An optimist despite inflation
An optimist despite inflation
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With the recent rise in inflation that it recognizes up front, the Economic Survey for 2006-07, seems to be caught in a bind on whether to highlight the 9.2% GDP growth that “surpassed expectations" or emphasize the importance of containing inflation. But in the end it adopts an optimistic stance stating that “With an upsurge in investment, the outlook is distinctly upbeat (and) a sense of optimism characterizes the current economic conjuncture."
The likely impact of the downside risks that are identified as the unravelling of global imbalances, volatile oil prices and delays in the completion of the Doha Round on the Indian economy would be fairly mild. This holds especially in light of the facts that the US economy and the dollar seem to be successfully managing a soft landing; that oil prices have come down from their earlier peaks; and that the Doha outcomes, focused as they will be on agriculture, will have limited implications for India.
On the other hand, the upsurge in investment supported by rising trends in domestic savings—now at 32.1% of GDP up from 23% in 2001-02, and an upswing in FDI (that, according to the Survey, increased by a whopping 98.4% in the first half of this year) is seen to have sufficient oomph to achieve the escape velocity and sustain the take-off to a higher growth trajectory. Given the strength of the growth-supporting structural factors and the benign external environment, we would tend to agree with the positive outlook adopted by the Survey.
The Survey, however, would have done well to more candidly discuss some of the weaknesses that characterize the Indian economy today. Without ranking these, the first is the slackening of growth of non-petroleum merchandise exports which deserves far greater policy attention, while the Survey seems to laud the somewhat spurious 36% export growth during the first half. Non-petroluem exports grew by less than 20% during the same period!
Second, the decline in organized sector employment, despite the 2.5% annual growth in overall employment, points to the fairly worrisome labour market and human resource situation in the country.
Third, the progress in addressing infrastructure bottlenecks has been less than satisfactory—with power generation targets and adoption of open access transmission far short of targets. Rather than appear to be satisfied with the establishment of SPV (special purpose vehicle) this year, the Survey would have done well to highlight the rather intractable problems of the lack of a shelf of project proposals and inter-governmental and inter-ministerial problems that prevent a higher participation of private investors, both foreign and domestic, in the infrastructure sector.
Fourth, the Survey would have done well to explain the sharp decline in public capital expenditure that has declined from 4.4% of the GDP in 1990-91 to barely 1.8% of GDP in 2006-07. With the all the talk on improving rural infrastructure, connectivity and public irrigation systems, how can this decline be acceptable?
The Survey’s objective of achieving rapid growth with macroeconomic stability and greater inclusion, laudable as it is, cannot be achieved if the share of public expenditure in GDP continues its declining trend. Hopefully, this will be reversed in the coming Union Budget. One quibble that’s important because the Survey, being a flagship document, should not be allowed to carry mistakes such as two figures for the ratio of net capital stock to gross value added for 2004-05. It can be either 2.60 or 2.66! (p15)
Finally, the problem of rising inflation. The Survey likes to term it a supply-side problem and calls for “carefully calibrated policies" to restrain it. It lists a large number of micro policy steps such as cuts in excise and import duties and bans on commodity exports taken to contain inflation. This seems to suggest it is not in favour of a hike in interest rates, as that could, possibly, dampen the growth momentum. But this is not quite right, as it could send contrarian signals.
It would be far better to highlight the need for reforms to address supply-side bottlenecks and evoke a more robust investors’ response. It has been argued that the food price rise could not be helped in the face of global price increases. But, the fact remains that our agriculture sector is so tightly controlled by a plethora of archaic and dysfunctional administrative measures and cut off from international markets that the required supply response is inordinately delayed. This delay engenders inflation-inducing market behaviour. Surely, we need to liberalize this sector and give up false and outdated notions of food security and self reliance, for example in edible oils! Only if we let our farmers, intelligent economic players as they are, to integrate with global markets, can we hope to generate the second green revolution, and achieve the necessary productivity increases and diversification in agriculture to address the core of the current problem.
The Survey gives a glimpse of some initiatives that might be in tomorrow’s Budget. Some of the schemes for poverty reduction and employment generation that have been ineffective, such as the PMRY (Prime Minister’s Rozgar Yojna), may be discontinued. There could be some measures to better target subsidies—smart cards to improve the PDS (Public Distribution Scheme) and a greater focus on rural infrastructure. These would be welcome.
Rajiv Kumar is director and chief executive of Icrier. Your comments are welcome at theirview@livemint.com
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