Given the number of reports on the Indian economy, all sounding suspiciously similar as they come from official sources (Reserve Bank, the finance ministry’s half-yearly reviews, the Economic Survey, and the PM’s Economic Advisory Council), it is difficult to bring novelty to another report.
However, the Economic Survey for 2011-12 comes as breath of fresh air for two reasons. The first is that, contrary to the stance being taken by everyone around, it does paint a relatively more cheerful picture for the economy on the premise that when the world is going downhill, we are actually not badly off. Further, the prospects for the next two years look better if certain conditions are satisfied, which is fair enough.
The other bit of freshness relates to certain new ideas that have been added, and it is not hard to guess that the author has to be Kaushik Basu, which makes the Survey easy to read.
The pure economic numbers are known to all but the Survey goes ahead and talks of growth of 7.6 percent and 8.6 percent in FY13 and FY14. This is a bold move considering that even last year we had started off with an assumption of 9 percent growth which has gotten diluted to 6.9 percent. However, it is reasonable to assume that the worst is probably behind us and that things can get only better, albeit, gradually.
The assumptions made are that inflation moves downwards and the RBI is in a position to roll back rates which will spur investment, which has come down to a low of 30 percent in the third quarter (Q3) of FY12. While this sounds fair enough it is assumed that there is an economic basis for these numbers and not just hope or aspiration – which appears to have been the case last year. The budget’s assumption will be important as this number will be used in all its income calculations.
The Survey hails the services sector which has been the driving force this year with growth of 9.4 percent, which makes up for the slack in industry. However, a pertinent point here is whether such a growth model is sustainable in future. India has seen a transition from an agrarian economy to services, without really having an industrial revolution. This being the case, the quality of services becomes important.
Services cannot on their own lead to growth and have to support the real economy, which has not been happening. Therefore, there is some unease when one looks at such a growth model in terms of its sustainability.
The survey talks a lot about farm reforms, which is good because it puts in one place all that has to be done in this sector. However, the issue really is of implementation. It also talks of foreign investment in multi-brand retail as being a possible cure and the need to revise our laws relating to the sale of produce across states.
This is actually the fundamental problem in India where most of these issues need to go through the legislative processes and get held up due to a divided view. The Survey rightly emphasises the need of importing commodities in advance once we sense that output will not be normal. A plain commonsense advise (can again be attributed to Kaushik Basu), which should be implemented immediately.
Industrial growth is to be between 4-5 percent this year and the Survey expects improvement in the next year. However, it points out that going by the plan target we could be looking at something like 9.8-11.5 percent during the 12th Plan period, to be consistent with growth of 9-9.5 percent in GDP. There are general statements made here about what is required and the policies that have been announced – but nothing specific really to bring about a turnaround.
This is a critical factor going ahead. The issues that have to be addressed here are land availability, infrastructure, linkages with agriculture and services, focus on high value addition industries and flow of FDI. If this is not done, then those wild dreams of raising the share of manufacturing in GDP to 25 percent can never materialise.
The Survey takes on a slightly defensive note on the fiscal deficit and maintains that fiscal consolidation is on despite the slippage expected this year, primarily due to the states performing well, thereby making the consolidated picture more resilient. Given the turbulence over the Railway Budget for totally extraneous reasons, the question to be asked is whether or not the government can really take tough measures in the Union budget to be announced on 16 March.
This is so because fiscal consolidation has to necessarily hurt people through taxation and probably rub someone wrong when it comes to tackling non-development expenditure, especially on subsidies. Food and fuel subsidies have become serious issues where consensus may be required. But the deficit concern also percolates to inflation.
The Survey rightly points out that the three pressures we need to look out for are supply shortfalls, fiscal deficit and oil economics. It is hopeful that inflation will come down next year and has also gone on to explain that certain apparently demand side shocks could be supply factors. The example given is textiles wherein high international prices feed back into prices of textiles. This makes it difficult to separate the demand and supply factors. Going ahead, as it expects commodity prices to cool down, this could on its own influence domestic prices in the downward direction.
The Survey is finally quite satisfied with the eternal performance notwithstanding the fact that export volumes have slowed down, as this is better than other countries. The significant achievement is that we have diversified our direction of exports away from the US and EU which sort of provides a buffer during such downturns.
However, the protectionist policies being pursued by countries pose a serious challenge, and this can pressure our balance of payments. On the current account deficit, a warning has been sounded that a trade deficit of over 8 percent and current account deficit of over 3 percent is unhealthy, and caution is expressed over import of unproductive goods like gold. But, how can this be done? The Survey does believe that the depreciation in the rupee will help iron out some of these creases.
The biggest novelty in the survey is the introduction of the concept of Comparative Rating Index for Sovereigns (CRIS) where the score looks at how the comparative position of countries stands vis-a-vis others – meaning, if there is no change in our rating when others have gone down, it essentially improves our own CRIS. Here, in the last six years, based on Moody’s ratings, India has actually progressed by 2.97 percent between 2007 and 2012.
Therefore, the Survey does tend to tell us the better stories and the pitch is that in relative terms we are better off than other countries in terms of economic performance (GDP, and trade) and credit rating. Industry is an issue, which could be addressed once policies turn positive after inflation comes down.
Fiscal problems are still there at the centre and have to be addressed. There are firm economic measures that can be implemented to make agriculture and industry more buoyant. But, it is silent on the implementation part, which is the concern today given the nature of coalition politics, where consensus is necessary. But then, the Economic Survey is a survey and a collection of ideas, and its own influence stops here. The rest has to be taken up at a different level. Over to you, Mr Pranab Mukherjee.
Madan Sabnavis is Chief Economist, Care Ratings. These views are personal