Average 9% growth in 11th Plan possible: Economy Survey
2008-02-28 12:14:36 Source: CNBC-TV18
Finance Minister, P Chidambaram presented the Economic Survey 2007-08 before the Parliament today. While asserting that inflation can be contained, Mr Chidambaram also emphasized that an average GDP growth of 9% is achievable in the 11th Plan. The FM said the country's growth has been reflected in the pace at which the average income is growing.
The Economic Survey, however, reveals that capital inflows have been putting pressure on prices. On investment opportunities, the Survey assures that a climate conducive for investment will be maintained. The FM said there is no need to ensure non-inflationary growth.
Excerpts from Finance Minister, P Chidambaram's speech:
I have just placed the Economic Survey for 2007-08 on the table of the House, and I wish to make a brief statement. The economy has decisively moved to a higher growth trajectory during the five years to 2007-08. In terms of GDP, the growth rate has averaged 8.7% per annum during these five years. This indicates stability and sustainability.
The growth is reflected in a near doubling of the pace at which the average income of our people is growing. If the rate of growth of per capita GDP at market prices continues at a five-year average of 7.2% per year, average income would now double in a decade instead of a generation or more.
The acceleration and improvement in the condition of the common man is also reflected in a near doubling of the rate of growth of per capital private consumption to 5.1% per annum from 2.6% in the previous 11 years.
With better targeting of government services, and an increase in their quality, we can ensure that overall welfare of the common man in terms of both private consumption and supply of public goods continues to increase rapidly.
I am optimistic about growth and containment of inflation in the coming year, which will be my priority - to continue to provide a conducive investment climate and manage the macro-economy to facilitate non-inflationary growth. We have to ensure that the benefits of this growth percolate to the most marginal and vulnerable segments of society.
If you wish me to sum up in one phrase the outlook for 2008-09, I would say, "Optimism, but with caution as the watchword." There are a number of things going in favor of India
Additional inputs from CNBC-TV18's Vivian Fernandes:
Economic fundamentals
Economics maintains a cautious stance on economic growth – it says that even though macro economic fundamentals are sound and the investment climate is full of optimism, maintaining 9% growth will be a challenge and raising it to double digits will be tougher still. The Survey admits that with the economy modernizing, globalizing and after last year's unexpectedly high growth of 9.4%, some degree of cyclical fluctuation was expected for deceleration of growth to 8.7% - this has not come as a surprise. This has been factored into the 11th Plan to achieve an overall growth of 9% growth during this Plan. The economy will have to grow by 10% to 11% in the closing years of the 11th plan.
The economic fundamentals continue to inspire confidence and the investment climate is full of optimism for further economic growth the survey says as translated into the government's mantra that is more inclusive growth both in terms of job opportunities and poverty reduction. But while employment growth has risen to 2.6%, the labour force has grown faster, the unemployment rate has risen to 8.3% in the 5-years to 2005 from 7.3% in the previous 5-years. So the unemployment situation has deteriorated.
Policy on FDIs
Unlike in previous years, when policy options were scattered through the Economic Survey, the Survey revisits the controversy on FDI and retailing and wants some equity to be given to foreign investors in all retailing sectors and 100% FDI allowed in consumer durable, semi-durable and luxury brand chains. It makes a case for 51% FDI in special category insurance firms, providing health and weather covers for farmers while renewing the call for raising the limit to 49% in other areas. In banking, it wants 100% FDI in new private Rural Agricultural Banks, with freedoms to takeover other private sector banks as an incentive - it wants them to be allowed to freely expand in small towns.
All these are recommendations and it does not mean that all these recommendations will be carried out because the Finance Minister will have to negotiate the political midfield and the numbers are not stacked in his favour for example on retailing. Even though the Survey says that 100% FDI should be allowed in consumer durable and luxury brand chains, the Left parties may not allow him to do that.
Rupee/ Exports-Imports/ Fiscal Deficit
The Survey also endorses the demand of the labour intensive and rupee-hit sectors like garment exporter for an increase in the working week to 60 hours to an amendment of the Factory's Act, so that they can meet seasonal demands. It says that controls on sugar, fertilizer and drugs should be fazed out and reiterates the call that made in the Economic Survey of 2005 to amend the Coal Mines Nationalization Act, to allow regulated private entry into coal mining, as coal mining is only allowed for captive users in cement and power.
The Survey says that the government will be able to meet both the revenue and fiscal deficit targets for this year. One would recall that the Prime Minister's Economic Advisory Council has said earlier this year - "While the fiscal deficit targets could be met, the revenue deficit targets might be hard to achieve." But the Survey says that is not the case both the deficit targets will be met. But next year it says, it will be difficult to bring revenue deficit to zero as mandated by the FRBM (Fiscal Responsibility and Budget Management) because strong tax revenues seen this year are conditional on the economy continue to grow strongly next year and because of the adverse global climate that might not be possible.
But on a fiscal deficit front it says, that the deficit target of 3% will be achieved, the target set for this year will be met because of record tax collections. There is a word of praise for the States, the survey say that the State has done much better than the Centre. All 26 States have enacted FRBM legislation and they will together turn in a revenue surplus of 0.3% this year. The survey says that there is a need to reduce the fiscal deficit to below 3% in the coming years to make RBI's monetary policy more effective, lower interest rates, reduce the gap with other countries and ease pressure on the rupee.
On the rupee front the survey says that the rupee has appreciated by 9.8% since April last year and by 13% last calendar. It quotes an IMF study to suggest that the rupee might be close to its equilibrium level. It says that it is not possible to establish a link between overall exports and the real exchange rate in the short-term; in the medium to long-term the survey says that productivity growth is a key to sustaining exports or manufacture growth and services. It admits that labour intensive export sectors like textiles have been hit apart from the rising rupee. The survey blame labour laws, lack of scale economy, logistical delays and high cost of power for all these things.
Investments on infrastructure
Even though the Survey says that the fiscal deficit should be reduced below 3% in the coming years, the planning commission itself has said that we must relax the fiscal deficit target to accommodate more investment in infrastructure, so I don't think the government will reduce fiscal deficit below 3%.
The point regarding revenue deficit, the economic survey says that the target for this year will be met but I think there is a bit of fudge here because the survey is completely silent on off-Budget subsidies given in the form of bonds to oil companies, fertilizer units and to the Food Corporation of India
On the ratio of inflation, the economic survey says that inflation in case of investment goods has declined from 5.3% or so and that is positive from investment point of view.
Tighter fiscal deficit targets
The economy survey says that this is necessary so that the interest rates can be brought down and the pressure on the rupee can be eased and the bank funds are not pre-empted by the government but I do not think that the government will actually go below 3%.
There is no need actually to go below 3% in fact it can use a fiscal deficit to invest in infrastructure. What is required is of course to contain the revenue deficit which is unproductive but to expand a government expenditure on infrastructure because it has multiple effects on the economy.
This is what the Survey recommends.
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