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 as inflation-indexed bonds, and improving savers’ access to financial products. “Insurance sector could be one of the long-term sources of long-term investment in infrastructure.”
The survey dropped a hint that the stronger government spending control, implemented during August-September, could well be extended to the next fiscal.“Reining in expenditure is likely to remain a theme for FY14,” Rajan said.
He, however, added that “it is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure-to-GDP ratio, in view of large unmet development needs.” This signals today’s Budget could still produce sufficient growth impulses through government spending, despite the announced 4.8% deficit target for 2013-14. The wasteful part of such spending could, however, face the axe. While the Direct Benefit Transfer (DBT) system with the help of the Unique Identification Authority can help in plugging many of the leakages, there is enough scope for expenditure reduction even in social-sector programmes through convergence.”
This year’s Economic Survey dwelt st some length on the “signs of strain” on the balance of payments (imports demand remained resilient because of continued high global crude prices). Although the record-high CAD (4.6% of GDP in the first half of this fiscal) has lately been financed by capital inflows, there has been high dependence on volatile portfolio investments and external commercial borrowings. This would make capital account vulnerable to a “reversal” and sudden stop of capital especially in times of stress. Roughly two-thirds of exports slowdown could be explained by external factors, Rajan said.
Poring over why high inflation has persisted so long, the survey reiterated known assumptions – a “secular decline in expenditure on food relative to that in other commodities and services due to rising income levels,” especially rising rural wages and increase in MSP which inflated input prices. Highlighting the shift in composition of private final consumption expenditure (towards education and healthcare, recreation and away from food), the survey said that this “desirable shift” was the result of an increase in income. “A thrust on (production of) horticulture products and protein-rich items is required for enhancing per capita availability of food items as well as ensuring nutritional security.”
According to the Survey, it is unlikely that support to Indian growth from the global economy would be significant (import bill is tied to oil prices and the country is exposed to the shifts in risk tolerance of international investors). “India cannot take external environment for granted and has to move quickly to restore domestic balance, it said.
Rajan and team predicted headline inflation to ease to 6.2-6.6% in March (the average during April-January was 7.5%). “The government is committed to fiscal consolidation. This, along with demand compression and augmented agriculture production should lead to lower inflation, giving the RBI requisite flexibility to reduce policy rates,” as per the Survey.
The Survey endorsed the Central Statistics Office’s advance estimate of a 10-year-low GDP expansion rate of 5% for 2012-13, despite the finance minister P Chidambaram’s differences with the CSO estimate.
Ruing the absence of a “reasonably well-developed corporate bond market” to supplement banking credit (bank deposits have grown at a dismal 13% this year as against the boom year norm of around 20% and 16% last year), the survey authors stressed the need to meet long-term funding requirements of the infrastructure sector. They suggested a structural shift from a bank-dominated financial system to a more diverse financial system, where top-rated companies access finance from the capital market. It also sought relaxation of investment guidelines for pension, provident and insurance funds to enable participation of long-term investors in the corporate bond market.
As for the performance of various sectors of the economy in the current fiscal, Rajan and fellow commentators painted a pretty gloomy picture. On last year’s low base of 2.7%, the manufacturing sector is expected to grow a disconcerting 1.9% this year. The services GDP will grow 6.6% this year, down from 8.2% last year, while agriculture sector growth would be 1.8%, just half of last year’s.
An independent reading of the growth drivers – savings, investments and consumption – would be less comforting. It is assumed that savings rate has fallen from 38.1% of the GDP in 2007-08 to 28-29% in 2012-13. The investment rate – gross fixed capital formation at current prices – too has fallen from 36.8% in 2007-08 to 35% in 2011-12. Fixed capital formation grew just 2.3% in the first half of this fiscal over the year-ago period. Private final consumption expenditure grew a meagre 3.8% in the first half of this fiscal. In the five years up to 2007-08, fixed capital formation growth was in the range of 14-15%, while total final consumption expenditure grew at 8-9%.