Here is something I gladly wish to share with everyone. After the pessimistic environment in the Indian market for most part of this new year, we have a mighty report infusing considerable optimism. Hereby i brief up a few pick points from the Economic Survey 2011.
What calls up for most of our attention is the prediction of 9% GDP growth rate over next year and staying there in the midterm. Services (which now have a 57.3% share in the GDP) will be the main locomotive of the economy. This, plus the coming demographic dividend, will offset many policy flaws and sustain fast growth. The Survey cites a new Index of Government Economic Power showing that India is now the fifth greatest global economic power after the US, China , Japan and Germany, and is well ahead of Britain or France.
The fiscal deficit in the first three quarters of this year was just 44.8% of the level in the previous year. The reason reveals a dirty economic secret: inflation can, in the short-run, be good for the government’s books. Inflation erodes the real value of debt, and the government is the biggest debtor of all. However, inflation with a lag also increases government spending.
The survey does not hint at any painful fiscal squeeze to come, either on the tax or spending side. It describes the spike in vegetable prices as temporary behavior which will soon be checked by a reversion to more normal behavior. Going forward, it expects monetary tightening and other steps to bring down inflation.
Rising oil prices pose a challenge, and the Survey says India must adjust to the reality of expensive energy.
Higher infrastructure spending is another reason cited by the Survey for optimism about future growth. However it also reported that losses of State Electricity Boards are 1% of GDP (which means Rs 76,000 crore). Unaccounted leakages of electricity (theft and transmission losses) are a whopping 35% of the electricity generated. No wonder power continues to be a constraint on growth. Cost overruns in public sector projects had come down to a reasonable 12% in March 2008, but rose to 20.7% by October 2010, thanks partly to higher steel and cement prices. Land acquisition and environmental clearance need to be streamlined to expedite infrastructure, along with standardised contracts and better designed projects.
Economic Survey enumerates a number of suggestions to resolve problems pertaining to key sectors.
On the agri front, measures suggested include reforms pertaining to the Agricultural Produce Market Committees Act that restricts free trade, introduction of FDI in multi-product retail which would help curtail the margin between farm gate and retail prices and raising food processing capabilities via investments in cold chains, logistics and packaging. Lastly on the fiscal front measures proposed include direct subsidy payments/usage of smart cards to curb corruption.
The underlying policy theme is that of ‘inclusive growth’. The Survey states that even as significant headway has been made on the ‘growth’ front, more needs to be done on the ‘inclusive’ front. Acknowledging that the food security bill is imperative towards reducing poverty and mal-nutrition it has emphasised that the efficacy would depend on the delivery mechanism. To this end, it has suggested the direct transfer of subsidy and the usage of smart cards to minimise leakages and corruption. Another key area of economic inclusion is financial inclusion. This would help mobilise savings through innovative products and an expansion of the banking system.
On a more medium-term basis, the Survey has cited that while savings and investment rates could peak out as the economy operates at full capacity, the key differentiating factor that would result in sustained growth would be innovation and skill development. To this end, focusing on education and research and development is an investment that the Survey believes would ‘make up for the eventually waning power of the savings rate.’
To sum up the optimism indicated by the report is supported by sustained trends in savings and investments, due to favourable demographics and a thrust on infrastructure development; continued momentum in services, with financing, insurance, real estate, transport and communication being high-growth categories; and efforts toward fiscal consolidation which would facilitate more credit to support growth. I reckon there are lots to cheer about up ahead. Thank You!
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