'Better days' still far away: Survey

FY15 GDP growth pegged between 5.4% and 5.9%; A speedy return to 7-8% growth path ruled out

The Economic Survey for 2013-14, tabled in Parliament on Wednesday, said the Indian economy was "poised" to overcome the sub-five per cent growth rate of the past two years. However, it warned the recovery would be gradual: Gross domestic product (GDP) at factor cost, it said, could grow at a rate between 5.4 per cent and 5.9 per cent in the coming year - more likely to stay closer to the lower end of the band because of concerns over a weak monsoon, expectations of inflation and geopolitical factors, among other things.

In a move to dampen post-poll enthusiasm, the Survey ruled out any speedy return to a high growth rate of seven-eight per cent. That would not happen either this financial year or the next, it warned, as it required regaining macroeconomic balance and efficiency-enhancing reform. Neither would happen overnight, though "the corrections in fiscal and current account deficits augur well for macroeconomic stabilisation".

The Survey said the fiscal deficit of 4.5 per cent of GDP, as compared to the budgeted target of 4.8 per cent, "is indicative of a continued focus on fiscal consolidation". However, it added "the fiscal situation of the central government is worse than it appears" as past inflation "has eroded the value of existing public debt". As for the current account deficit (CAD), the Survey called the turnaround "remarkable", saying CAD for the full year was 1.7 per cent of GDP, as against 4.7 per cent in 2012-13. It predicted a CAD of 2.1 per cent of GDP for 2014-15.

Moderating expectations

The main reason for the Survey's sombre forecast is that the constraints on India's growth cannot be removed in the short term. Its growth slowdown, it argues, broadly corresponds to similar dips in other emerging markets - but is "relatively deep" because of specific structural constraints and higher inflation. Both these domestic hurdles are difficult to remove in the short run.

Specific structural factors, the Survey mentions, include administrative paralysis, low regulatory capacity and a high cost to doing business. And, the Survey says, it is these structural constraints that lead to even the 2013-14 gross fixed capital formation (GFCF) of 28.3 per cent of GDP translating into a low growth rate for the economy. GFCF, the most useful indicator of economy-wide investment, has itself declined, the Survey argues, thanks in particular to a sharp decrease in the "machinery and equipment" segment of private-sector investment.

But an investment revival, the Survey further says, is essential to industrial growth restarting - and industrial growth is central to more generalised growth. In effect, the services sector will need more buoyant manufacturing, since the industrial sector accounts for almost 60 per cent of the inputs employed in the economy.

The Survey clearly details a series of reform recommendations that it says will revive investment, and thus growth and jobs. It says three fronts are crucial: Tax and spending reform; a framework for sustained low and stable inflation; and the creation of market-friendly laws and regulations.

Fiscal correction

The Survey calls for "a sharp fiscal correction". On the tax side, reform should begin with a unilateral Central goods and services tax (CGST); states could be brought on board later. The Survey says, sharply, that there are too many exemptions and rates at present - "Industrial policy, where the government picks winners, has generally failed in most countries".

On the expenditure side, subsidy programmes should all become income-support programmes. Government should provide only public goods - health spending, for example, should be retooled to focus on public health programmes like anti-malaria measures, and not on the number of hospital beds created. The Survey, produced by a team in the finance ministry, also argues that India has a dual budgeting process - through the ministry, and through the Planning Commission - which leads to misallocation of resources. So "the unification of Budget-making at the finance ministry" is desirable. A "set of consequences" for departments that fail to achieve their targets is also necessary.

The Survey notes that high deficits, and thus high government borrowing, have made it tougher for the private sector to access funds. Household financial savings, at 9.9 per cent of GDP in 2011-12, were 7.1 per cent in 2012-13. Centre and states together borrowed 7.1 per cent of GDP domestically. In a way, there was no household saving left over for private enterprise.

Controlling inflation

Inflation, the Survey argues, can be controlled through fiscal correction - but also through instructing the Reserve Bank of India to follow a single target, consumer price index-based inflation; and through a broad-based deregulation of agricultural markets, in order to free up food prices.

The Survey describes the Essential Commodities Act - recently used by the government to control the prices of onions and potatoes - as "incompatible with an integrated, competitive national market for food". It also argues, in a move sure to be controversial, that Parliament "has the power to legislate a national market under the Constitution" which means it can pass a law to "override" state agricultural marketing Acts. Legacy laws like the employment guarantee scheme should shift focus partly to enhancing agricultural productivity - something the previous government was reluctant to do. Minimum support prices, the Survey suggested, should in future be "scrupulously linked to the cost of production".

Second-generation reform

The 1991 reforms focused on deregulation. The Survey says the second-generation reforms should be the "positive agenda of constructing state structures that address market failures". It suggests, for example, a move towards outcome-based schemes; an independent agency with the skill to design workable private-public partnership contracts; and major financial reforms along the lines recommended by a recent committee report. It also says that cross-border capital flows should be made easier to help Indian companies that are increasingly globalised.

Repeatedly, the Economic Survey admits that these reforms and changes are focused on the long term. It does, however, also make the case that committing to long-term reforms will help even in the short term, and might spark a revival. If potential GDP growth goes up, firms are more willing to invest, for example, and foreign investors push capital into India. Households, too, might spend more in anticipation of future income, acting as a mini-stimulus.

Overall, the Survey argues that "achchhe din" (better days) are not around the corner - but they could arrive soon enough, if the government does not drop the ball.
POLICY PRESCRIPTION

FISCAL CONSOLIDATION-Cutting capital expenditure not good; need for diesel price deregulation, new FRBM Act and raising tax-to-GDP ratio

INFLATION CONTROL-Cut spillovers from food to non-food inflation through formal monetary policy framework

TRADE & INDUSTRY-Some FTAs need to be reviewed; SEZs should be revived

LEGISLATION-Laws governing business need revamp; shift decision making from inspectors to higher officers

IMPEDIMENTS TO GROWTH

• Prediction of a sub-normal monsoon
• Uncertain geopolitical environment
• India's weak investment climate