Economic Survey: incredible optimism, but little cognizance of future risks

Economic Survey: incredible optimism, but little cognizance of future risks

This might well be a case of being disappointed because one had unrealistic expectations. I had expected the Economic Survey to have even greater clarity, analytical rigour and academic circumspection than in the past. But I find that at least on four counts, I am disappointed.

First, on the growth estimates for agriculture. The survey simply accepts the Central Statistical Organisation’s advance estimates of a decline of a mere 0.2% in 2009-10 despite what the survey itself says: “Overall production of kharif cereals in 2009-10 has shown a decline of 18.51 million tonnes..." This is a decline of around 15% over the previous year. This is expected to be compensated by an increase in rabi output. But according to the second advanced estimates from the ministry of agriculture, sown area under rabi crops is likely to increase only by 0.2%.

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This marginal increase in sown area cannot be expected to yield an increase of more than the 106.3 mt of cereal output achieved in 2008-09, that will compensate the loss in kharif production. The survey could have at least cited it as a downside risk.

Second, we all know that the fiscal expansion in 2008-09 and 2009-10 of more than 3% points of gross domestic product (GDP) each year was done for electoral reasons. That our electoral cycle fortuitously coincided with the steep downturn of the global economy is simple good luck, which I am sure we deserved.

But to claim, as the survey does, that “the fiscal expansion undertaken by the Central government as a part of the policy response to counter the impact of the global economic slowdown..." is certainly pushing credibility.

Third, with non-food credit offtake between April 2009 and 15 January at an anaemic 14.4 % compared with 22% during the same period in 2007-08, to say that “...there has been a revival in investment and private consumption demand, though the recovery is yet to attain the pre-2008 momentum" is again beyond credible limits.

Finally, the first overall chapter forecasts GDP growth at around 8.5% (+/- 0.25 percentage point) for 2010-11 and 9% for the year after. I sincerely wish this forecast would come true. But I would have been far happier if the survey had mentioned some of the associated risks.

For example, there is no certainty that the global economic recovery will not slacken after June, and industrial growth may hit a capacity constraint with gross fixed capital formation having increased by only 4% in 2008-09, compared with 15% in 2007-08. And the bad news is that fixed capital formation in 2009-10 is estimated to be only 5.2% even after the sharp decline in 2008-09.

The survey also provides a summary of the recommendations made by the 13th Finance Commission, which were also made public on Thursday. The commission has recommended a calibrated exit from the fiscal expansion, and reiterated the need to eliminate the revenue deficit both at the Central and state government levels by 2014.

The finance minister will do well to heed this advice and preset a road map for achieving this in his Union Budget today. That will provide significant confidence to the markets that the government is conscious of its fiscal responsibility.

The commission also does well to provide much greater fiscal space to state and local governments by allowing them to cap their debt at 25% of GDP compared with 45% for the Union government, whose share is currently at 54%. But I would not go as far as making the 68% public debt to GDP ratio a hard constraint, because that might unduly constrain the government from increasing its expenditure on critically needed infrastructure.

Rajiv Kumar is director and chief executive of the Indian Council for Research on International Economic Relations. These are his personal views. Comments are welcome at