Tuesday, 26 March 2013 02:25


The Economic Survey for 2012-13, tabled in Parliament on February 27, 2013, exuded confidence that the Indian economy would bounce back to achieve higher growth of 6.1-6.7 per cent, up from the advance estimates of five per cent in 2012-13. However, the improved growth number, the Survey noted, would be contingent on a normal monsoon, further moderation in inflation, which should induce relaxation of the tight monetary stance, and a mild recovery of global growth.

The Economic Survey said the current environment was difficult and the future held promise only when “we can answer the question that is foremost in the minds of India’s young population: Where will my job come from?” The Survey noted that the current pace and quality of job creation in India were not satisfactory and it was necessary to create better and high-productivity jobs to ensure the “best form of inclusion”.

The Survey reiterated India could not take the external environment for granted and had to move quickly to restore domestic balance through fiscal consolidation. The other policy imperatives, it noted, were lower inflation through demand compression and augmented agricultural production, giving the Reserve Bank of India the necessary flexibility to reduce interest rates.

On the crucial question of fiscal consolidation, the Survey said open-ended commitments like uncapped subsidies were problematic for fiscal credibility, and favoured fiscal deficit reduction through a higher tax-to-GDP ratio, rather than a cut in expenditure.

The Economic Survey identified three factors that led to the slowing of the Indian growth engine. One, the large monetary and fiscal stimulus in the wake of the global financial crisis contributed to robust consumption growth at an average of eight per cent annually between 2009-10 and 2011-12, fuelling inflation and provoking a strong monetary policy response which, in turn, slowed consumption demand.

Two, corporate and infrastructure investment started slowing from 2011-12 as a result of policy bottlenecks and tighter monetary policy, even as the economy faced the twin shocks of a slowing global economy and a weak monsoon.

Three, the government’s revenues did not keep pace with spending as growth slowed and the fiscal deficit threatened to breach the target.

The way out, according to the Economic Survey, is to shift national spending from consumption to investment and remove the bottlenecks to investment, growth and job creation. This could be achieved through structural reforms, tackling inflation through monetary policy measures and improved supply-side steps, reducing the borrowers’ cost for raising funds and increasing the opportunities for savers to get real investment returns.

As the global conditions aren’t expected to play a significant role in the revival, a team of finance ministry advisors, led by Chief Economic Advisor Raghuram Rajan, have recommended fixing domestic economic issues, particularly the Centre’s fiscal deficit. The Survey also said that India would have to focus on fixing the domestic economy in a manner that all the three sectors of the economy—farm, industry and services—contributed to growth.

For 2012-13, GDP growth is estimated at 10-year low of five per cent. The Survey said compounded annual GDP growth through the decade ending 2012-13 would be 7.9 per cent.

Services sector growth is expected to recover over the coming months, projects the Survey, but only if the global economic situation does not worsen. Retailing, construction and telecom would perform better, triggered by some reforms and a mild relaxation in monetary and credit policy. Growth in tourism and hotels, however, could remain moderate.

The Economic Survey also pointed that foreign direct investment in retailing is a positive for the economy. Besides, it says, that Indian tourism must go for an image change, along with higher investment in infrastructure through private-public partnerships. User charges could be levied if tourist sites are developed by the private sector or through PPP. Also, there is a need to address issues such as the high luxury taxes on hotels by States. “Refunding VAT (value added tax) as done in Thailand and Singapore can help the tourism sector,” it says.

The Economic Survey warned that the ongoing issues in the energy sector, particularly related to pricing, may pull down growth of the overall infrastructure sector. It recommended doing away with subsidies through import parity in domestic fuel prices and correcting policy imperfections for realizing the targeted $1-trillion infrastructure investment in the current Five-Year Plan. The Survey pointed that a majority of ongoing projects costing Rs 150 crore and above are facing delays in the power, coal and petroleum sectors.

While India's overall energy production will increase to 670 million tonnes of oil equivalent (MTOE) by 2017, it will fall short of the demand by at least 29 per cent. This will have to be met through imports. “Aligning domestic energy prices with global prices, especially when large imports are involved, may be an ideal option as misalignment could pose both macro and micro-economic problems,” the Survey advocated.

Thermal power generation increased 8.5 per cent to 562 billion units between April and December 2012, primarily on the back of a massive 14 per cent jump in coal-based generation. However, generation gas-based power declined 25 per cent and hydro power declined 14 per cent during the period.

The rate of growth of bank credit for the power sector, which alone accounts for over a half of the total infrastructure sector’s credit, increased from 14 per cent in the first quarter of 2012-13, to 22 per cent in the third quarter ended December. Credit flow for the overall infrastructure sector, however, showed a marginal improvement from 13.5 per cent in the first quarter, to 16.5 per cent in the third quarter, as the telecom sector continued with a sixth consecutive decline.

As the government battles to keep food inflation within manageable limits, the Economic Survey has advocated the use of tools other than the existing price support mechanism to incentivize farming in the medium term. It also said the policy on price and procurement support should be so calibrated as to not encourage more production of crops that were abundantly available.

