New Delhi: Prime Minister Manmohan Singh warned on Thursday against a “business as usual” approach in the face of slowing economic growth, putting a reversal of the downturn at the top of his government’s priority list with less than two years remaining for the end of its second term in office.
At a meeting of the National Development Council (NDC) attended by state chief ministers and top policymakers in New Delhi, Singh suggested limiting subsidies, aligning energy prices with global levels and sought a report from the Planning Commission in three weeks on fuel shortages that are crimping power production.
Singh blamed a combination of the global downturn and domestic constraints for the slowdown in India’s economic growth, which slipped to 5.3% in the quarter ended 30 September from 5.5% in the preceding three months.
At the meeting, NDC, which advises the Planning Commission, cleared the 12th Five-Year Plan document targeting average 8% growth in the five years to March 2017.
“Our first priority must be to reverse this slowdown,” he said. “We cannot change the global economy, but we can do something about the domestic constraints, which have contributed to the downturn.”
The government has reduced its target for economic growth in the 12th Plan to an average annual rate of 8% from an original 9% in the face of the downturn. High borrowing costs and inflation have hurt corporate investment and consumer spending in Asia’s third biggest economy.
“The most immediate problems we need to tackle are the implementation problems affecting large projects, including especially power projects, which are stuck because of delays in getting clearances and fuel-supply agreements,” said Singh.
Even the modest 8% growth target in the 12th Plan is ambitious given that growth in its first year is pegged at less than 6%, he said.
“The high growth will definitely not materialize if we follow a business as usual policy,” the Prime Minister warned.
Ending years of policy inertia, the Congress-led United Progressive Alliance government in September allowed foreign direct investment (FDI) in multi-brand retail, paving the way for foreign supermarkets chains like Wal-Mart Stores Inc. to enter the country, allowed foreign airlines to invest in domestic ones and liberalized FDI in pensions funds and insurance.
To protests from opposition parties and some of its own allies, the government also raised the price of diesel and capped the supply of subsidized cooking gas to six cylinders per household per year to cut its spending on subsidies and reduce fiscal deficit that has been estimated at 5.3% of gross domestic product (GDP) in the fiscal year to March.
Singh said on Thursday that subsidies must be kept within limits of fiscal sustainability and tying energy prices to global prices.
“If domestic energy prices are too low, there will be no incentive to increase energy efficiency or to expand supply. Unfortunately, energy is underpriced in our country,” Singh said, adding that rapid, inclusive and sustainable growth required “a phased adjustment in energy prices to bring them in line with world prices”.
Finance minister P. Chidambaram said in his intervention that some fiscal measures may cause immediate pain, but were necessary to ensure the fiscal deficit came down to a targeted 3% of GDP in the next three years.
Planning Commission deputy chairman Montek Singh Ahluwalia warned at the meeting that growth could get stuck at 5-5.5% if a policy logjam prevails.
If oil subsidies remain as high as they are, spending on other sectors such as health and education would have to be lowered, Ahluwalia said, noting that domestic oil marketers were running up a combined revenue loss of Rs.1.6 trillion by selling fuel below production cost.
“The adjustment can be delayed even by one year, but there is no way that you can expect to get 8% growth and investment in infrastructure if we keep subsidizing energy as much as we are doing,” he said.
Meanwhile, oil marketing companies requested the government to release payments for subsidies or issue a so-called letter of comfort to the companies’ creditors before the end of December, a government official at NDC said on condition of anonymity. The finance ministry had issued such letters to bankers covering debt to the tune of Rs.30,000 crore in the six months to September.
The finance ministry recently received Parliament’s nod to release an additional Rs.28,500 crore to the oil retailers against the debt covered in the letters of comfort. The government had budgeted for Rs.43,580 crore of fuel subsidies in March.
Some state governments were critical of the government for lowering the growth target.
“Significantly lowering the growth targets will further add to the mood of despondency and pessimism in the country,” Gujarat chief minister Narendra Modi said.
Some state chief ministers said the Centre had steadily reduced fund allocations to states. “Support to states has been declining continuously since the first Plan,” said Bihar chief minister Nitish Kumar.
Tamil Nadu chief minister J. Jayalalithaa’s prepared address asked the Union government to meet the states’ demand for fiscal devolution and greater freedom in utilizing funds allocated under centrally sponsored schemes. Jayalalithaa couldn’t complete her intervention in the 10 minutes allotted to each speaker at NDC and walked out in protest.