Worst is over: Survey

Focus on curbing current account deficit and widening the tax base

The pre-Budget Economic Survey for 2012-13, tabled in Parliament on Wednesday, exuded confidence that the Indian economy would bounce back to achieve higher growth of 6.1-6.7 per cent, up from the advance estimates of five per cent in the current financial year. However, the improved growth number, the Survey noted, would be contingent on a normal monsoon, further moderation in inflation, which should induce relaxation of the tight monetary stance, and a mild recovery of global growth.

Multimedia | Shyamal Majumdar, Executive Editor, Business Standard, decodes the Economic Survey 2012-13

Without mincing words, the 294-page Survey said the current environment was difficult and the future held promise only when "we can answer the question that is foremost in the minds of India's young population: Where will my job come from?" In a grim reminder to the recently released data on past growth failing to produce an adequate number of jobs, the Survey noted the current pace and quality of job creation in India were not satisfactory and it was necessary to create better and high-productivity jobs to ensure the "best form of inclusion".

This year's Survey is Chief Economic Advisor Raghuram Rajan's first major official document assessing the state of the Indian economy and introduces a completely new chapter on jobs, titled 'Seizing the Demographic Dividend'. It has argued that India has to focus on an agenda to create productive jobs outside of agriculture, which will help it reap the demographic dividend and improve livelihoods in agriculture. There is also the need to review regulations that constrain businesses excessively and how these should be stripped away while ensuring "adequate protection and minimum safety nets for workers". (Click here for graphic)

The Survey reiterated India could not take the external environment for granted and had to move quickly to restore domestic balance through fiscal consolidation. The other policy imperatives, it noted, were lower inflation through demand compression and augmented agricultural production, giving the Reserve Bank of India the necessary flexibility to reduce interest rates. The Survey hoped that lower interest rates could provide an additional fillip to investment activity for the industry and services sectors, especially with the easing of regulatory, bureaucratic and financial impediments.

On the crucial question of fiscal consolidation, the Survey said open-ended commitments like uncapped subsidies were problematic for fiscal credibility and, significantly, favoured fiscal deficit reduction through a higher tax-to-GDP ratio rather than a cut in expenditure, in view of the large unmet development needs. "Raising the tax-GDP ratio to above the 11 per cent level is critical for sustaining the process of fiscal consolidation in the long run," it noted, adding it was much better to raise this ratio through a broadening of the base, rather than by increasing marginal tax rates significantly. "Higher and higher tax rates impinge more and more on incentives to undertake taxable activity while encouraging tax evasion," the Survey observed.

In a candid assessment of what caused the recent economic downturn, the Economic Survey identified three factors that led to the slowing of the Indian growth engine. One, the large monetary and fiscal stimulus in the wake of the global financial crisis contributed to robust consumption growth at an average of eight per cent annually between 2009-10 and 2011-12, fuelling inflation and provoking a strong monetary policy response which, in turn, slowed consumption demand.

Two, corporate and infrastructure investment started slowing from 2011-12 as a result of policy bottlenecks and tighter monetary policy, even as the economy faced the twin shocks of a slowing global economy and a weak monsoon.

Three, the government's revenues did not keep pace with spending as growth slowed and the fiscal deficit threatened to breach the target. Worse, with the falling government and private savings rate, the current account deficit, too, widened.

The way out, according to the Economic Survey, is to shift national spending from consumption to investment and remove the bottlenecks to investment, growth and job creation.

This could be achieved through structural reforms, tackling inflation through monetary policy measures and improved supply-side steps, reducing the borrowers' cost for raising funds and increasing the opportunities for savers to get real investment returns, hinting at, perhaps, how investors might have preferred gold to other forms of financial investments, which, in turn, had contributed to the widening of the current account deficit.

The broad message that the Economic Survey left for the government was to recognise that the Indian economy was in a difficult situation and measures had to be taken to bring the macroeconomy back into balance and growth on track.

"What is important is to recognise that a lot needs to be done and the slowdown is a wake-up call for increasing the pace of actions and reforms," it concluded.