The good news first. The economy is in fair health, if not in fine fettle. Growth rate is projected between 6.1% and 6.7%. So, while this is clearly not like the heady days of 8-9% growth, at least the slowdown won’t contract the economy any further.
This would also mean that the downturn is more or less over.
Industry and financial experts have welcomed the Finance Minister’s attempt to contain fiscal deficit at 5.3%, rather than letting it bloat to over 6% as was predicted by the Kelkar report.
While medium term fiscal consolidation measures have been found credible and doable, there is greater scepticism on methods of achieving short term targets.
Tax collection is looking shockingly poor, which indicates that tightening of fiscal belt is likely to come from expenditure cuts or postponement, both of which are not very sound policy methods.
Rationalisation and widening the base of taxes is therefore recommended. This means smarter slabs and better track and enforcement methods are needed. Indications are that corporate taxes may go up, as an anxious attempt to recover more money.
Another much needed technique could be to slash subsidies, particularly our oil bill. The Economic Survey recommends exactly that – increasing diesel and LPG prices by cutting subsidies. But with 2014 round the corner and the middle class already reeling under regular fuel price hikes, it may be a difficult decision to push through.
One more method to cut the current account deficit as suggested by the Survey is curbing gold imports. The way to do it is to impose higher customs duty, which would push prices up further from the current Rs 30,000/10 gm levels.
The Economic Survey is bullish on reforms and says the government needs to stay the course, if it aspires to continue to grow at 6+%. It also emphasises on the need to tackle inflation, when headline WPI is still around 6.2-6.6%.
While our investment rate has not fallen, production and productivity look to have stagnated. One area that needs immediate attention is removal of supply side constraints. For this our energy needs have to be addressed and infrastructure bottlenecks removed.
One reason for the slowdown in the past two years has been the recession in global markets. To push exports, the government may have to dole out more sops.
Easing or minimising regulations so as to boost investment may be a way forward.
The Economic Survey further recommends: “Measures to ease the inflow of remittances and steps to diversify software exports could help reduce financing needs. Greater emphasis on FDI including opening up sectors further can help increase the quantum of safe financing. FII flows need to be targeted towards longer term rupee instruments so as to minimize the `reversal` of capital during risk-off phases.”
On the demand front, it may look like contraction is a worry, as per the Economic Survey, but financial experts are more sanguine. Naina Lal Kidwai in an interview to a news channel pointed to healthy performances of FMCG companies as an indicator that appetite for consumption remains.
She felt FDI in Retail will boost both investment and help grow demand.
Kidwai echoed another sentiment that is waiting to see realization for a long time. The roll out of the Goods and Services Tax (GST), she feels, would instantly add 2% to our growth rate.
Experts also feel that the government may make loans cheaper and especially so for the Small and Medium size industries to give the economy and consumption a further boost.
A new chapter has been added for the first time on job creation with focus on quality jobs. With India showing the highest increase in share of services in GDP at 8.1%, this is obviously a welcome move.
Healthcare, education and social entrepreneurship need to grow through PPP, as per the Survey. If Indian Railways can go the PPP way, then certainly the social sector can experiment as well.
Clearly, the economy is poised but we need to step on the gas to push reforms and difficult decisions need to be taken.
The bullet needs to be bitten.