New Delhi: The Economic Survey for 2011-12 has signalled that India’s economic growth has bottomed out and will bounce back to a 7.6% pace in the fiscal year beginning 1 April.
And, like the Reserve Bank of India, the survey stressed that this recovery depends on reducing the fiscal deficit and pushing through critical reforms such as cutting back on petroleum subsidies, especially since crude oil prices have turned volatile.
The survey, written by a team headed by chief economic adviser Kaushik Basu and presented in Parliament by finance minister Pranab Mukherjee, estimated that the economy will grow 7.6% in 2012-13 and expand 8.6% in the year after that.
Finance minister Pranab Mukherjee talks to journalists about Economic Survey report for 2011-2012 a day ahead of presenting the annual budget in New Delhi on Thursday.
“This is revival, but a slow revival,” Basu told reporters. However, he said if the Brent crude price goes up from $126 a barrel to $140, the growth rate could fall below the projection.
This is an optimistic projection, Citigroup India economist Rohini Malkani wrote in a note. “We believe that similar to 2011-12, this (7.6% growth estimate) once again runs the risk of a miss given the fragile political environment,” she added.
The finance ministry, in last year’s survey, had estimated that the economy will grow around 9%, higher than what most economists thought at that time. The Central Statistics Office has estimated growth to be 6.9% in the year ending 31 March.
The survey said that if easing inflation leads to the Reserve Bank of India (RBI) cutting policy rates, it would spur investment and growth.
The government is “showing signs of taking steps to restart the reform process,” which may further boost the growth engines of the economy, it said. “We expect growth to pick up in a small measure soon, arguably even from the second quarter of 2012-13.”
It is important to pare the fiscal deficit in the interest of medium- to long-term growth, the survey said. Raising the tax to gross domestic product ratio and cutting down wasteful expenditure would be the ways to do this.
The centre’s gross tax to GDP ratio in 2011-12 is budgeted at 10.5%. “Our aim must be to cross 13% by the last year of the next Five-Year Plan period, which is 2016-17,” the survey said.
Focusing on expenditure reforms, the survey suggested reducing oil subsidies. There is a need for a “transparent formula” for petrol pricing as the government can easily influence the state-owned oil marketers “through nods and winks,” the survey pointed out. It suggested that the government announce a maximum price of petrol every month or fortnight and allow companies to innovate and cut costs.
On diesel subsidies, the survey said the first step towards freeing prices of this fuel needs to be taken by fixing a per litre subsidy.
“This is not ideal, but as an interim measure has several advantages. Note that, since this subsidy is fixed per litre, the government’s fiscal burden will not have to take on the full share of the burden created by a rise in the price of crude. The only change in burden will be caused by changes in the aggregate consumption of crude, which is a fairly predictable number,” the survey said.
The survey advocated a greater use of Aadhaar—the project which aims to provide a unique identity number to every Indian resident—to transfer food subsidy directly to target households, who can then buy food from any public distribution system (PDS) store or maybe even non-PDS shops.
The survey said while there may be some slippage in the current year from the fiscal deficit target of 4.6% of GDP, the medium-term stance of fiscal consolidation could be salvaged, though the time frames may have to be redrawn.
However, the survey cautioned that policies need to be in place to cater to the uncertainties that might arise during the course of the year, particularly in dealing with risks like rising global oil prices.
The survey said the danger of high inflation is not yet over and and the government should work to gently bring it down below 5%. Inflation in February measured by the wholesale price index rose to 6.95% from 6.55% in the previous month, reversing its downward trend.
Despite inflation worries, the government’s primary concern now has to be to advance the economy’s productivity and improve income distribution, the survey said. “This means that during the coming year, all hands have to be on growth.”
While conceding that there could be a few policy failures, the survey critiqued RBI’s monetary policy, arguing for a “counter-cyclical financial policy.”
The survey criticised RBI’s stance that the government needs to present a credible fiscal consolidation road map before the central bank starts cutting policy rates. On Thursday, RBI decided to take a pause in its mid-quarter policy review, cautioning that high oil prices and fiscal slippage have pushed up inflation risks in Asia’s third-largest economy.
“The RBI increasingly voiced concern that the fiscal deficit that the government was tolerating was too high and made its task of controlling inflation harder. There were some in government who felt that the monetary tightening, successively 13 times, was not having adequate impact on inflation and the hardening interest rates were instead impacting more on growth; and that this needed rethinking because we were living in a world in which industrialized nations were maintaining near-zero interest rates, thereby creating a propensity for inefficient interest rate arbitrage,” the survey said.
The survey favoured a “well-demarcated bifurcation of responsibility” between the government and RBI, holding that it has worked well where “each entity took account of the ideas on the table and took independent decisions in their respective zones.”
N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, said fiscal and monetary policy coordination is important for price control.
“In India, prices are not decided by the market forces alone. Around 30-40% of the prices are regulated. So without coordination with the government, RBI only cannot fight against inflation. Fiscal deficit has an important bearing on RBI’s interest rate policy,” he said.
Admitting that there is “slackening in the pace of reforms”, the survey said one consequence of increased awareness of high-profile corruption scandals and civil society activism has been a sense of caution among civil servants in taking decisions.
“Since one way to avoid the charge of an ill-considered or, worse, ill-intentioned decision is to take no decision, it is arguable that some civil servants in this season of charges and counter-charges have resorted to precisely this strategy. This would cause a slowdown in decision-making. In addition, coalition politics and federal considerations played their role in holding up economic reforms on several fronts, ranging from diesel and LPG (liquefied petroleum gas) pricing and taxation reform like the goods and services tax and direct taxes code, to FDI (foreign direct investment) in retail and reform of the APMC Act (Agricultural Produce Marketing Regulation Act ).”
Elizabeth Roche contributed to this story.
Economic Survey (Full Text)