The government needs to watch how private investment recovers in the final two quarters of this fiscal before it starts withdrawing fiscal stimulus measures, cautioned the Economic Survey, authored by chief economic advisor Kaushik Basu. The growth recovery and marginal expenditure cuts would keep the fiscal deficit at 6.5% of GDP this fiscal, but only deeper reform would ensure lasting fiscal consolidation, noted the Survey released on Thursday, a day ahead of Union Budget 2010-11.
To the pleasant surprise of corporate India, the Survey proposed a slew of measures to reduce indirect taxes, including a ?further reduction in excise duties to make exports and industry competitive?. It said the customs duty on major intermediate goods should be lowered from 10% to 7.5% to bring down overall applied-tariff levels. Tariffs on capital goods should be at a uniform 3%, which would obviate the EPCG concession scheme for exporters.
The Survey advocated the transfer of oil, fertiliser and food subsidies directly to deserving households to be identified through the proposed Unique Identification system, instead of through the public distribution system storekeeper. It proposed a system of oil, food and fertiliser coupons that are accepted by PDS stores and can be encashed at a local bank. The Survey, therefore, makes a strong case for the allocation of more resources to the poor, but under a foolproof system that minimises leakages.
The Economic Survey acknowledged that stimulus?both fiscal and monetary?was useful in driving all-round consumption demand, when the global crisis forced the corporate investor to look the other way.
Despite a drastic fall in year-on-year growth in gross fixed capital formation (it was just 1.8% in Q2 this fiscal, against an average of 15% in recent years), the Survey assumed this proxy of investment growth would be 5.2% for year as a whole.
Growth in per capita income, the most obvious measure of welfare, was predicted at 5.3% in 2009-10, up from 3.7% in 2008-09, but still a far cry from the around 8% growth reported in the previous three years. Per capita consumption this year would grow at 2.7%, half last year?s 5.4%, indicating a restraint on consumption.
Commenting on the Survey, finance minister Pranab Mukherjee said: ?I want my ministry to be engaged in not just designing fiscal policy and recording economic performance, but to be a laboratory of new ideas. The Economic Survey this year also provides new ideas and foundations for policy initiatives over the medium-term.?
The Survey endorsed the Central Statistical Organisation?s advance estimate that real GDP would grow at 7.2% this year and showed cautious optimism that the economy would expand at a higher 8.25-8.75% in 2010-11 and could potentially accelerate to double digits in four years. Sharing this optimism, Mukherjee said: ?Fiscal 2009-10 began amidst the gloom of an economic downturn. But the year is ending with clear indicators of a vibrant economic rebound.?
Planning Commission deputy chairman Montek Singh Ahluwalia told FE: ?We agree with the projections made in the Economic Survey. We in the Planning Commission have a similar assessment, which would be reflected in the mid-term appraisal to be presented soon. The next fiscal year is definitely going to be better than this year and growth would indeed be 8% plus.?
The recovery is a broad-based one, with seven out of eight sectors growing at 6.5% or more, the survey said. The laggard is agriculture where growth is estimated to decline 0.2% due to the sub-normal monsoon. The Survey called for policy measures to pitchfork farm sector growth to the targeted 4%. The Survey warned of ?higher-than-anticipated generalised inflation? over the next few months amid signs of high prices of food and some fuels getting transmitted to non-food items.
It called for sound food management policies, but chose to not make an unambiguous statement on petroleum product prices, despite the currency of the Kirit Parikh committee?s recommendation to deregulate petrol and diesel prices. The Survey said the current level of petroleum product prices are unsustainable, given the over 40% spike global oil prices since July, but reminded policymakers that any price hike at this juncture would have an impact on inflation.
The Survey sought to drive home the point that while growth-induced revenue buoyancy coupled with some expenditure controls would help contain the fiscal deficit at the budgeted level of 6.5% this fiscal, deeper structural reform would be required on this front. ?Lasting fiscal consolidation would accrue with reforms in design and delivery of Plan schemes, outcome-focus of expenditure and institutional reforms,? it said. In this context, the Economic Survey quoted a suggestion made by the 13th Finance Commission to cap total government debt at 68% of GDP by 2014-15. The combined debt of the central and state governments currently stands at around 80%.
An important novelty in this year?s Economic Survey is a chapter entitled ?Micro-foundations of inclusive growth?, which details the government?s role as an enabler, one that ?does not intervene when in doubt?, but frames ?incentive-compatible rules? for the markets to be strong and undistorted. Pointing to the need for a rethink on the role of the government, the survey felt the need to say the obvious: it should help the poor by ensuring basic education and health services, adequate food and nutrition.
The Survey also offered some loud thinking on labour reforms. Referring to the inflexibility of labour laws and its deleterious impact on organised industry, it suggested that since reforms would lead to greater demand for labour, they could prove better at empowering workers rather than through conferred rights. Labour reforms would positively influence the culture and customs of the labour market, the survey prophesied.
The Economic Survey was rather brief on the financial sector. It advocated statutory status be given to regulator PFRDA to enable it to take the new pension system to unorganised workers and thereby establish a sustainable social security net. It also recommended emulating the catastrophe risk insurance scheme prevalent in advanced economies for the transfer of insurance risk of natural calamities to the capital markets. It said the corporate bond market is showing signs of revival?the total traded volume in corporate bonds in April-Dec 2009 was 173% higher than the corresponding period in the previous year.
The Economic Survey underlined the need to ensure that growth in money supply and credit to productive sectors is strong enough to sustain the growth prospects in the near to medium term, but added that the price situation ought not be jeopardised. In fact, the survey saw a possible return of pricing power with a stronger economic recovery, further revival in private demand and a likely spurt in global commodity prices.
Data released on Thursday showed that the annual food price index rose 17.58% in the 12 months to February 13, marginally less than the previous week?s 17.97%. Annual wholesale inflation rose 8.56% in January 2010, compared with 7.31% in December.