A continuing decline in investment and capital formation, widening current account deficit, and depleting financial savings of both the government and household are some of the structural factors impeding Indias growth, the Prime Ministers Economic Advisory Council (PMEAC) today said.
Raising red flag over these issues, the PM panel in its Economic Outlook 2012-13 report, said there has been a sharp dip in private corporate investment, which dropped to 9.9 per cent in 2010-11 from 14.3 per cent in 2007-08 while the gross domestic fixed capital formation has also continued to decline, falling from a peak of 32.9 per cent in 2007-08 to 30.4 per cent in 2010-11.
On the savings front too, both the government and private savings depleted. Due to fiscal stimulus provided earlier and burgeoning subsidy bill, the negative saving of the government has increased to 3.2 per cent of the GDP in 2011-12 from 2.1 per cent of GDP between 2007-2011.
Under pressure due to rising wages, raw material cost and high interest rates, the retained margins of the private corporate sector also saw a decline from 9.4 per cent in 2007-08 to 7.9 per cent in 2010-11. Savings of households also fell, partly due to problems in distribution of financial instruments like mutual funds and life insurance. This is a situation that policy must squarely address and resolve, the PMEAC said.
With the aggregate pool of financial savings shrinking, the additional needs to finance government has exacerbated matters and made the crowding out phenomenon particularly acute, the panel said.
Unprecedented widening of current account deficit (CAD), the panel said, has cast a shadow on the macro-economic fundamentals. Huge gold import between 2009-12 and higher inflation widened the CAD to 4.2 per cent of GDP in 2011-12.
Given that net oil imports and gold have been the two fastest growing components of the import bill, and that these are not normal commodities where import demand could be compressed through depreciation of the currency, the task of improving the CAD is harder, the panel warned.
As regard gold imports, the panel suggested a quantum improvement in the regulatory context in which mutual funds and life insurance products are sold.