Striking a note of caution

Written by fe Bureau | New Delhi, Feb 28 | Updated: Feb 29 2008, 06:12am hrs
Indias growth is unlikely to slip below the 9% rate in the next few years, says the finance ministrys Economic Survey, but the downside risks have become stronger this year.

Among those risks are the international subprime crisis and a slackening of growth in agriculture and manufacturing within the country. The other is the political opposition, because of which the Survey tabled in Parliament by finance minister P Chidambaram on Thursday has had to tuck away its 12-point list of reforms in a box, outside the main narrative.

The more significant of these reforms are in the financial sector: allowing the public float of at least 10% in all public sector units, permitting FDI in retail, raising the FDI cap in insurance, besides 100% foreign investment in greenfield rural agricultural banks.

The Survey says if the current growth trend persists the economy would average over 8.9% per annum over the 11th Plan period.

The finance minister said this would double the average income of every Indian in a decade, instead of a generation or more, earlier.

But the more pertinent Budget pointers in the Survey are its recommendation to increase public investment in agriculture. Growth of the sector has decelerated to 2.6% in the current fiscal, from 3.8% the year before. Any deceleration in the growth of this sector is translated into a lower overall GDP growth, it says.

On the industrial sector, the document says the slowdown can be corrected by rapid investment in infrastructure. It says the government has launched a $5-billion India Infrastructure Finance Initiative as venture capital. The fund will have $3 billion in equity capital and the rest in long-term debt financing with maturities exceeding ten years, to draw the projected $500 billion in capital for infrastructure.

The Survey has, however, placed fresh riders on capital account convertibility, saying it can proceed only after domestic interest rates converge with those abroad. But it has asked for development of the domestic debt and currency markets at a rapid clip.

According to the Survey, buoyancy in tax revenues has given the government leeway to cut customs duties and move towards a GST. The tax-to-GDP ratio has been projected at 11.7% by the end of this fiscal. It has, however, questioned whether the revenue deficit would remain on the course laid down by the FRBMA and be eliminated by 2008-09. Saying inflation management has become a complex task in an open economy, the Survey has projected it at 4.4% at the end of the fiscal, compared to 5.4% in 2006-07.