India’s wheat and rice production has reached record highs in the last few years because of a steady increase in the minimum support price (MSP). But the high production has put enormous pressure on the government’s fiscal balance, as procurement by State agencies has also grown in the same proportion. The Survey criticized the government’s off and on policies on exports, imposition and removal of tariffs and the futures markets. “These (measures) tend to make it harder for producers to plan and reduce incentives to produce by limiting their remuneration and inhibits their production increases that are needed to bring food prices under more sustained control,” the Survey noted.

The overall agriculture and allied activities growth in 2012-13 is pegged at around 1.8 per cent in the Survey, which, though lower than the annual target of four per cent, is not a bad projection considering that monsoons were patchy in 2012.

On crop insurance, the Survey said it needed to be modified further to cater to unavoidable climatic conditions or pest epidemics. It said the private sector should be allowed to operate in developing critical market linkages for better supply chain management. India needs to improve the productivity of various crops to maintain its self-sufficiency in grains and be competitive in global markets, it added.

The government has pegged the oil subsidy at Rs 43,580 crore, food subsidy at Rs 75,000 crore and fertilizer subsidy at Rs 60,974 crore.

The Survey also recommends that decontrolling the sugar sector be brought about in a fiscally neutral manner and issues considered for implementation in a phased manner.

On the ambitious Food Security Bill, the Survey favoured its quick implementation and said subsidy for it could be provided by minimizing other expenditure.

Among other initiatives to promote the corporate debt market, banks were permitted to take limited membership in SEBI-approved stock exchanges for the purpose of undertaking proprietary transactions in the corporate bond markets. Improving the market infrastructure for enabling liquidity, transparency in price discovery, and stimulating growth in trading volumes also needs to be suitably addressed.

The Economic Survey acknowledged that the $100 billion Indian information technology and business process management (IT-BPM) faces some serious competition from many of the developing countries. In the last five years India has lost about 10% market share to the rest of the world in the business process outsourcing (also known as BPM) space, most of which is in the voice contract segment.

In the BPO sector, countries such as the Philippines, Malaysia and China in the Asian continent; Egypt and Morocco in North Africa; Brazil, Mexico, Chile and Columbia in Latin America; and Poland and Ireland in Europe are emerging as attractive destinations for voice contracts, posing a significant threat to Indian firms.

The global slowdown has impacted the revenues of the IT-BPM sector, the growth of which decelerated from 15% in 2011-12 to an estimated 8.4% reaching $ 95.2 billion in 2012-13 as per NASSCOM.

The deceleration in growth of the dominant export sector (80% share) was from 16.5% in 2011-12 to 10.2% in 2012-13. In Indian rupee terms domestic revenues have grown at 14.1% in 2012-13 compared to 16.6% in 2011-12. NASSCOM estimate of growth for 2013-14 are 13-15% for total IT-BPM revenue, 12-14% for exports and 13-15% for domestic sector.

As a proportion of national GDP, IT and BPM sector revenues have grown from 1.2% in 1997-98 to an estimated nearly 8% in 2012-13.

While the global slowdown, increasing competition from new countries, and rising protectionist measures in the wake of job losses in developed countries have slightly dimmed the prospects for exports of IT and ITeS services, a great opportunity is waiting in India’s domestic market with increasing technology adoption within the government sector and the small and medium business (SMB) sector. In such a situation, the Economic Survey believes that Indian BPO industry needs to gear up to address the challenges. Information campaigns to dispel the myths and fears about outsourcing needs to be undertaken by the industry in the developed economies.

India should also move up the value chain in software services. Equally important is the need to focus on the large domestic sector where there is a huge opportunity which, if tapped could also lead to lower costs due to scale economies. To address the rising wages in the urban BPO space, there is a need to move more towards rural areas, for which skill development, and English language training with American and different European accents is necessary.

The Economic Survey has captured the significant changes in the composition of domestic savings over the years and has outlined the required measures to shift investments in gold to other areas. The savings rate in the country (gross domestic savings as percentage of gross domestic product at market prices) peaked in 2007-08 at 36.8 per cent and reached an eight-year low of 30.8 per cent in 2011-12.

The survey has pointed out that within households the share of financial savings, as against physical savings, has been declining in recent years. It said that a combination of lower returns and higher volatility in the 2000s, as compared to the 1990s, could have contributed to the reduced share of shares and debentures in total financial savings.

Pointing out that the rising demand for gold is only a “symptom” of more fundamental problems in the economy, the survey has emphasized that curbing inflation, expanding financial inclusion, offering new products such as inflation indexed bonds, and improving saver access to financial products are all of paramount importance.

Much of the financial savings of the household sector in the country are in the form of bank deposits (around 30 per cent in the 2000s), life insurance funds (22 per cent in the 2000s as against 9.6 per cent in the 1980s), and pension and provident funds (16.5 per cent in the 2000s as against 23.6 per cent in the 1980s).

The country’s telecom sector has seen a sharp decline in foreign investor interest which was reflected in a sharp decline of Foreign Direct Investment in April-November 2012. FDI inflows plummeted 96% to $70.46 million in April to November 2012 period. The sector had seen FDIs of $1,987.18 million in the same period a year ago.

