Plurality of views aids meaningful consensus

The economic outlook for 2006-07 presented by the Economic Advisory Council to the Prime Minister has no startling revelations. It however serves its purpose?of providing periodic, independent updates on the state of the economy. The performance did enable the PM to assert with confidence that for the third year in succession, economic growth would be an unprecedented 8%. This is underpinned by a projected 9.8% growth in industry and a slightly decelerated 10.5% in the services sector. Agriculture continues to be uncertain with adverse weather yielding at best a 1%, and the good monsoon taking the growth to 2%.

The report argues that growth in recent years has been consumption-driven, supported by demand for homes financed through easy loans at low interest rates. And prescribes investment led growth. It is now fashionable to suggest that while China needs to move to a consumption driven growth, India must be investment driven. This may be an oversimplification. As Stephen Roach of Morgan Stanley argues, ?If China were a pure market economy with relatively stable financial institutions then a revaluation of the renminbi would be appropriate, but China?s not there. I think we [the US] need to grow slower, and if the rest of the world is not willing to pick-up its internal demand to offset that, it deserves to grow slower. There is, therefore, a wider implication to growth patterns and priorities?an inevitable consequence of global interdependence.

In tangible terms, for India the advisory council expects the following: One, investment capital at reasonable rates of interest; two, a lower fiscal deficit, particularly revenue deficit; three, better provision of infrastructure by government; and four, investment in infrastructure with direct public investment or with public-private partnership.

Going forward, it projects that the net accretion to resources will slow down with slight deterioration in the current account balance, but that its financing will be sharply higher from FDI flows estimated at $8.5 billion ag-ainst RBI?s projection of $5.7 billion. It also projects a marked slow do-wn in portfolio flows from the previous year.

The report concludes by projecting a growth rate of 7.8-8% and says, ?the growth momentum can be maintained if the government can create a conducive climate for private investment through strong supply side response mainly in two ways?greater quality and quantity of infrastructure and a credible fiscal adjustment to release resources for private investment. Some hardening of interest rates is inevitable to restrain inflation. The WPI inflation may be expected at around 5.5%?

The prescription is somewhat at variance with government?s other thinking in this regard on four counts: First, the XI Five Year Plan target of average 8.5% GDP growth may not look so unrealistic if the growth momentum of the last three years can be sustained. However, resources for the XIth Plan for a 8.5% increase as a percentage of the GDP is expected to be 9.43% and the gross budgetary support increasing substantially to over 5%. This is not in line with the Fiscal Responsibility and Budget Management (FRBM) Act?s targets. The Plan says, ?this raises the issue if FRBM targets should be waived further out by, say, two years and alternative pr-ojection and profile of investment requires a modification of the Act or at least the rules on the fiscal deficit targets not to be specified in ab-solute terms but to be cyclically ad-justed in keeping with international best practices.?

In simple terms, whereas the advisory council would like fiscal deficit to be significantly moderated, the XI Plan is predicated on a more flexible approach on fiscal targets. Similarly, on the revenue deficit, the council?s report would like their elimination as soon as possible, whereas the Plan, for good reasons, argues that conceptually, revenue expenditures are not so undesirable and their targeted elimination is not in line with best international practices.

Second, on interest rates, while the council expects some inevitable hardening, the continuation of a more accommodative regime is an assumption in the Plan. The finance ministry?s reaction in asking banks to seek their board approval was not merely observance of procedural propriety, but an indication of dissuading hikes in interest rates.

Third, nobody can deny the need for better infrastructure, nor question the need for public-private investment, even though the continuation of large public investments has fiscal implications. More than that, working with public-private partnership and securing the required investment still represents a learning curve with uncertain outcomes, and in creating acceptable models for replication by state governments.

Fourth, the council, while expecting the current account deficit to continue, visualises significantly large FDI flows and a marked slow down in portfolio resources. Notwithstanding some recent increases in FDI flows, it is not clear if without other significant policy changes, private investments, particularly FDI, would rise significantly.

The executive summary of the council?s report largely deals with key macro variables. Structural changes, particularly sectoral issues like energy, agriculture, and infrastructure, were not analysed. Some of these may hold the key to larger private flows, as indeed, the resolution of important policy changes mentioned in the XI Plan paper. Even on a macro framework, there are some incongruities in the council?s prescription and the XI Plan policy package.

Not all bodies can think alike. Their divergent perception alters the policy prognosis. Plurality of views in a federal polity makes for improved consensus.