North Block view

Not yet a master of all that it surveys

The Union finance ministry’s Economic Survey 2010-11 offers an upbeat view of the state of the Indian economy and its prospects in the foreseeable future. While the document does raise concerns about potential spoilers like inflation, high levels of fiscal and current account deficits, declining levels of foreign direct investment, global economic conditions, including a spike in oil prices, it tends to portray them as transitory. It would be dangerous to minimise the potential ramifications of these downsides to growth and to that extent the Survey seems a bit too sanguine for comfort. To be sure, India has a lot to celebrate about its recent economic performance. It has been among the few countries to have emerged from the global economic downturn relatively unscathed. Annual economic growth fell below 7 per cent just once in 2008-09, the darkest year of the crisis. The speedy recovery to 8 and 8.6 per cent in the two subsequent years is a tribute to both the resilience of the Indian economy and astute fiscal and monetary policy. It is heartening that savings and investment rates, while lower than the heady pre-crisis levels never fell below 32 per cent of GDP and are now inching their way back to former highs.

The downsides to growth are nonetheless daunting. Inflation remains the biggest concern, especially with global commodity prices rising again. The Survey offers a masterly overview of the problem and puts forward some interesting hypotheses. Inflation in India is still largely supply driven, particularly with respect to food articles. While a decent rabi and kharif harvest may boost production and lower prices, supply chain bottlenecks and unclear procurement policies could still prevent the full benefit of a bountiful harvest from being realised. The RBI which has positioned itself as a ‘first line of defence’ against inflation would be forced to hike interest rates only to lower inflationary expectations, thereby setting off a chain of undesirable outcomes, notably a fall in private sector investment. Indeed as highlighted in this space, much of the new ‘investment’ is infrastructure driven---private sector capacity expansion has been ominously low over the past two years.

The gross fiscal deficit even at 4.8 per cent of GDP is worrisome and already hurting. Fiscal consolidation is an imperative. The 3G & Broadband auctions along with a few successful divestment programs (particularly in Coal India Limited) provided a one-time bonanza in FY 2010-11, but the government will hereafter have to rely on tax revenues, while cutting down on unwanted expenditures to keep the fiscal deficit within bounds. The way forward is through another round of comprehensive reforms. These would include sustained investment in agriculture, tax reform mainly in getting the GST in place, removing administrative hurdles to FDI, and reducing transactions costs that stifle domestic enterprise. Complacency could derail hard earned progress and further weaken the political resolve for tough minded fiscal and economic reform that India needs to sustain and stabilise its growth story.