Survey pins hopes on economic revival

Written by ASHOK B SHARMA | New Delhi | Updated: Jul 4 2009, 02:08am hrs
Indian Governments Economic Survey 2008-09 has given the hope of revival of the economy saying that it has shock absorbers that will facilitate early revival of growth. Banks are financially sound and well capitalized. The foreign exchange reserves position remains comfortable and the external debt position has been within the comfort zone.

It said the rate of inflation in prices has since abated and provides a degree of comfort on the cost side for the production sectors. Agriculture and rural demand continue to be strong and agriculture production prospects are normal.

According to the Survey while there are indications that the economy may have weathered the worst of the downturn, in part, due to the resilience of the economy and also various monetary and fiscal measures initiated during 2008-09, nevertheless, the situation warrants close watch on various economic indicators including the impact of the economic stimulus and developments taking place in the international economy.

It suggested taking policy measures that squarely address the short and long term challenges which would help achieve tangible progress and ensure that the outlook for the economy remains firmly positive.

The Economic Survey noted that during the last two years, Indian economy had been buffeted by three major challenges originating in its external sector. First, a surge in capital inflows which reached a crescendo in the last quarter of 2007-08.

Second, an inflationary explosion in global commodity prices which began even before the first challenge had ebbed, that hit us with great force in the middle of 2008. There was barely any time to deal with this problem before the third challenge, the global financial meltdown and collapse of international trade hit the world with severity.

Each of these, however, has implications for medium-term, that requires a considered and integrated response if our objective of sustained high growth is to be realized. An analysis of the impact of these shocks brings to the fore the importance of pursuing reforms, including in the financial sector, to make the economy more competitive and the economy regulatory and oversight system more efficient and sensitive to new developments, it said.

The uncertainty surrounding the macro-economic developments world over in 2009-10 and the need for minimizing the second round impact of the global shock call for a continued fiscal policy stimuli, it said and noted that while in 2008-09 fiscal expansion in an overall sense helped arrest the decline in growth, given the relatively weaker automatic stabilizers in operation in the country, a more selective discretionary fiscal policy was used to address the affected sectors and sections of the workforce in a sustainable manner and promote investments that would not only boost demand in the short run but yield long run growth dividends.

The Survey suggested that within the proposed fiscal expansion, the mix of expenditure and tax cuts would be critical in the context of its impact on overall macro-economic fundamentals like growth, interest rates and exchange rate. A commitment to return to Fiscal Responsibility and Budget Management Act of 2003 (FRBMA) mandate at the earliest and quick reversibility of expansionary policies are critical for markets to synchronise their expectations with that of the Government and work in a coordinated manner towards restoration of the high growth momentum.

The Economic Survey also suggested the need for adequate liquidity and credit from financial sector. But once the economic growth picks up sufficient momentum, the excess liquidity should be rolled back in an orderly manner. It cautioned monetary transmission channels has been more efficient in the money and bond markets and somewhat sluggish in credit market with its implications for the real side of the economy

The credit market suffers from structural rigidities which may have been reinforced in the recent years due to a high credit demand encouraging the banks to raise deposits at higher rates for maintaining long-term liquidity. These high rates have now come in the way of cutting lending rates at a pace which is consistent with the current outlook on inflation and the need for stimulating investment demand, the Survey noted.

It suggested expansion of mutual fund industry, greater insurance sector penetration in non-life business. A reasonably well developed bond market is required to supplement the banking system in meeting the requirements of the corporate sector for long-term capital investment besides raising resources for infrastructure development in the country, it said.

The Pension Fund Regulatory and Development Authority faces the challenge of covering the unorganized sector under the NPS, empowering the subscribers to take appropriate investment decisions based on their risk and return profile, provide safety and optimum returns and to improve literacy levels.