New Delhi: Noting that the Indian economy has “taken off”, the annual report card on the state of the Indian economy affirmed that the government’s pressing fight against inflation shouldn’t come at the cost of the nation’s long-term economic growth and potential.
The government’s bullishness is based on the fact that the investment rate for the current year may have already scaled 35% of the gross domestic product, for the first time ever, up from 33.8% in 2005-06. The savings rate is at 32.4%.
Finance minister P. Chidambaram, who presented the Economic Survey in Parliament, told reporters later that “the most heart-warming feature of this growth is that savings and investments have increased very sharply. Investment may have reached the desired rate for the Eleventh Plan.” The approach paper to the 11th Plan says that a 9% GDP growth will require an investment rate of 35%.
Other independent economists, such as Saumitra Chaudhuri, who is a member of the Prime Minister’s economic advisory council, also reiterated that investment rates in the economy had hit new highs. He predicted that the savings rate, too, would be 33.8% in 2006-07.
Predicting a growth rate of 9.2% in the current year, the fastest in 18 years, despite continuing inflation, which too is at a two-year high, the Survey said: “There is no scope for uneasiness or nervousness about high growth...The first priority is rising to the challenge of maintaining and managing high growth.”
The Survey usually comes ahead of today’s Union Budget and sums up the government’s economic concerns and priorities. According to the Survey, the government also expects to cut its gross borrowings, called fiscal deficit, to 3.6% of gross domestic product (GDP) this fiscal, from a target of 3.8%, thanks to the beneficial impact of record growth on revenues.
The government is also confident that not only will the current phase of high growth be sustained with moderate inflation, it will also be made more inclusive. But, before that, it said, “It is important to avoid the misconception that inclusive growth will have to be low growth.”
“Sticking to high growth does not mean neglecting inflation,” said Chaudhuri, who is also economic advisor to Icra Ltd. “A fair interpretation of the bullishness would be that the Survey acknowledges the many pressures and tightrope walking that high growth would require.”
Cautioning that pressure on inflation may persist and there were “no immediate answers to commodity-price inflation”, the Survey said it was “necessary to make the required adjustments in mindset, economic behaviour and policy-making” to tackle the challenges thrown up by “phase transition”. For that, Chidambaram said, “the priorities are to maintain and manage the high levels of economic growth, stick to fiscal prudence and encourage high investment.”
Refuting recent and growing concerns of overheating, the Survey said such concerns are “connected more with capacity utilisation and skill shortages” which the rising investment rate can help avoid. Even imports, another indicator of overheating, appear reasonable, the Survey said.
However, this doesn’t mean that fiscal reforms can be ignored and the government needn’t curb wasteful spending. The good experience of the past few years showed the benefits of sticking to the Fiscal Reform and Budget Management Act targets from 2004. “Like going up a hill, the adjustments become harder as the destination gets closer,” it said. The Survey hinted at cutting all subsidies, including those for petroleum products, and proposed a pilot project that would ensure a more efficient delivery.
Apart from lack of overheating, there are several reasons why the government believes high growth is sustainable. First, as Chidambaram said, the “virtuous cycle” of growth, savings and investment has taken hold in the economy. Secondly, efficiency of various sectors has improved since the turn of the century. India now needs less capital to produce anything, with the ratio between the two improving from 2.78:1 in 1999-2000 to 2.6:1 in 2004-05.
The third factor is the buoyancy displayed by new services sectors—apart from the old faithfuls like infotech and communication—such as tourism, which grew at double digits in the past three years. Fourth, the government finds a tangible progress in all infrastructure sectors and in finding funding for them.