Admitting that “forecasting at potential turning points is difficult”, Raghuram Rajan, the main author of the Economic Survey 2012-13 tabled in Parliament on Wednesday, went on to predict a “wide range” of 6.1-6.7% for India’s 2013-14 real GDP growth. Although a bit conservative by government standards, the growth estimate in the survey is almost in line with that of most private economists.
Even as the economy is in the doldrums with sharp falls in growth rates of investments, savings and consumption, Rajan, chief economic adviser in the finance ministry, opting to look at the brighter side of things, celebrated the country’s much-touted demographic dividend and said that with some special effort, this could be converted into “real dividend” for the economy.
According to the survey, “The way out lies in shifting national spending from consumption to investment; removing the bottlenecks to investment, growth and job creation, in part, through structural reforms, combating inflation both through monetary and supply side measures.” A former chief economist to the International Monetary Fund (IMF), Rajan gave a variety of specific prescriptions to spur growth over the medium to long term while endorsing the “sustainable and inclusive growth” paradigm. He also called for a greater focus on the supply side.
Widening the tax base, Rajan said, was central to the immediate fiscal deficit reduction agenda, adding that the target of 5.3% of GDP in 2012-13 would be met, despite a “significant shortfall” in revenue (independent analysts see revenue receipts falling 8-9% short of target thanks to the growth slowdown).
Coming to specific policy proposals, Rajan saw a “strong case” for hiking the 26% foreign investment limit in defence production to 49%.
Rajan said “the benefits of the current offset policy is not visible on the domestic defence industry”. He reiterated the insurance Bill proposal to hike foreign investment ceiling in the sector to 49% so as to reduce premia and expand the services to the untapped rural India. He also proposed raising the FDI limit in public sector banks to 26%, given the capital constraints facing them, credit squeeze faced by corporate India and the inability of the government to re-capitalise the PSBs adequately. FDI norms could be “rationalised”further in many other sectors given the drop in inflows this year.
The rising demand for gold was only a “symptom” of more fundamental problems in the economy, the survey writers said and recommended curbing inflation, expanding financial inclusion, offering new products such