The survey recommends creation of the key drivers and enablers of growth be it infrastructure, transportation sector, housing or sustainable agriculture.
In fact, the survey includes a special chapter focusing on job creation. The future holds promise for India only if we seize the 'demographic dividend', as nearly half the additions to the Indian labour force over 2011-2030 will be in the age group of 30-49. As per the survey, an increasing number of high-productivity formal jobs have to emerge from the manufacturing and service sectors.
The survey has come down heavily on Indias current macro-economic management.
While the key fiscal risk lies in the burgeoning subsidy burden, the tight monetary policy in the absence of fiscal correction has led to a sharper-than-expected slowdown. The survey has advised the RBI to weigh the costs of a rapidly slowing growth against persistent CPI inflation and set the monetary policy on the behavior of core inflation.
On the front of external debt, the survey has strongly recommended a careful monitoring of the trends in size, source, maturity and hedging of external debt by the regulators.
The most worrying factor, it highlights, is the growing unhedged forex exposure of Indian corporates in the wake of a strong depreciation bias in the currency. The rupee has developed a strong depreciation bias because of the nations widened current account deficit, resulting from the nations falling savings rate, which is nothing but the consequence of high inflation and fiscal profligacy.
The survey is moderately optimistic about fiscal consolidation efforts and feels that the strong resolve with which the government is moving since mid-Sept, 2012, should enable it to contain its fiscal deficit at the revised target of 5.3% of GDP in 2012-13. The survey has paid special attention to the challenge of infrastructure financing as most of the banks have approached their lending limits to infrastructure sectors amid stalled projects and rising pressure for restructuring of loans.
The surveys cautiously optimistic stance on next years growth conditional upon normal monsoon, containment of inflation and fiscal prudence, augurs well for the market sentiment. However, it is risky to take a cue from the survey for the quality of Union Budget, as unlike Economic Surveys, the Budgets have to adhere to political compulsions.