Inflation management and reforms agenda

Comment: Jairaj Purandare

The Economic Survey 2010-11 presented in Parliament today confirms India’s robust and continuing growth story. It acknowledges India’s impressive GDP expansion estimated at 8.6% for 2010-11, up from 8% in the previous year, underscored by a strong rebound in agriculture and robust growth in the services and manufacturing sector. Further, the growth momentum, fuelled by rising savings and investment rates, is expected to lift GDP to the 9% trajectory by 2011-12, marking a return to pre-crisis levels.

The survey, however, strikes a note of caution against the major challenges of management of inflation, fiscal deficit and developing vulnerabilities of the external sector - the worsening current account deficit and adverse debt ratios in the face of rising global uncertainties. Areas that need to be specifically looked into include ways of attracting less volatile flows, notably sector-specific FDI.

To address these issues and concerns, the survey points to the need for strong measures and initiatives to put the reform agenda back on track:

• Strengthening farm sector support with introduction of the food security bill, and long overdue overhaul of the PDS through smart cards, coupons for better subsidy targeting and expansion of storage facilities. 
   
• Continued focus on promoting inclusive growth through better monitoring and improvement in the NREGS schemes, private sector participation in health and education through the PPP model 
   
• Requirement of persistent anti-inflationary monetary policy stance to deal with stubborn prices 
   
• Return to fiscal consolidation through gradual rollback of stimulus measures, following the roadmap set out by the Government Debt Report for reduction of debt to GDP during 2010-11 to 2014-15. 
   
• Measures to create a more investor-friendly environment by addressing bureaucratic hurdles, issues related to land acquisition and environmental clearances in infrastructure and focusing attention on liberalising of FDI caps such as in multi brand retail. 
   
• Efficient taxation of goods and services through GST which would lead to healthy revenue collections 
   
• Need for deepening capital markets and corporate bond market 
   
• Moving ahead with banking reforms with two track licensing policy, differential minimum capital requirements and consideration for basic banking licenses for MFIs and NBFCs

Issues of implementation continue to plague the economy, particularly in infrastructure where actual investment has fallen short of budgetary plans in earlier years. Therefore, special attention needs to be given to monitoring of outcomes and responding to early signals of rising debt to GDP. The criticality of timely interventions that the Budget is expected to define can see India further strengthen its position in the global economy and eventually break into double digit growth over the next few years.

Jairaj Purandare, Executive Director and Country Leader - Markets & Industries, PwC India