New Delhi, February 26: The government’s crystal-ball is radiating optimism on the Indian economy.
The 2009-10 economic survey, presented to parliament by finance minister Pranab Mukherjee on Thursday, says the economy is revving up, and growth will be anywhere in the range of 8.25-8.75% in 2010-11. It will breach 9% the year after.
If — it’s a big if — the government gets its act right and improves infrastructure, spruces up governance, implements reforms and reduces red tape and corruption, we’ll hit the big time. “It is entirely possible for India to move into the rarefied domain of double-digit growth and even attempt to don the mantle of the fastest-growing economy in the world in the next four years,” says the survey.
That’s the dream. Whether India will overtake China as the world’s fastest we will know only by 2014. In the short-term, it is not double-digit growth but double-digit inflation that’s looming large. To put the inflation genie back in the bottle, the government will have to crimp both money supply and fiscal overspending. The Reserve Bank last month raised banks’ cash reserve ratio (CRR) to tighten money and the chances are that in April it will signal a rise in interest rates, too.
Mukherjee will have to do his bit of belt-tightening on the fiscal side by cutting down subsidies on oil and fertiliser, and also winding down the economic stimulus unleashed in 2008-09 to stave off a recession. The pre-budget survey, authored by chief economic advisor Kaushik Basu, specifically recommends a “gradual rollback” of stimulus measures after assessing the impact on each sector. These steps are possible in view of the broadbased recovery in the economy this year, with GDP projected to grow by 7.2%.
Experts reckon that excise duties and services taxes (either one or both) may be raised by 2%. This prospect worries the market. Neeraj Dhavan, director, Quantum Securities, noted the positive tone of the survey. “There is a clear indication that the growth, both economic as well as industrial, is coming back on track. As growth comes back, the case for a gradual withdrawal of stimulus could become stronger and that’s a worry for the market.”
Some economists wonder if the growth projection for 2010-11 is over-optimistic. Says DK Joshi, principal economist at rating agency Crisil: “Broadly the survey is optimistic on growth; such high growth, even with stimulus withdrawal which the survey suggests, would be challenging.” The survey red-flagged inflation as the biggest immediate worry.
It warned that food prices would rise further over the next few months and criticised the food management policies that have led to “unacceptably” high prices of items like sugar. Food inflation is at present hovering close to 18%.
In a direct criticism of the government, particularly over the very high consumer price inflation, the survey said the “hype” over the kharif crop failure without taking into account comfortable food stocks and rabi prospects “may have exacerbated inflationary expectations, encouraging hoarding and resulting in a higher inflation in food items”. “In the case of sugar, delay in the market release of imported raw sugar may have contributed to the overall uncertainty, thereby allowing prices to rise to unacceptably high levels in recent months,” it added.
The survey said that “since December, 2009, there have been signs of these high food prices, together with the gradual hardening of non-administered fuel product prices, getting transmitted to other non-food items, thus creating some concerns about higher than anticipated generalised inflation over the next few months.”
On the foreign trade front, which had taken a beating in 2009, the survey hopes for a recovery in world output and trade volumes. The downside risks for world and Indian trade lie in the fact that though the fall has been arrested, both output and trade recoveries are still fragile as the recovery has been pumped up by the stimulus given by different countries, including India. The effects may dry up if natural recovery does not follow.
On reforms, the survey favours a more liberalised regime for foreign direct investment in the services sector, including health insurance, rural banking and higher education. The policy change would include legislating a user-friendly policy, rationalisation of taxes and streamlining of domestic regulations like licensing requirements and procedures.
–PTI–