The government on Thursday acknowledged that sustaining 9% growth while keeping inflation within bounds was its primary economic challenge, and appealed to states to push reforms which would increase capacity in and improve delivery of the economy.
Releasing the Economic Survey 2007-08 which sports a cleaner, bolder new look this year, in Parliament, finance minister P. Chidambaram said he was optimistic, “but with caution as the watchword” about the coming year.
The survey argues that despite distinct signs of a global slowdown, India’s gradual approach towards financial reforms has helped keep the economy relatively insulated from the spreading fallout of the subprime mortgage crisis in the US.
“The new challenge is to maintain growth at these (current) levels, not to speak of raising it further to double-digit levels,” the finance ministry said in the Economic Survey, its annual report card to the government.
India is expected to grow slower at 8.7% in 2007-08, as compared with 9.6% in the previous year.
INFLECTION POINT? (Graphic)
“Surely, a slightly slower growth is a small price to pay for low inflation,” said Bimal Jalan, former Reserve Bank of India (RBI) governor.
Other economists, unmindful of the positive spin given by the Economic Survey, have flagged concerns on growing inflationary pressures.
According to Pronab Sen, chief statistician of India, lower agricultural production this year could contribute to inflationary pressures in 2008-09. “To add to it, both Bangladesh and Pakistan have reported lower food production, fuelling the chances of cross-border diversion of stocks,” he said.
Advance government estimates expect a farm sector growth of 2.6% in 2007-08, and Sen said the year was likely to end with a growth of less than 3%. He also said there was as yet no evidence that supply-side constraints had abated, even though investment growth had been strong since 2005.
The survey, released a day before the Union Budget for 2008-09, the ruling United Progressive Alliance’s fifth and last for this term, gives the finance ministry’s assessment of the economy and its various sectors as well as the challenges ahead. It is lead-authored by chief economic adviser Arvind Virmani.
India, Chidambaram said, had a good chance of doubling per capita income in the next decade if per capita income continued to grow at 7.2%, the average of the past five years.
This is because the rate of growth of per capita private consumption accelerated from an average of 2.2% per year during the 12 years from 1980-81 to 1991-92 to 2.6% per year during the next 11 years following the reforms of 1990s. The growth rate has almost doubled to 5.1% per year during the subsequent five years beginning 2003-04, with the current year’s growth projected at 5.3%.
Even the rates of investment, or gross capital formation (GCF), and savings are far higher at 35.9% and 34.8% of gross domestic product, or GDP, he added. However, the survey quotes national account statistics to project GCF at 32.6% of GDP in 2007-08.
“Growth is of interest not for its own sake but for the improvement in public welfare it brings about,” the survey said. “Some observers have gone so far as to say that government at the cutting edge level, where it interfaces with individuals and economic agents, is the most important constraint on raising the growth rate of the economy to 10%.”
The Centre has conceptualized, funded and incentivized various basic services programmes for all citizens, but for them to be successful the “states must refocus their efforts on the provision of public and quasi-public goods” that have been neglected, and improve the quality of services by passing some of them on to private and non-profit sectors, the survey said.
“We have the means,” Chidambaram added, “to bridge and address the chronic gaps and weaknesses in our physical and social infrastructure,” because both the Centre and the states have managed to temper past fiscal indiscipline.
Despite a doubling of spending on education and health over the past few budgets to benefit its poor, India’s rank in the UN’s Human Development Index slipped two places to 128 in 2007. Expenditure on social programmes is now more than one-fifth of total annual spending.
The survey said inflation should remain moderate in the coming months—about 4.4% in the year—due to policy measures taken over the last year, although rising incomes and commodity prices as well as large capital flows would continue to challenge price management efforts.
“Any reduction in excess capital flows from the high levels in 2007 may affect the equity markets in the short term, but will make the task of monetary management easier,” the survey said.
“The excess of net capital inflows posed newer problems for macroeconomic management,” the survey said, adding that the cost of absorbing such capital inflows may have more than doubled to Rs8,200 crore in 2007-08. RBI also raised the limit on the sale of “market stabilisation bonds”, to mop up excess cash and curb inflation, to Rs2 trillion from Rs1.5 trillion earlier.
Abheek Barua, chief economist, HDFC Bank, said that “for the first time, the survey has clearly spelt out several reform recommendations, certainly a nice change from the earlier generalized policy prescriptions...”