Indian economy has shown significant growth acceleration during 2010-11. The growth of real GDP during the first two quarters of the current fiscal averaged 8.9 per cent as compared to the 7.5 per cent recorded during the corresponding period last year. Furthermore, the acceleration has been broad-based as seen in agriculture, industry as well as services. The outlook for the rest of the year continues to be buoyant and it is expected that the economy may register a growth rate of close to 9 per cent during the year which is higher than most forecasts.
On the external front, both imports and exports have recorded strong growth, and despite sharp increase in the trade deficit, the current account deficit is likely to remain within manageable limits. Of course, rising oil prices may yet create an uneasy situation, but on the whole, the situation seems to be manageable. On the fiscal front, substantially higher realisation from spectrum auction has provided enough cushion to meet increased outlay on subsidies and with both direct and indirect tax collections showing high buoyancy, the fiscal deficit of the central government at about 5 per cent of GDP is likely to be lower than the budgeted, and the consolidated fiscal deficit for the current fiscal could be about 8 per cent of GDP which is lower than last year’s by two percentage points.
While the agriculture recovered due to bountiful monsoon, the acceleration in industry and services even in the wake of sluggish global environment was mainly due to fiscal expansion. In fact, the expansion was not intended as a stimulus as it started much before the global crisis. Nevertheless, it did help the economy to soft-land when the crisis actually occurred and helped in its fast recovery. Thus, India is one of the few countries in the G20 to bounce back to the growth rates that prevailed before the crisis.
Despite the optimism, there are several challenges to be met in the short and medium term. The most important concern is the crisis of governance. The recent exposes, which are only the tip of the iceberg, have provided a glimpse of the rot that has set in. While the Commonwealth Games scam has yet again shown the contractor-politician nexus, the Adarsh Housing Society and Niira Radia tape episodes have shown that the disease has spread even to armed forces and the fourth estate as well. Many of the worthies have turned out to be simply the “fixers”. Perhaps, the media should institute an award for the best fixers among them! Of course, such episodes of corruption and fixing, significant as they are, may not impact on the daily lives of the people as compared to the pervasiveness of petty corruption arising from the licence-permit raj to get a number of clearances for building houses, getting water and electricity connections and accessing education and health facilities. Indeed, the website launched by Janaagraha, Ipaidthebribe.com, brings out a variety of corruption episodes and in every case, the authorities concerned create scarcity conditions and cash in on them. Surely, rather than ranting about corruption, it is necessary to find ways of liberating the system from the licence-permit raj.
On the economic front, the most immediate concern is the continued rise in prices, particularly of food items. Despite expectations of good harvest, the food prices have continued to rise. Unfortunately, the response to this has continued to be the “band aid” type and this hurts long-term investment decisions in agriculture. As the price of a commodity increases, we ban its exports! Similarly, when the international price of cotton is high, we export to make cheap cotton available to the cotton mills! Apart from food prices, the rising international price of crude oil could create a cost-push inflationary situation. Combating inflation while maintaining the growth momentum will be the most immediate challenge for the policymakers.
A major medium-term worry is to achieve fiscal consolidation. The Finance Commission has recommended that the consolidated fiscal deficit of the central and state governments be contained at 5.4 per cent from the prevailing level of about 8.5 per cent, and the central government’s deficit be brought down to 3 per cent in 2014-15 from the budgeted level of 5.5 per cent in 2010-11. In addition, the government is embarking on major programmes on food security, universalising health care and expansion of education, and these could add expenditure of about 3 per cent of GDP by 2014-15. Thus, the government will have to generate additional revenues or re-prioritise expenditures or disinvest to the tune of 6 per cent of GDP in the medium term.
The niggling infrastructure continues to be a constraining factor in maintaining a high growth rate. In the power sector, there are problems in generation, transmission as well as distribution. The supply-demand gap for power at peak is estimated at 13 per cent. There will be a significant shortfall in the Plan target for power generation due to a variety of constraints in land acquisition, coal supply, environmental clearance and simply the contractors’ not honouring their commitments, and reforms in the power distribution has just not taken off. The performance of railways has been deplorable and is suffering from both neglect and unwanted interference at the same time! The investment in the road sector is not picking up at the planned pace. Urban infrastructure and services continue to be pathetic. Besides infrastructure, there are a variety of reforms needed to create an investment climate.
Another challenge to be faced is to neutralise capital inflow, most of which is volatile. Ensuring competitive exchange rate in the wake of surging capital flows is an important challenge which the policymakers will have to face. So far, the inflow has been manageable, but if it surges in the near term, intervention will become unavoidable.
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While the revival of growth rate of the Indian economy to the pre-crisis level is heartening, sustaining high growth rates over the medium and long term requires reviving reforms. The government cannot afford to continue with a “band aid” type of policy response. Most of the structural reforms will have to be initiated this year itself, for postponing them will make them even more difficult to implement. Almost two years have been lost since the government assumed office. It has been bogged down by one issue of governance or another. Unless it cleans up its own act quickly, the economy will continue to underperform.
The author is director, NIPFP. The views expressed are personal