Economic Survey | Recovery on, but concerns remain

Economic Survey | Recovery on, but concerns remain
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First Published: Fri, Feb 26 2010. 12 36 AM IST

Updated: Fri, Feb 26 2010. 12 37 AM IST
New Delhi: The Economic Survey for 2009-10 says growth for 2010-11 will be around 8.5%, plus or minus 0.25%, provided the monsoon is normal and the recovery in the global economy continues.
The survey, which is essentially an assessment of the economy by the finance ministry, says it expects GDP (gross domestic product) growth to breach the 9% mark in 2011-12, signalling a full recovery. It bases its assessment on the resilience of the manufacturing sector despite the poor monsoon; the recovery in the growth rate of capital formation, including a pick-up in private investment demand; a turnaround in export growth; and the rebound in infrastructure services including power, railways, communications and civil aviation.
For the longer term, the survey points to the fact that Indian savings rate and domestic capital formation are now at levels traditionally associated with the East Asian economies. It argues that as India’s demographic dividend begins to pay off and the working age group expands disproportionately compared with the rest of the population over the next two decades, the savings rate, which was at 32.5% of GDP in 2008-09, is likely to rise further. Given these strong fundamentals, the survey says that with improvements in infrastructure and reform in governance and administration, “it is entirely possible for India to move into the rarefied domain of double-digit growth and even attempt to don the mantle of the fastest growing economy in the world within the next four years”.
The survey chants the mantra of inclusive growth, but in a language rather different from the one used by the government. It makes no bones about the fact that “for achieving inclusive growth there is a need for rethinking the role of the state”.
The survey says that, instead of the government trying to directly deliver everything, it should create an enabling environment that allows individual enterprise to flourish. It says the role of the government should be to set forth rules and incentives, while “remaining on the sidelines with minimum interference”. It does say, though, that the government has a role in ensuring that the poor get education, food and health services, but argues that rolling back government in the rest of the economy will allow it to devote more energy and resources towards helping the poor. The survey also argues that, instead of controlling prices, the poor will be best served by providing them funds directly through coupons.
On inflation, while the survey says that a significant part of current inflation is the result of supply constraints in some essential commodities, there’s a risk of inflation spilling over to non-food items through wage price revisions. It points out that sustaining current levels of domestic petroleum prices while international prices are rising may not be viable, though raising prices will add to inflation.
At a more fundamental level, the survey says there is an urgent need to improve farm productivity by focusing on research and better agricultural practices. It also questions the continuous increase in minimum support prices of various crops over the last few years, by pointing to the inability of a large number of small and marginal farmers to directly access the agricultural market and, therefore, benefit from the higher prices. It says that agriculture needs to “go the way India did with industry in 1991”, implying liberalization of the sector.
While upbeat about the economy, the survey also points to certain risks to its outlook. It says that, though the recovery is on the whole broad-based, the slowdown in agriculture has affected some labour-intensive sectors such as food products, paper products, leather products, jute and cotton textiles. Since sustaining high growth depends on the ability of manufacturing to absorb the vast surplus labour in the farm sector, labour-intensive manufacturing needs to grow at a high rate. It points to the gaping infrastructure deficit in the country and says that reaching the target of investing 9% of GDP in infrastructure envisaged by the 11th Five-Year Plan would be “an extremely challenging task”.
On the external front too, the survey notes a number of risks. These include the danger of a double-dip recession in advanced economies and rising unemployment there fuelling protectionist sentiment. It says, however, that India should not be unduly worried and should instead “lead from the front by taking bold steps towards reforms as it did in 1991… and, thus, force the wavering leaders of liberalization and globalization not to backtrack”.
Towards that end, it recommends lowering peak customs duties, weeding out unnecessary exemptions and other measures including liberalizing foreign direct investment in health insurance, rural banking and higher education.
 The risks to its outlook are perhaps responsible for the survey’s cautious view on the fiscal deficit. While it says that it might be possible to contain the deficit this fiscal year at budgeted levels and there is a need for a resumption of the process of fiscal consolidation, this should be done in a gradual manner.
manas.c@livemint.com
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First Published: Fri, Feb 26 2010. 12 36 AM IST