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%.