Clear message from Economic Survey: Budget 2013 will be cautious

The Economic Survey is one more official document on the state of the economy and is timed just before the budget. It supersedes the quarterly reviews of the Reserve Bank of India (RBI) and the prognosis of the Prime Minister’s Economic Advisory Council (PMEAC), and hence is the most contemporary document before the financial year-end.

It, however, does not really add anything new to the broad economic numbers that the Central Statistics Office (CSO) provides on GDP, IIP and CPI, or what the Office of the Economic Advisor provides on WPI, or the commerce ministry on trade, the RBI on external accounts, the Department of Industrial Policy and Promotion (DIPP) on FDI, and Sebi on FIIs and so on.

The Economic Survey does not give its own numbers and collates the same from these sources in one place. It then goes on to give details of every segment and there is hence a plethora of numbers for the researcher. If one is looking out for projections for the year or the next one, this may not be the source you should be looking at.

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The Economic Survey for 2012-13 does take a call this time on the GDP growth number for 2-13-14 and places it at between 6.1-6.7 percent. As it does not really comment on the future policy framework, one can guess that this is more based on a realistic scenario of marginal improvements here and there, and is probably the cushion of a low base for two successive years.

The premise can be that if in 2012-13 we are touching 5 percent GDP growth with virtual zero industrial growth, things can only get better from here, which is not an unreasonable assumption. Further, since we are not witness to any significant economic process that justifies the feeling that things have turned around, this number may just be a ‘hope’. Hence, if one is sanguine, the upper-end 6.7 percent number could be accepted; if one is still in doubt, 6 percent should not be unrealistic.

There is also a projection for inflation by the end of the current fiscal, which has been placed at 6.2-6.6 percent. This number, it is believed, will be a useful trigger for the RBI when it goes about looking at interest rates. These are probably the two variables where one can make conjectures about other economic actions.

Otherwise, the Survey appears to be filled with the usual bromides and clichs that go into all such documents. The story narrated is now well known. Let us see how it goes. Low growth is the major concern and the global economic slowdown explains a part of this malaise. Consumption, investment and government expenditure are down because high inflation has affected consumption, high interest rates investment and high fiscal deficits the government’s ability to spend.

High inflation has also meant that financial savings have come down - which has been witnessed now for three years. It is also but natural that households have preferred gold as an investment, which has widened our current account deficit. The forex reserves have held on as has the exchange rate due to capital inflows. While we welcome FDI, where some progressive steps have been taken in the last six months, one should be wary of FIIs which have been very supportive. This has also kept the rupee under check which should otherwise have depreciated. This has been the silver lining.

Inflation continues to be high due to issues on the supply side as well as structural impediments that have to be tackled going ahead. The government has to get its house in order, but the measures taken on fuel subsidy as well as implementation of the direct cash transfers are commendable. More importantly, the Kelkar Committee has laid down the roadmap to be followed. Revenue slippages are a logical corollary to low GDP growth.

With expenditure cuts being invoked across the board, the deficit will slip by 0.2 percent of GDP this year and the lesson learnt is that we should not go in for “open-ended commitments” as they expose ‘fiscal marksmanship’.

One interesting observation made is that the Survey actually points to minimum support process (MSPs) as the reason for higher wheat prices. It maintains its stance on inflation and asks the RBI to look through higher food prices and focus on core inflation - and cites the textbook to support its stance. This, however, can be disputed because globally when we speak of inflation it is CPI, and not WPI, which is used, and real interest rates based on CPI are in the negative territory, which actually gives savers a negative return.

Hence, the Survey is a bit equivocal here: it is concerned about low financial savings but also supporting low interest rates. Quite clearly we cannot have both at the same time.

Does the Survey offer solutions? The answer is a cross-question: Is it expected to do so? Probably not, as it is a review of the economy which states the facts and highlights issues that have to be sorted out. It is not surprising that the words ‘concerns’ and to a lesser extent ‘challenges’ are repeated either directly or in derivative form as problems are posed along the way for each and every sector.

If one were to independently conjecture what this means for us, this could be a likely scenario. 2013-14 would tend to be better in terms of economic numbers and policy action. Since the FM has striven hard to provide palatable budgetary numbers, which will be revealed tomorrow, fiscal discipline will be maintained in 2013-14. The RBI will lower rates, though the timing and extent is uncertain given that our new normal for inflation has gone up. Inflation numbers could be lower given the high base effect for three successive years.

Also, the decline in commodity prices worldwide may help a bit. The external account will improve as the price of gold internationally is moving down and the higher duties will have their effect. Also a gradual global recovery may help exports marginally to move from negative to positive territory. Easy liquidity conditions in the euro region and US will continue to direct foreign flows to the emerging markets, and we will benefit to a large extent. Industrial growth will pick up, albeit gradually, as this entire process is inter-dependent on all other developments.

If the basic message of caution in the Economic Survey is juxtaposed with the Railway Budget delivered yesterday, one can expect the Union Budget to also be conservative. It will try and placate in bits and pieces without giving too much away, while keeping an eye on prudence.

The author is Chief Economist, CARE Ratings. Views are personal