Eco Survey sees growth, inflation with rose-tinted glasses

Even as the railway budget continues to hang fire and raises question-marks over both political stability and prospects for the Union Budget due on Friday, the government’s Economic Survey for 2011-12 paints a rosy picture of reviving growth and falling inflation in 2012-13 and 2013-14.

The Survey, which is prepared by finance ministry’s Chief Economic Advisor, keeps the current year’s GDP growth at 6.9 percent - which was the figure projected by the Central Statistical Office’s Advance Estimates - but sees a rebound to 7.6 percent next year and 8.6 percent in 2013-14.

And on what does the Survey base this optimism when 2012-13 is supposed to be a year of fiscal consolidation where taxes are to be raised, subsidies cut and expenses pruned?

The Survey provides a circular argument that fiscal consolidation by itself will provide the impetus for growth. Its logic: “As fiscal consolidation gets back to track, savings and capital formation should begin to rise; moreover, with the easing of inflationary pressures in the months to come, there could be a reduction in policy rates by RBI, which should encourage investment activity and have a positive impact on growth.”

Needless, to say, the Reserve Bank of India (RBI) does not share this sunny optimism on either fiscal consolidation or inflation - which is why it has held back on cutting repo rates in its policy review on Thursday. It wants to see what is in Pranab Mukherjee’s budget box before taking any steps to ease rates.

Signs of continuing tension between the RBI and the finance ministry are visible if one reads between the lines. Though Chief Economic Adviser Kaushik Basu has in the past asked the RBI to “think out of the box” and cut rates to boost growth instead of taking a conservative monetarist line on inflation, Governor D Subbarao has declined to oblige.

Not surprisingly, there is veiled criticism of the RBI’s policy for the slowdown in growth. A Press Information Bureau summary of the Economic Survey has this to say: “While a large part of the reason for the slowing of the Indian economy can be attributed to global factors, domestic factors also played role. Among these are the tightening of monetary policy owing to high and persistent headline inflation and slowing investment and industrial activity.”

In other words, the RBI contributed to the slowdown. But the Survey’s highlights do not seem to put any part of the blame for high inflation on the lack of fiscal rectitude in the finance ministry.

In fact, it goes out of its way to pat the government on the back for fighting off inflation - which is, on the contrary, showing signs of resurgence in the February numbers which are close to 7 percent again.

The fiscal year 2011-12, says the Survey, “saw several initiatives to improve agricultural productivity and management of supply chains which have yielded results and contributed to containment of food price inflation.”

The Survey also “takes note of the government fighting (the) malaise of inflation with numerous calibrated steps which constituted a combination of policies to improve supply, especially of food and basic agricultural products, and curb fiscal and revenue deficits.”

If this is what the government has done - started fixing the fiscal deficit - we haven’t heard any of it, since subsidies continue to bloat and revenues continue to lag.

More ominous is the harping on social spending when the fiscal consolidation is still to happen. Having already claimed some kind of victory against inflation, the Survey says “The government thus is in a position to turn its attention more exclusively to inclusive growth” and adds that “the government’s primary concern now has to be to advance the economy’s productivity and improve income distribution.”

It says the “critical task of inclusion cannot be left to the free market. For government the role has to be that of enabler.”

Taxes are clearly on the way in this new effort to redistribute income from rich to poor.

Says the Survey: “The principal way in which this (fiscal consolidation) has to be achieved is by raising our tax-GDP ratio and cutting down wasteful expenditures.” The centre’s gross tax-GDP ratio at the start of fiscal 2011-12 was 10.5 percent, and the survey says “Our aim must be to cross 13 percent by 2016-17.”

Do the writers of the Economic Survey expect higher taxes and cuts in expenditure (through a pruning of subsidies by raising administered prices) to result in faster growth and lower short-term inflation?

The RBI, with its suspicious mind, seems to have its feet firmly on the ground while the finance ministry’s mandarins seem to have their head in the clouds.

Large parts of the Survey seem to have been conceived in La-la Land.