Fiscal deficit reduction to 4.8% is commendable

Comment: Samiran Chakraborty

The Economic Survey for 2010-11 sounds an optimistic note in an environment where investors are perceiving near-term risks to India’s growth outlook and equity markets have gone down by close to 14 per cent in the last two months echoing those sentiments.

GDP growth expectation for 2011-12 has been pegged at close to 9 per cent, which is even higher than the 2010-11 advance estimate of 8.6 per cent. Unless investment growth gathers momentum quickly, we believe that achieving 9 per cent growth in 2011-12 might be quite challenging.

However, we completely agree with the assessment of the survey that inflation is the dominant concern. There is an explicit recognition that inflation is as much a supply-side phenomenon as it is caused by rising demand pressures.

While the monetary policy is expected to continue on its anti-inflationary stance, the need for fiscal deficit compression to manage demand has been acknowledged in the survey.

One of the critical issues will be how this demand compression from the fiscal and monetary side can be achieved without affecting the growth target of 9 per cent. Given the current trend in global commodity prices, the problems seem to be more acute.

Fiscal deficit reduction to 4.8 per cent of GDP in 2010-11 from 6.3 per cent is a laudable success. However, the tendency to spend windfall revenue on non-asset creating expenditure could have been avoided.

A bigger challenge will be to continue the process of fiscal consolidation in 2011-12 by projecting an even lower fiscal deficit to GDP ratio.

Especially, if the growth momentum slows, then maintaining revenue buoyancy could be a tough ask, even if the government plans to move out of fiscal stimulus completely.

Although these macro challenges will shape the near-term economic outlook, the survey is generally positive about extending the reform agenda forward.

Be it streamlining of land acquisition and environmental clearance norms or allowing FDI in multi-brand retail — the policy focus has been to remove supply-side bottlenecks and improve productivity.

We will have to wait and watch to find out how much of this reform agenda is carried forward to the upcoming Budget and beyond.

Samiran Chakraborty, Regional Head of Research, India Standard Chartered Bank