New Delhi: The most important aspect about the latest Economic Survey isn’t what it says about the Indian economy in 2008-09 or the road ahead, but the insight it provides into the economic strategy of the United Progressive Alliance (UPA) government—linking growth to welfare programmes, thereby making the reforms imperative for growth that much more palatable.
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It is marginal because there isn’t that large a gap between 6.7 and 7.
It is significant because no one expected India’s recovery to be as sharp.
The finance ministry, which scripts the document, has signalled an economic recovery from the third quarter of this fiscal year and maintains that the country could recover its high growth momentum provided it is able to push through second-generation reforms related to energy pricing, managing the fiscal deficit, tax structures, the public distribution system and education.
It has, however, presaged this on the assumptions that the country will have a normal monsoon, a clear picture of which will emerge only by the end of July, and the US economy will bottom out by September, eliminating the risk of any fresh external sector shocks. The downside of this risk is that growth could drop to 6.25%, which by any metric in the current global context is still impressive, but not enough given the vaulting ambitions of India’s UPA government to guarantee inclusiveness.
The Economic Survey, which is the annual post-mortem by the finance ministry of the preceding fiscal year, was tabled in Parliament on the first day of the month-long budget session—also the first season for the Congress-led UPA in its second term in office. It is an important document that sets the context for the Union budget due on 6 July and, at the same time, reflects the current thinking within the finance ministry, particularly with respect to the assessment of the macroeconomic prospects.
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The ministry is apprehensive that the hard lessons emerging from the unprecedented global macroeconomic shock—the runaway rise in international crude oil prices and the subsequent financial meltdown— may be ignored and that the economy could gravitate to a slower growth orbit.
Such a circumstance, it fears, will not only nip the economy’s potential, but at the same time jeopardize the entire welfare spending programme of the government. One factor that allowed the UPA, in its first term, to ramp up welfare spending, including the Rs71,680 crore farm loan waiver, was the rapid expansion of the economy that ensured a spurt in tax revenues.
“High growth is critical to generate the revenues needed for meting out social welfare objectives on a sustained basis and ensuring inclusive growth,” the survey said.
The attempt to link the government’s ability to fight poverty with rapid expansion of the economy is significant. The survey does so by correlating aggregate poverty and aggregate consumption. By doing so, it argues that growth of aggregate consumption is a sufficient condition to reduce overall poverty.
The fact that this is a reiteration of what was laid down in President Pratibha Patil’s address to the first session of the 15th Lok Sabha, suggests that this belief is now a key part of the government’s economic ideology. And since return to high growth rates can only be managed by easing infrastructure bottlenecks, reducing vulnerability to energy shocks and return to fiscal prudence—all of which need radical policy overhaul—the UPA has linked its pursuit of inclusiveness with another round of economic reforms. This will also make the reforms politically easier to defend.
While it is likely as Virmani pointed out in the interview that finance minister Pranab Mukherjee will list fiscal correction measures in the budget, the UPA has, through statements of its various cabinet ministers listing 100-day agendas, indicated that the government will not shy away from tough decisions.
The overview also sets out the vulnerability of the Indian economy, given its growing global linkages, but with a homily that economic “shocks” should not be used to reverse the country’s economic stance. According to the survey, the risks associated with high growth should not be a deterrent. Instead, there should be a strong policy response that will revive growth prospects in the economy.
Tight measures:Security personnel checking the copies of the Economic Survey to be distributed among members of Parliament on the first day of the budget session in New Delhi on Thursday. Kamal Singh / PTI
Among the immediate areas of concern, and hence a likely policy focus area, is the sharp drop in the growth rate of private consumption and of investments. The Economic Survey attributes the former to a combination of the erosion in value of real estate and equity, job losses, a cut in consumer credit and loss of consumer confidence. According to the survey, investment has slowed in the economy due to the credit squeeze and spurt in borrowing costs.
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In the final analysis, it is clear that the Economic Survey in its examination of 2008-09 and the first two months of 2009-10 has concluded that the worst is behind the Indian economy. Even if the underlying assumptions behind this do not pan out as expected, the economy will not plunge precipitously. Still, that is only part of the conclusion.
The kicker in this year’s survey is its very candid assertion that the country has to undertake some very contentious economic reforms if it has to avoid the risk of falling back to a low-growth cycle.
By linking this to the ability of the government to manage its inclusive strategy, the has also provided the political wherewithal to effect these reforms.