New Delhi: Prime Minister Manmohan Singh warned on Saturday that a prolonged policy logjam could slow economic growth to 5%, a day after government unveiled long-delayed reforms aimed at reviving growth and preventing a credit rating downgrade.
Singh said at a Planning Commission meeting to finalize investment targets for the five years to March 2017 that the government would aim for 8.2% annual growth over that period, down from an earlier target of 9%. He also outlined three potential scenarios at Saturday’s meeting.
“Scenario three is called a policy logjam. It reflects a situation where, for one reason or another, most of the policies needed to achieve scenario one are not taken,” Singh said.
“If this continues for any length of time, vicious cycles begin to set in and growth could easily collapse to about 5% per annum with poor outcomes on inclusion,” he said.
With Singh’s embattled government long unable to push through reforms to promote investment and shore up government finances, growth in Asia’s third largest economy has slowed to 5.5% or below in the past two quarters.
Defending the downward revision of the 12th Plan average growth target from 9% to 8.2% over the five-year period, the Prime Minister said it is realistic given the state of the world economy.
Planning Commission deputy chairman Montek Singh Ahluwalia had said at a curtain raiser to the event on Friday that this reduction in the growth target must be seen in the context of the global situation where Brazil, a BRICS ally, also sought to lower its growth forecast for 2012 from 3% to 2%.
Credit rating agencies have warned of the risk of a downgrade to “junk” status.
On Friday, the government said it was opening up its supermarket sector to foreign chains and would allow more foreign investment in airlines and broadcasters. It also approved the sale of stakes in four state-run industries.
Those moves came a day after the government announced a steep increase in the heavily subsidized price of diesel, setting up a showdown with the opposition as well as allies within the ruling Congress party coalition, who demand a rollback of the retail and fuel price decisions.
Singh said government policy initiatives such as the hike in diesel prices were aimed at reining in a widening fiscal deficit and reviving investor sentiment.
The investment environment is critical, the Prime Minister said, adding: “Our fiscal deficit is too high and is attracting adverse comment from analysts. It must be brought down over the medium term to release domestic resources for productive deployment in the economy.”
Calling the hike in diesel prices an “important step in the right direction”, he later said the Plan projection of the current account deficit at 2.9% must be financed mainly through foregin domestic investment (FDI) and foreign institutional investment given that export prospects seemed bleak.
Reviving growth in the second half of the current fiscal was the immediate priority, Singh said, adding: “The most important area for immediate action is to speed up the pace of implementation of infrastructure projects. This is crucial for removing supply bottlenecks which constrain growth in other sectors. It will also boost investor sentiment to raise the overall rate of investment.”
The May report of the ministry of statistics and programme implementation showed that over 80 mega infrastructure projects of Rs.1,000 crore or higher were delayed due to various reasons such as delay in land acquisition and environment clearances, leading to major cost overruns.
For the longer term, Singh spoke about the need to ensure effective delivery of the “ambitious Plan programmes in the health, education, water resource management and infrastructure development”, calling these key sectors. He also spoke about the need to accelerate agriculture growth to 4%, and develop infrastructure through both public investment and private partnership.
Pointing to the disappointing decline in manufacturing sector jobs in the second half of the last decade, Singh said the manufacturing sector needed to grow faster and create more jobs. The draft Plan document says that between 2004 and 2010, National Sample Survey data showed manufacturing jobs fell by five million.
The full Planning Commission meeting is chaired by the Prime Minister and attended by all members of the panel including Union cabinet ministers, who are ex-officio members. The Plan document approved at this meeting is sent for cabinet approval, after which it is finalized after discussions at the National Development Council (NDC), which is the apex decision-making body of India. The NDC meeting is expected to be held in October this year.
The government projects a fiscal deficit of 5.1% of gross domestic product in India’s nearly $1.8 trillion economy in the current fiscal year ending in March, while many private economists predict it to reach 6% or more.