New Delhi: For the second year in a row, the annual economic survey has maintained that the worst is over for the Indian economy, this time with the caveat that higher growth is contingent on the government following through with key policy actions to address structural flaws.
Presented to Parliament a day before finance minister P. Chidambaram presents the Union Budget, the Economic Survey of 2012-13 forecast that the economy should recover to a growth pace ranging between 6.1% and 6.7% in the next financial year.
The document, which is a diagnosis of the adverse state of the economy in the current fiscal, unambiguously identifies the structural constraints facing the Indian economy and argues that bold policy initiatives are an imperative, not an option, to ensure the forecast is realized.
It has effectively argued that policy inaction is the downside risk to the economy.
In a break with the past, the Economic Survey has devoted an entire chapter on the critical issue of the economy being unable to generate jobs despite record growth. “Because good jobs are both the pathway to growth as well as the best form of inclusion, India has to think of ways of enabling their creation.”
Raghuram Rajan, the chief economic adviser who took charge in August, later told reporters at a press conference, “There are no silver bullets here. There are lots of things that we need to do that will start us on the path of macroeconomic stabilization, which will instill confidence both in financial and real investors.”
The Indian economy is projected to slow to 5% growth in the year to 31 March, the slowest pace in a decade, burdened by regulatory hurdles for infrastructure investments, higher interest rates and global economic crisis.
The survey pointed out that with the ongoing private sector deleveraging and government fiscal consolidation in developed economies, the global economy is likely to post a “very moderate” recovery in 2013 and would only gather steam in 2014. The survey said India cannot take the external environment for granted and has to move quickly to restore domestic balance. “What is important is to recognize that a lot needs to be done, and the slowdown is a wake-up call for increasing the pace of actions and reforms,” it said.
Rajan said India is in a difficult situation, but not an impossible one. “The bigger issue is whether we have a good handle on the underlying circumstances of the economy and the necessity for the policy to rectify that.”
The survey, however, seemed to be against raising income-tax rates or the imposition of a super-rich tax. “Of course, it is much better to achieve a higher tax-GDP (gross domestic product) ratio by broadening the base that is taxed rather than increasing marginal tax rates significantly—higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion,” it held.
C. Rangarajan, chairman of the Prime Minister’s economic advisory council, had mooted a higher tax rate for the super rich to compensate for falling tax revenue collections.
India’s tax-GDP ratio, after reaching a peak of 11.9% in 2007-08, declined to 9.6% in 2009-10 and was at 9.9% in 2011-12.
“Raising the tax-GDP ratio to above the 11% level is critical for sustaining the process of fiscal consolidation in the long run,” the survey said.
Making a case for the Reserve Bank of India to lower interest rates further to enable a pick-up in investment and consumption, the survey said the central bank should link its monetary policy to the behaviour of the less-volatile non-food manufacturing inflation, or core inflation.
“To the extent that monetary policy has limited influence over certain aspects of inflation such as food prices, it may be appropriate for monetary policy to set rates based on what it can influence,” the survey said.
Advocating expenditure reforms, the survey said the fiscal deficit should be reduced by shrinking wasteful and distortion-inducing subsidies while protecting Plan expenditure, given the large unmet development needs. Chidambaram has promised to keep the fiscal deficit at 5.3% of GDP in 2012-13 and bring it down to 4.8% in the next fiscal.
Measures highlighted in the Economic Survey may resonate in the Union Budget on Thursday, said Madan Sabnavis, chief economist at Care Ratings.
“This environment has warranted the government to reduce spending to anchor inflation, facilitate corporate and infrastructure spending to ease supply and work towards fiscal consolidation. Going forward, these steps would need to be pursued with greater fervour,” he added.
The survey stressed the need for creating more productive jobs, especially in the organized manufacturing sector, to meet growing aspirations of the youth. It estimated that nearly half the additions to India’s labour force in 2011-30 will be in the 30-49 age group.
“The survey has raised some very valid concerns. Joblessness is a key issue and the government needs to focus its energies on generating employment,” said Rajesh Chakrabarti, executive director, Bharti Institute of Public Policy, and a faculty member at the Indian School of Business.
“There is a need to create jobs for our burgeoning population. The job creation numbers show that some of the government’s strategies surrounding employment generation like the skill development strategy have not worked,” he added.