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ECONOMIC SURVEY - FEBRUARY 2011
The Economic Survey continues its optimistic stance on the Indian economy
both, for the short term and the long term. It has forecast a growth of
8.75% - 9.25% for FY12, which can once again make India the second-fastest
growing economy in the world. To achieve this, it has advocated a strong
infrastructure push through removal of bottle-necks and also through
administrative reforms.
While it is optimistic on growth, it has taken cognizance of the various
challenges faced by the economy. The most important among these are
inflation and the global economic uncertainty.
While accepting the existence of supply bottlenecks in the economy, it has
also indicated that, higher demand is one of the important reasons for the
increase in inflation. Also, it has pointed to the change in the constituents
of the continuing high inflation over the past 12 months. The Survey has
recognized the urgent need for a second green revolution as a long term
solution to the inflation problem. Apart from this, it has also indicated the
need for better storage facilities, better distribution system and the passage
of the Food Security Bill.
On fiscal deficit, the Survey has indicated that the fiscal deficit can be at
4.8% as against the budgeted levels of 5.5%. This is on the back of higher
tax as well as non tax revenues, which has given the Government, the
flexibility to incur higher developmental expenditure.
On reforms, the Survey has dealt with subsidies, the financial sector and
FDI. Gradual withdrawal of subsidies on diesel and differential licensing for
banks has been recommended.
All in all, the Survey, while being optimistic on growth, also acknowledges
the various challenges faced by the economy and has made
recommendations to overcome these. The Survey has stressed on effective
implementation of infrastructure projects. It emphasizes convergence of
plan schemes with focus on outcomes.
Active implementation of these recommendations, we opine, can lead to
sustained high growth in the long term for the Indian economy. We
understand that, implementation of all of these may be difficult in the near
term.
High confidence on sustainability of growth - FY12 growth at 9%
(+/-25bps)
The Survey has applauded the fast turnaround in the Indian economy after the crises
of 2008-2009. It has also expressed high optimism about a sustained high growth in
the economy in the near and long term. The target for growth in FY12 has been set
at 8.75% - 9.25%.
The optimism is based on the continuing high growth in agriculture, industry and
services. While the IIP has shown some moderation in recent months, the Survey
sees this as temporary. This, along with buoyancy in other indicators of industrial
performance, should results in high growth for industry and manufacturing in the
future.
On demand side, the Survey points out that the high Savings and Investments rate
should help the economy achieve high growth rates. These have improved to 33.7%
and 36.5% in FY10 (Quick Estimates), respectively.
However, the Survey accepts that the Gross Fixed Capital Formation has fallen to
30.8% in FY10 from 32%, likely due to the lower confidence levels during the global
economic turmoil. With a revival in spends, this ratio is expected to improve.
Infrastructure is the key - administrative and procedural issues to
be addressed
The Survey has stressed on the importance of infrastructure to help the economy
grow at a fast pace. It has pointed out to the performance which has lagged targets
in critical areas like power, roads, new railway lines and doubling of railway lines.
It has referred to the $1trn investment requirement in infrastructure in the 12th five
- year plan projected by the Planning Commission. For meeting this, it has recommended
removing several procedural bottlenecks in areas like tendering of unviable
projects; bad quality of engineering and planning at DPR stage; land acquisition delays
and slow approval processes, especially environmental and forest clearances;
insufficient optimization of procurement costs (of PSUs); weak performance management
in nodal agencies and PSUs and; inadequate availability of skilled and
semi-skilled manpower.
We opine that, addressing these issues will go a long way in speeding up the infrastructure
development in India.
Equitable growth is a necessity
The Survey clearly states that, the benefits of growth should flow down to all segments
of the society for growth to be really sustainable. Increased social welfare of
the people requires a more equitable distribution of development benefits along with
better living environment. The State has to formulate inclusive plans to bridge regional,
social and economic disparities.
The Survey suggests that, employment generation programmes of the Government
like the NREGS should be further improved by initiatives like shifting to permanent
asset building and infrastructure development activities, reducing transaction costs,
better monitoring, and extension of the NREGS to urban areas. It has also cautioned
against implementation of the programme resulting in shortage of labour during the
peak agricultural season.
With a view of reaping the demographic dividend, the Survey has recommended
doing more in schemes like National Skill Development Mission.
More importantly, the Survey has recommended firming up policy structures to facilitate
effective implementation of the social programmes and to ensure that allocation
results in outputs and outputs in outcomes. Initiatives like the outcome budget
and the setting up of the Unique Identification Authority of India by the Government
are some steps in this direction, it says.
