Says expedite clearances for infra & other projects
The Prime Minister?s Economic Advisory Council (PMEAC), which projected a 6.4% economic growth and an annual inflation rate of around 6% through 2013-14, has highlighted the adverse impact of policy paralysis on the nation’s economic growth in the previous fiscal. It has also recommended urgent reforms in agriculture and energy sectors.
The council, chaired by C Rangarajan, strongly urged the government to expedite clearances for infrastructure and other projects through the newly created cabinet committee on investments.
The council, in its review of 2012-13 released on Tuesday, highlighted the fact that growth fell more sharply than what can be caused by the fall in investment. The council analyses incremental capital output ratio (ICOR), a measure of how incremental income has arisen from increments to capital stock in the past.
The worsening of ICOR has more to do with policy paralysis and the sharp slowdown in growth doesn’t seem to have flowed in from conventional structural parameters, said the report.
Investments made did not commensurately translate into output and/or did not create optimal economic value in the absence of complementary output. Rangarajan said that although investments have come, complementary projects have not. This, however, can be corrected, he said.
?The very high level of investment rate that we have even now gives us the hope that if we take action for speedy implementation of projects, we can achieve the higher rate of growth quickly even in the short term,” the PMEAC chairman said after releasing the review.
The slowdown in economic growth in 2012-13, possibly to 5%, may be partly caused by an unsupportive macroeconomic situation in the rest of the world and the withdrawal of both fiscal and monetary stimuli starting 2010. However, that does not fully explain such a sharp deceleration in economic growth.
The council said the principal problem affecting economic growth is the issue of clearances that have stalled projects and undermined conditions for investment.
?The only way to get the economy move ahead to a higher growth trajectory by overcoming investment and implementation bottlenecks over the short term is to pursue reforms with energy and expedite clearances through the newly constituted cabinet committee on investment,? said the council.
what the report says
* Economic growth has declined more sharply than what can be caused by the fall in investment, but has bottomed out and would rise to 6.4% in 2013-14 from the (likely) 5% in 2012-13
* Agriculture to grow at 3.5% in FY14 (1.8% in FY13); industry (including mfg, mining & quarrying, electricity, gas, water supply & construction) at 4.9% (3.1%) and services at 7.7% (6.6%)
* The worsening of incremental capital output ratio has more to do with policy paralysis; the sharp slowdown in growth doesn’t seem to have flowed in from conventional structural parameters
* Investments made did not commensurately translate into output and/or did not create optimal economic value in the absence of complementary output
* Rectification of the current account deficit will take more than a single year; take steps to boost capital flows in the short run, while, over the medium term, the CAD needs to be brought down to moderate levels
* The spurt in demand for gold as an investment vehicle is not related to the declining return on investments in mutual funds and life insurance; the flaws in distribution of savings products need urgent redress
* Recent decline in WPI inflation is bigger than expected, core inflation too in comfort zone; this creates more room for monetary policy to support growth; inflation to be around 6% over the next on year
* Inflation in primary food articles remains uncomfortably high; danger of a fresh spike in wage and other cost pressures remains; supply side measures and re-look at approach to administrative pricing needed
* Reform agricultural marketing & supply chains, the APMC Act limits the freedom of farmers to sell and has prevented the modernization of the supply chain, causing primary food inflation to rise
* Improve net energy availability. Aside from price reform, need to facilitate increase in domestic coal production (but no specific proposal to de-nationalise commercial coal mining)
* Budget target of 19% gross tax revenue growth achievable; control over the magnitude of petroleum subsidies is central to keeping expenditure within budgeted limits
