Every year the Economic Survey of the current year is released just before the Union Budget for the coming year is presented to Parliament in order to make people aware of its background, problems and difficulties, and appreciate the efforts of the government to tackle them. This time it is, to an extent, different from the last Survey in an important sense. It exhibits a great deal of seriousness as compared to the childish-ness seen in the preceding survey. This is simply because the present Chief Economic Adviser, Raghuram G. Rajan, in spite of being a leading member of the Chicago School, the bastion of neoliberalism, has been always honest in his comments and has fearlessly vented them. Let us give a few examples. One, in his speech at the Bombay Chamber of Commerce on the occasion of its Founders' Day Celebration on September 10, 2008, he stressed that Indian capitalists, by and large, lacked entrepreneurial zeal. The rising number of Indian billionaires was largely owing to a nexus of politics and business. Politicians need huge amounts of money to fund election campaigns and day-to-day activities and bribe the media while businessmen need minerals, forest resources, contracts etc., exemptions from taxation, various kinds of licences, and resources from public financial institutions. Thus there is a quid pro quo.
Second, in a book, Saving Capitalism from the Capitalists, co-authored by Rajan with Luigi Zingales, published in 2003, it has been pointed out, obviously keeping in mind India: “One reason many firms in developing countries are inefficient, despite their access to cheap labour, is that they have been protected for a long time against domestic and foreign competition and have consequently become slow and lazy. Equally important, however, is that these firms are not managed by the best talents available.” It goes on to add: “Many companies are controlled by insiders, who acquired that right at birth rather than in the marketplace. Heir-controlled firms … tend to be managed particularly poorly. In a rapidly changing world with immense dislocation, such entrenched management is likely to have strong incentives to co-opt the distressed into demanding protection. A classic example of such an organisation is what is loosely termed the Bombay Club in India, an amorphous organisation led by the scions of the old, venerable business families, which strongly oppose opening up the economy.”
Third, Rajan is among a handful of economists who had predicted the coming of the Great Recession and he is fully aware of its conse-quences for developing countries like India. Like Nouriel Roubini he must know that it is not going away very soon.
Fourth, Rajan has strong views against writing off loans of farmers. He views it as dangerous because this will lead to a “moral hazard”.
Last, Rajan has been a strong advocate of full convertibility of the rupee on capital account. Years ago, he had recommended this to the government. (See, www.planningcommission. nic.in/reports/genrep/reports-fr.htm) Fortunately, the government did not accept it.
Now, let us turn to the Economic Survey 2012-13. Rajan, in his introduction, points out that there are three objectives for India, namely, the revival of growth so that jobs can be created for those who are seeking them and those who are soon going to enter the labour force in the coming days, in order to reduce the incidence of poverty. Second, the country has to shift its emphasis from consumption to investment which, in turn, requires a substantial increase in savings, whether family or government, and enhancement of the level of corporate and infrastructure investment. Obviously, there needs to be a shift from consumerism which has, in recent times, gripped almost all sections of the society. Last, the country needs macroeconomic stabilisation so that inflation, fiscal deficit and current account deficit are substantially reduced. This last objective requires reducing subsidies which, in turn, lead to an increase in the prices of oil, gas, fertilisers and so on and create a noise in the media and public forums against price rise. A wave of consumerism has gripped almost all sections of the society unmindful of its consequences. People with money are going in not only for private but bigger and ostentatious motor vehicles also, unmindful of the fact that crude oil has to be imported and its products subsidised.
The Survey looks into the causes of recession that has gripped the economy in recent times. To counter its impact, the government has resorted to monetary and fiscal stimulus measures but they have now reached their limits because the potential of economic growth has got exhausted. The recovery boosted consumption which has, in turn, increased the inflationary pressure. Since 2011-12, there has been a decline in the rate of corporate and infrastructure investment. The reasons for this have included policy bottlenecks and tighter monetary policy. External factors like the crisis in the countries of the Euro zone and the uncertainties regarding fiscal policy in America have aggravated the problems for India.
