A balanced Survey: Nitin Desai

The Economic Survey is supposed to be an objective assessment of the state of the economy by economists in the government, led by the chief economic advisor (CEA). In practice, the objectivity is often diluted to avoid embarrassing the government in power and, increasingly, to avert risks to market sentiment. Though there is no formal interference, any CEA who values his job will temper objectivity with discretion. But this year's Survey is a little more candid on the risk factors facing the economy, perhaps to support the finance minister, as he cracks down on the spending proposals of ministries.

The mood conveyed by the Survey is cautiously optimistic - the worst is behind us, says the overview, and the good times will soon roll. The growth rate will turn around and inflation will moderate. The Survey accepts the recent Central Statistics Office (CSO) projection of five per cent growth in financial year 2013, despite assertions by key ministerial policymakers that it would be more when the actual estimates come out.

This year, the Survey is more cautious and projects a growth revival to 6.1-6.7 per cent, a welcome spirit of caution compared to last year's forecast of 7.6 per cent. A growth forecast that is seriously wrong is dangerous - it can lead to revenue projections and spending decisions that become seriously inflationary. Even this year's forecast does require measures to relieve infrastructure bottlenecks and revive investor sentiment. The Survey holds out the promise of more to come on the reform front; so let us wait and see.

The projected deficit figure for this year is only about 0.2 percentage point worse than the Budget projection of 5.1 per cent. As for the projected deficit of 4.8 per cent in 2013-14, which is what was indicated by the Vijay Kelkar committee, its plausibility depends on the revenue projections in the Budget.

Clearly, the finance ministry has cracked down on spending; but if this has hit public investment, then one must accept it will delay getting back to the high growth profile projected in the 12th Plan. The Survey expects inflation to come down to 6.2-6.6 per cent and, thankfully, drops clear hints about a rate reduction to the Reserve Bank of India, whose tight policies led to a sharper-than-expected slowdown.

When it comes to the current account deficit, the Survey is even more guarded. It sees geo-political risks for oil prices and gold imports as the big risk factor, though, this year, the slowdown in exports has also played a major role in widening the deficit. It does recognise the slowness of recovery in the West and what it means for Indian exports.

How plausible is this scenario? After all, the short-term trends in investment are far from encouraging. In fact, the Survey has a box that paints a grim picture of stalled and postponed projects. It also recognises that the slowdown in investment is partly attributable to a slower demand growth from abroad and, for durables, even at home. The Survey talks about the importance of public investment in infrastructure and how it can crowd in private investment. But judging by the railway budget, we may see less of this than warranted.

Chief economic advisors can put their imprint on the standard structure of the survey. Thus, Kaushik Basu introduced a chapter on the micro foundations of macroeconomic development in the 2010-11 Survey to reflect his articulate research interests.

Raghuram Rajan has followed suit and has brought into the Survey his particular concerns about jobs and growth, which he expounded so ably in his book, Faultlines.

Here, it takes the form of a fine chapter on the demographic dividend and what needs to be done to realise this potential. Much of the focus here is on regulatory reform, job creation in MSMEs, labour market improvements and so on. The tone is captured well in the conclusion of this chapter that "India's continuing on a rapid growth path is not preordained" and requires ''deft policymaking''. Here's hoping our new chief economic advisor will be able to do just that.

NITIN DESAI
Former Chief Economic Advisor