The cumulative Foreign Direct Investment in the sector from April 2000 to November 2012 period stood at $12.62 billion. The sector also saw a decline in bank credit throughout the financial year 2011-12 from 17.77% to 15.21%, the Survey said.

With a marginal rise in bank credit share at 15.55% for the telecom sector in first quarter of FY 2012-13, credit to the industry further declined to 13.5% in third quarter. The average bank credit for the sector was at Rs 930.43 crore throughout 2011-12 fiscal.

Telecom was among leading sectors along with Tourism and Railways that have registered more growth compared to other sectors. The survey said that telecom connections (wire and wireless) increased from 4,297.25 lakh in 2008-09 to 9,513.4 lakh in 2011-12.

Pointing to sharp rise in bad loans, Economic Survey said the gross non-performing assets (NPAs) of public sector banks are still at manageable level. Yet, they need to closely monitor them to avoid adverse impact on their balance sheet. The economic slowdown, rise in interest rates and aggressive lending in good times led to sharp rise in bad loans of banks. The switchover to system-based identification of NPAs by state-owned banks also increased tally of stressed assets. Some industry and infrastructure sectors are experiencing a rise in NPAs due to the slowdown and high levels of leverage.

Overall NPAs of the banking sector increased from 2.36% of total credit in March 2011 to 3.57% of total credit in September 2012.

India's financial sector faces certain challenges that hold it back from becoming a preferred destination for global investors even though reforms have made domestic capital market more vibrant and transparent. The performance of domestic financial sector will depend on both short term and long term factors such as risk perception of investors.

Expenditure on social services by the general government (Centre and States combined) has increased in recent years reflecting the higher priority given to this sector. As a proportion of GDP, expenditure on social services increased from 5.9 per cent in 2007-08 to 6.8 per cent in 2010-11 and further to 7.1 per cent in 2012-13 (BE). Nevertheless, India’s expenditure on health as a per cent of GDP is lower than in many other emerging and developed countries and the share of the public sector still lower.

Poverty has declined in the country, though precisely how poverty is measured is currently being examined. Based on the methodology suggested by the Tendulkar Committee, the percentage of people living below the poverty line in the country declined from 37.2 per cent in 2004-05 to 29.8 per cent in 2009-10. Even in absolute terms, the number of poor people declined by 52.4 million during this period. Of this, 48.1 million are rural poor and 4.3 million urban poor. Thus poverty has declined on an average by 1.5 percentage points per year between 2004-05 and 2009-10.

In the last few years public expenditure on social programmes increased dramatically. A number of legislative steps have also been taken to secure the rights of people, like the Right to Information Act, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the Forest Rights Act, and the Right to Education (RTE). However, there are also pressing governance issues like programme leakages and funds not reaching the targeted beneficiaries that need to be addressed. Direct benefit transfer (DBT) with the help of the Unique Identification (UID) number can help plug some of these leakages.

Though multilateral efforts on sustainable development and climate change have led to several positive outcomes, there are still areas of concern where further work is needed to safeguard the interests of developing countries. The key question to be addressed is equity in the evolving arrangements. It has to be ensured that domestic goals continue to be nationally determined even as we contribute to the global efforts according to the principle of common but differentiated responsibilities (CBDR). More importantly, equity, fair burden sharing, and equitable access to global atmospheric resources have to be protected and addressed more adequately.

The challenge for India is to make the key drivers and enablers of growth – be it infrastructure, the transportation sector, housing, or sustainable agriculture—grow sustainably. This leads to the most vital issue: of raising additional resources for meeting the need for economic growth with greater environmental sustainability. “More often, it is the resource crunch which is the stumbling block for developing countries like India. While it makes efforts to efficiently and expeditiously bring price signals and other policy instruments into play, India could do much more if new and additional finance and technology were made available through the multilateral processes. There is a case for greater cooperation, action, and innovation, provision of finance and technology for developing countries, and institutions and mechanisms for capacity building,” says the Economic Survey.

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 fronts. In Europe, in particular, this is also being accompanied by changes in the institutional framework. With the ongoing private sector deleveraging and government fiscal consolidation, most analysts have projected only a very moderate global recovery in 2013, which could gather steam in 2014. At the same time, if the United States can deal with its fiscal overhang, the potential upside to global growth could be substantial, given the health of US corporations, continuing innovation, low energy costs, and the improving finances of households. Emerging markets can also compensate a little for tepid growth in industrial economies, and the changing direction of Indian exports towards emerging markets can help their revival.

Nevertheless, 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. 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.

The bottom line is that India cannot take the external environment for granted, and has to move quickly to restore domestic balance. The government is committed to fiscal consolidation. This, along with demand compression and augmented agricultural production, should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates.

Lower interest rates could provide an additional fillip to investment activity for the industry and services sectors, especially if some of the regulatory, bureaucratic and financial impediments to investment are eased.

Given such a scenario, where all the three major sectors of the economy perform better in 2013-14, as compared to 2012-13, the overall economy is expected to grow in the range of 6.1 to 6.7 per cent in 2013-14. Of course, these projections assume a normal monsoon, further moderation in inflation as expected (to induce further relaxation of the tight monetary stance), and mild recovery of global growth.