Happy days are here again, says the pre-budget Economic Survey. GDP growth is going to pick up from this year’s 5% to range between 6.1% and 6.7% in 2013-14. Wholesale price inflation will fall to 6.2-6.6% by March despite hike in diesel prices and higher rail fares and freight rates, and the medium-term price trend is distinctly downward, especially for nonfood manufactures.
Even better, the World Bank predicts that global commodity prices (including oil but excluding metals) will keep falling in 2013 and 2014. This should facilitate interest rate cuts by RBI. The Survey says fiscal deficit is being brought under control, combating both inflation and current account deficit. Recent reforms and fasttrack clearances will help revive infrastructure and industrial production. And agricultural output, hit by a bad monsoon last year, should revive with normal rainfall. No political party could ask for more in an election year.
The only problem with this story is it sounds so much like the one told in last year’s Economic Survey, and that story turned out to be mostly fiction. Any doctor will tell you positive thinking is good for health, and the Survey certainly does that, but acting positively matters much more. That implies not only a good budget on Thursday but purposive reform, slashing of red tape, and bold decision-making throughout the coming year.
The Survey emphasises that India must tackle its twin deficits, fiscal deficit and current account deficit. Dependence on global finance has gone up because of the high current account deficit. But this carries risks of insufficient or even reverse flows. Sputtering growth in rich countries is worsening the risks, and the hung election in Italy raises fresh misgivings about the future of the Euro zone.
The Survey notes that efforts are finally in place to cap the subsidy on fuel, disinvestment of government stakes in public sector undertakings is proceeding, and targeting of welfare measures will improve with the proposed Direct Transfers (using Aadhar, biometric identification and universal bank accounts through banking correspondents).
After reaching a peak of 11.9% of GDP in 2007-08, the tax to GDP ratio has fallen and needs to return to the old level. The Survey says this will be better achieved by broadening the tax base than by increasing tax rates.
It would not be wise to see in this a hint of what Thursday’s budget will contain: experience shows that good advice dished out in economic surveys is frequently ignored in the budgets that follow.
The Survey is clear that record imports of gold should not be blamed for current account deficit. In our inflationary environment, gold has provided an average annual return of 27% since 2007, against just 7.3% for the Nifty and 8.2% in savings deposits. So, the rising demand for gold is a rational response to economic incentives, not a sign of black money run amuck.
Indeed, rising gold imports are symptoms of more fundamental ailments that have caused high inflation and sluggish growth. The solution lies in curbing inflation and reviving GDP growth, not in quick fixes to try and lower gold imports. Structural reforms are needed to ensure higher productivity, better return for savers, and higher investment.
This means shrinking wasteful and distortionary subsidies; speeding up clearances of every sort; increasing the access of people to finance and decent infrastructure; improving the quality of regulation, including the reduction of corruption; and reducing barriers to the entry of new business, not just foreign investment but also small and medium enterprises.
In a special chapter on “Seizing the Demographic Dividend”, the Survey highlights both India’s coming advantage in having a high share of the population of working age, as well as the steps needed to maximum this advantage. The proportion of people studying has risen considerably, and this is welcome although it has delayed an increase in labour-force participation.
This phenomenon has also occurred in other countries passing through a demographic transition. Policies must help accelerate the shift of workers from agriculture to industry and services, where productivity is inherently higher. Industry is creating new jobs, but most of these are in the unorganised sector, offering low incomes and little social protection.
Service jobs have relatively high productivity, but these are not being created fast enough. The big shift seen so far is out of agriculture into construction. To harness the demographic dividend, India needs to lower barriers to investment and growth.
Too many firms stay small because they lack access to finance or infrastructure, or because they want to steer clear of the regulatory burden of entering the formal sector. Rigid labour laws discourage employment (although some economists have argued that these are less formidable in practice than they appear at first sight).