Inflation is a concern
The document has candidly admitted to inflation being a major concern for sustained
growth. While accepting that food inflation is high, it suggests that, the constituents
have changed from cereals, pulses, sugar etc last year to onions, tomatoes,
fruits, milk, fish, eggs, etc this year, indicating changing preferences.
While supply constraints are a primary reason for this, it also alludes to rising demand
as being a factor for the rising prices. Higher income in hands of rural people
and rising income trends in general, has generated additional demand, is says.
With a view to address supply side issues, it has stressed the need of a second green
revolution. It has advocated raising farm productivity. With about 60% of our net
sown area being still rainfed development of these areas should be prioritized, according
to the survey. Diversification of Indian agriculture from just crop farming to
livestock, fisheries and poultry and horticulture should also be focused on, it says.
On top of it, higher investments are recommended for increasing farm productivity
and creating adequate infrastructure for transport, storage and distribution of agricultural
produce. With demand for food processing increasing fast, investment in food
processing, cold chains, handling, and packaging of processed food are recommended.
The Survey has also expressed some concern on the food inflation spilling into the
core sector, though manufactured items inflation has remained moderate.
External Sector
Cumulative export growth during 9MFY11 stands at 29.5% (YoY) with cumulative
export figure touching $164.7bn during the same period. It is expected that India
would achieve the export target of $200bn for FY11.
Trade deficit during 9MFY11 has reached to $82bn as compared to $80.2bn in the
corresponding period of the previous year. There has been some concern of high
Current Account Deficit (CAD) on back of relatively higher import growth compared
to export growth along with lower invisibles inflow. However, with slowing import
growth since October 2010 and export growth picking up in November 2010, the
concerns on the trade deficit have been allayed.
In FY08, a surge in capital flows had complicated the monetary management on
account of trade-offs involving the impossible trinity. However, with orderly conditions
in the forex market (CAD being financed by rising capital inflows), the external
sector has remained supportive of the monetary policy settings.
India's external debt stands at $295.8bn at the end of Q2FY11 recording an increase
of $33.5bn over the level of FY10. This rise in debt has been largely due to higher
commercial borrowings, short term trade credits and multilateral government borrowings.
However, the maturity profile indicates the dominance of long term borrowings
accounting for ~78% of the total external debt at the end of Q2FY11.
Fiscal consolidation on track
The Budget for 2010-11 had begun the process of fiscal consolidation with a partial
withdrawal of the stimulus measures on back of some clear evidence of economic
recovery. The fiscal outcome during 9MFY11 has remained broadly on the consolidation
track as chalked out by the budget. With growth reverting to pre-crisis levels,
revenue remaining buoyant and much higher realization in non-tax revenue (3G/
BWA auctions), there is headroom for higher levels of expenditure at the given fiscal
deficit targets, the survey says.
With 11.2% growth in total expenditure as against 8.5% growth envisaged in the
budget for FY11, fiscal and revenue deficits constituted 44.9% and 42.1% of the
budget estimates, respectively. With nominal GDP placed at Rs.78.8trn (Advance
estimate for FY11 by CSO), target for the fiscal deficit to GDP ratio in FY11 is placed
at 4.8% and revenue deficit at 3.5%.
Economic survey has articulated that the estimated level of growth in tax revenues
seems likely given the recovery in the economy to the pre-crisis levels. Thus it is critical
to anchor expenditure reforms to realize the projected deficit levels. They are of
the view that a beginning has already been made with reforms announced in subsidies,
some of which have already been implemented. Going forward, deepening of
reform process would hold the key to sustaining the fiscal consolidation process.
Reforms
The Survey has also indicated that the several reforms can be undertaken by the
Government. It recommends reducing the subsidy burden on diesel gradually. Also,
it recommends opening up the banking sector by allowing more banks with differential
licenses. It further suggests that Industrial houses, Business houses and NBFCs
may be allowed full banking licence with provision for avoiding conflict of interest
issues. On issue of foreign players in banking, it advocates the principle of reciprocity
could be applied to countries that have allowed Indian banks to expand in their jurisdictions.
It has also recommended partially opening up the retail sector to FDI. It has recommend
permitting FDI in retail in a phased manner beginning with metros and
incentivizing the existing retail shops to modernize could help address the concerns
of farmers and consumers. FDI in retail may also help bring in technical know-how
to set up efficient supply chains which could act as models of development.
While we concur with the intentions of these recommended reforms, we understand
that all of these may not be immediately implemented because of several other
constraints like inflation, etc.
Conclusion
The economic survey, which being positive on growth, is also cautious due to some
of the headwinds faced by the Indian as well as the Global economy. The recommendations
suggest government's inclination to implement structural solutions to
counter most of these. It is encouraging to note the push on reforms agenda and
some of these may get reflected in today's Union Budget presentation.
