Fiscal consolidation key to revive growth

The prescription from a team of advisers led by Chief Economic AdviserRaghuram Rajanwas to fix domestic economic problems, particularly Centre's fiscal deficit

Economic advisers in the Finance Ministry today projected India’s GDP growth to recover to 6.1-6.7% in 2013-14 from estimated decade-low expansion of five% in the current financial year.

The confidence was expressed in the Economic Survey for 2012-13, even as global conditions are not expected to play a significant role in the revival.

The prescription from a team of advisers led by Chief Economic Adviser—Raghuram Rajan—was, therefore, to fix domestic economic problems, particularly the Centre's fiscal deficit.  

The confidence about the recovery was bit blunted by the fact that the range of GDP growth given is too wide—0.6 percentage points. This came in the wake of the previous two surveys projecting economic growth, which ultimately proved way off-mark.

Assuming normal monsoon, further moderation in inflation and mild recovery of global growth, the survey said,"the overall economy is expected to grow in the range of 6.1 to 6.7% in 2013-14."

The survey gave the reasons for projecting such a wide range of economic growth. "Forecasting at potential turning points is difficult, hence the relatively wide range this time."
The pre-budget document cautioned that the support to Indian growth from the global economy is not likely to be significant. Rather, there are two downward risks emanating from the global scenario-- volatile capital flows and oil prices.

It said India is exposed to shifts in the risk tolerance of international investors.
Secondly, India's import bill is strongly tied to the price of oil. "Of course, one reason for rising oil prices would be improvements in the global economy, which would mean stronger exports."

However, the more worrisome situation would arise if the oil prices rise because of geopolitical risks, which would mean increasing investor anxiety and slow world growth.

As such, India will have to turn its attention to fixing the domestic economy so that all three sectors of the economy--farm, industry and services-- contribute to overall growth. The foremost task is to adhere to five-year fiscal consolidation, as laid by Finance Minister P Chidambaram last year.

Asserting that this fiscal consolidation is a commitment, the survey said this would give a lever to RBI to cut policy rates as demand compression along with greater agriculture production would pull down inflation.

This would then give a fillip to investment activity for the industry and services sectors, if some of the regulatory bureaucratic and financial impediments to investment are eased.
India's economy is estimated to grow by ten-year bottom growth of 5% in 2012-13. Nonetheless, the survey said the compound annual growth rate for GDP over the decade ending 2012-13 stands at 7.9%.

It attributed the slow down in economic growth in 2012-13 to effects of strong dose of stimulus in 2008-09, a slow down in corporate and infrastructure investment due to bottlenecks as well as tight monetary policy and external shocks—crisis in the Euro area and uncertainties about fiscal policy in the United States. A weak monsoon, at least in initial phase, is also blamed for the slow growth, after the economy recovered from global financial crisis of 2008-09 in the next two years.