New Delhi: Breaking with the string of depressing macroeconomic news flashes, the finance ministry on Friday projected that economic growth would accelerate to 9% in 2011-12.
The economy is estimated to grow by 8.6% in 2010-11 to $1.7 trillion (Rs77.18 trillion).
The ministry’s annual postmortem of the Indian economy extends this bullish projection to suggest that the country is poised to “further improve and consolidate in terms of key macroeconomic indicators”. While this is indeed the headline news, the fine print belies this optimistic outlook.
What the Economic Survey 2010-11 says is that while there is enough momentum in the Indian economy to propel it to an even higher growth rate next year, this is contingent on a string of variables, including stability in international oil prices. This points to considerable underlying economic uncertainty, which makes it that much more difficult for the Union budget, due to be presented on 28 February, to provide a policy response on key issues: inflation, jobs growth and governance.
Interestingly, the Economic Survey, in a departure from the past, dwells on the issue of governance failures. It has, in no uncertain terms, indicated that the failure to fix this pernicious issue could well nix the best-laid plans. Kaushik Basu, chief economic adviser and principal author of the survey, said: “Trustworthiness, honesty and personal integrity are good moral qualities in themselves, over and above that they are drivers of economic efficiency and growth. I feel, especially today in India when these qualities are coming up for a huge amount of public discussion, it is very important to stress that these qualities are good for economic development; so we thought we have to give some focus to that.”
The macro outlook
The survey, while acknowledging the structural shift in the Indian economy towards a domination by the services sector (57.3% of gross domestic product in 2009-10) also notes its newly acquired resilience. This is a fair assessment considering that the economy has recovered quickly from the two successive shocks—the global financial crisis in 2007-08 and the partial failure of the monsoon in 2009-10 that triggered a severe drought.
Still, the finance ministry document candidly admits to the dubious record on food inflation, which has been in double digits for 76 weeks from 5 June 2009 and which was above 20% in 22 out of 23 weeks between 15 January 2010 and 19 June 2010. According to the finance ministry, the composition of food inflation in the current fiscal is different from what it was previously; earlier it was driven by a supply shortfall, while in the current year, it is demand-driven.
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Though the survey points to a moderation, it warns that domestic prices are likely to come under pressure due to higher international commodity prices, especially of oil, and a liquidity glut arising from a fiscal stimulus in advanced economies such as the US.
As a palliative to inflation, the survey makes out a strong case for supply-side management, including reforms such as permitting foreign direct investment in a phased manner in multi-brand retail, and continuing with fiscal consolidation. “Going forward, the need to deepen the process of fiscal consolidation that has resumed in the budget for 2010-11 cannot be overemphasized,” the survey said. Basu signalled that Monday’s budget would continue with this process of a gradual exit from stimulus packages and announce a medium-term fiscal consolidation plan.
Another area of concern, and something already flagged by the Reserve Bank of India, is regarding the balance of payments. The current account deficit and trade deficit, together with net earnings from invisibles such as payments for software services, doubled in the first half of 2010-11 to $27.9 billion. This was, however, offset by inflows of foreign capital, mostly made up of portfolio flows. While Basu expressed concern at this domination of “volatile foreign inflows” in funding the current account deficit, he expressed confidence that it would soon be corrected.
Despite these concerns, the finance ministry is confident that the economy still enjoys considerable momentum, riding on the growth in savings and investments, and will expand by 9% with a margin of 25 basis points either way. In the medium term, however, it warns that growth will be presaged on productivity improvement, particularly of human resources, emphasizing further the need for skill development programmes.
The political economy
This year’s survey has, like its predecessor, explored new territory.
Not only has it provided economic justification for the ideological stance of the United Progressive Alliance—the welfare of the common man or aam admi—it has also joined the contentious debate over graft in public office.
“Inclusive development is an act of faith for the government,” the survey said, before highlighting that social sector spending now accounts for almost Rs2 of every Rs5 of government expenditure. It further argues that some of this spending has acted as a social safety net that actually cushioned the adverse fallout of the recent economic shocks and probably explained India’s quick economic recovery.
Similarly, it made out a strong case for a food security. According to the survey, persistent double-digit inflation is sure to have affected poor households, who spend an estimated 67% of their income on food consumption. “The way this has to be handled is by developing stronger systems of food security for the poor, more effective systems of providing cheap fertilizer for the farmer..., and basic health support and other such services,” the survey said.
The survey, however, makes it clear that going forward, the emphasis has to be on ensuring effective implementation through the use of instruments such as the UID (unique identification) number and the revamp of the public distribution system through the use of smart cards. The implicit message is that the government, having embarked on a fiscal consolidation programme, will no longer be able to dole out additional resources at the pace it has been doing.
The most striking point the survey makes on equity is the case against graft. “What is increasingly recognized is that successful economic development has a strong correlation with these human qualities of honesty and trustworthiness. The drive for greater profit and greater personal utility, devoid of these social qualities, creates a dysfunctional and chaotic society,” it said, making a case for governance reform.
“For India to develop faster and do better as an economy, it is, therefore, important to foster the culture of honesty and trustworthiness,” it added.