With the slowing down of the rate of economic growth, the government's revenue has declined and this has adversely affected government spending. Fiscal deficit as well as current account deficit have gone up.
The annual rate of economic growth has come down to just five per cent in the current year from 8.6 per cent and 9.3 per cent respectively in 2009-10 and 2010-11. Since the rate of inflation was rising, the RBI gave more attention to it because of popular clamour and tightened the monetary policy that adversely affected the pace of investment, leading to a further downslide in the rate of economic growth. Obviously, a vicious circle set in.
The Survey points out that the decline in the growth rate “is primarily attributable to weak-ness in industry (comprising the mining and quarrying, manufacturing, electricity, gas and water supply, and construction sectors), which registered a growth rate of only 3.5 per cent and 3.1 per cent in 2011-12 and 2012-13 respectively. The rate of growth of the manufacturing sector was even lower at 2.7 per cent and 1.9 per cent for these two years respectively. Growth in agriculture has also been weak in 2012-13….” The growth rate of the services sector too declined during 2011-12 and 2012-13. This reflected the impact of the slowing pace of primary and secondary sectors. During the first decade of the 21st century it was the services sector that had acted as the driving force of the economy. Its contribution to the overall growth of the economy was 65 per cent while industrial and agricultural sectors contributed 27 and eight per cent respectively.
The Survey has focused on the need not only to increase savings but also to stabilise them. With this end in view, new instruments to boost savings have to be explored. Inflation, especially food inflation, remains a matter of great worry. Food inflation reached the double digit figure in December 2012. Prices of vegetables too have been rising at faster rates. The rising prices of essential goods have far-reaching social and political implications. The Survey underlines the need “to reduce the fiscal impetus to demand. Also a focus on incentivising food production through measures other than price supports, while facilitating storage and distribution, can help contain food inflation, which is hard for the RBI to control. Policy on price and procurement supports should be calibrated so as to not encourage more production of crops that are abundantly supplied. Other measures to increase investment more broadly, and therefore supply, can also help over the medium term.”
The Survey has emphasised a number of steps to improve the health of the economy and put it on the path of rapid growth. They include: containment of the fiscal deficit, reduction in the barriers to the entry of investors in as many areas as possible and allowing foreign direct investment, providing incentives and all possible help to farmers to induce them to increase production, the simplification of the taxation regime through the introduction of GST (goods and services tax) and undertaking financial sector reform. It appears hopeful when it says: “More generally, India's situation is difficult but steps have been taken to bring the macro-economy back into balance and growth on track. What is important is to recognise that a lot needs to be done and the slowdown is a wake-up call for increasing the pace of actions and reforms.”
The time ahead is not likely to be easy. The Great Recession is not going to go away very soon. As Nouriel Roubini stressed some months ago, the year 2013 was likely to be the toughest and there would be a hopeful turn only after it. The Survey admits: “The revival of growth in the advanced countries is expected to be slow and uncertain at least in the near future, despite the measures being taken on monetary and fiscal front.” It goes on to add: “… it is unlikely that the support to Indian growth from the global economy will be significant. Indeed, there are two sources of downside risk. First, India is exposed to shifts in the risk tolerance of international investors. Second, India's import bill is strongly tied to the price of oil. Of course, one reason for rising oil prices would be improvements in the global economy, which would mean stronger exports. The more worrisome situation would be if the oil prices rise because of geopolitical risks, which would mean increasing investor anxiety and slow world growth.”
It is hoped that, as a result of the steps suggested by the Survey, the rate of economic growth will hopefully be somewhere between 6.1 to 6.7 per cent. An important factor in favour of India is the demographic structure. The proportion of dependent population is going to be lower here as compared to advanced countries and China. We shall have a great and growing number of earners than China. As a result, our economy will be resilient and youthful.
In the end, the statistical tables appended to the Survey, if looked at carefully, punctures the claim of Narendra Modi to be a messiah of development, that is, vikas purush.
The author, a well-known economist, used to teach Economics at Kirorimal College, University of Delhi, before his retirement a few years ago. He can be contacted at: gmishra@girishmishra.com