The Prime Minister’s Economic Advisory Council (PMEAC), on Friday, projected a higher than hitherto anticipated growth rate of 6.7 per cent for the current fiscal year and pitched for implementation of a slew of bold reforms aimed at containing the twin deficits on the fiscal and the current account front and return to the path of fiscal consolidation by trimming the oil and fertilizer subsidy bills, opening up of FDI in multi-brand retail and unveiling of predictable tax policies.
In its ‘Economic Outlook 2012-13’ submitted to Prime Minister Manmohan Singh earlier during the day, the PMEAC headed by C. Rangarajan asserted that it would be definite signs of improvement in the fiscal situation that could dissuade global agencies from cutting India's sovereign rating.
Briefing the media on the issue while releasing the document, Dr. Rangarajan said: “If we show definite signs of improvement in both these areas [fiscal deficit and current account deficit], the rating agencies will have to take that into account…We must chalk out a new path of fiscal consolidation so that we can reduce the fiscal deficit. The CAD is also at a high level, so we need to address that also. What is really needed is to show that we are moving towards the path of fiscal consolidation and containing CAD.”
The alert by the PMEAC is for real as global rating agencies such as Standard & Poor's (S&P) and Fitch had held out a warning on a ratings downgrade to speculative grade — or junk status — citing policy inaction and fiscal imbalance, among other things. Achieving these call for an upward revision in diesel and LPG prices in phases along with rationalisation of fertiliser subsidies.
Farm sector growth
In view of the deficient monsoon, the Council has projected a pull-down in farm sector growth to a mere 0.5 per cent which, in turn, is certain to put further pressure on inflation.
In the event, the inflation level during the fiscal year has been pegged at 6.5-7 per cent.
Given the current scenario, the “economy is expected to grow a shade better at 6.7 per cent in 2012-13,” the PMEAC Chairman said, which appears to be in line with what the Prime Minister announced on August 15 about the GDP growth rate being a “little better” than the 6.5 per cent in 20011-12. In any case, PMEAC's growth projection for the current fiscal is higher than that estimated by the Reserve Bank of India (RBI) and other entities. While the apex bank lowered its GDP forecast to 6.5 per cent from 7.3 per cent estimated earlier, Moody's and Crisil pegged it much lower at 5.5 per cent.
Negative global environment
Dr. Rangarajan maintained that to accelerate growth and deal with the impact of the negative global environment, the government will have to provide a boost in investment in infrastructure, allow foreign airlines to pick up stake in domestic carriers and allow at least 49 per cent FDI in multi-brand retail so as to contain the fiscal and current account deficit.
“For channelising transfer of capital and technology, FDI in multi-brand retail up to 49 per cent may be allowed to attract investment in this sector...,” Dr. Rangarajan said.
Besides, there is a need to bring about predictability in taxation regime, Dr. Rangarajan said while pointing out that efforts have to be made to address investor concerns.
Evidently, his reference was to the concerns expressed by investors over retrospective amendment to the Income Tax Act and the General Anti-Avoidance Rules (GAAR).
“There is a need to specifically focus and address the apprehensions that have been occasioned by perceptions of arbitrary actions on tax and other fronts,” he said.
The PMEAC chief also recommended a check on the import of gold. Other recommendations such as an improvement in regulatory regime to encourage investment in mutual funds and insurance are already under implementation and were announced by SEBI on Thursday after its board meeting in Mumbai.
Turning to the oil sector, Dr. Rangarajan pitched for “a suitable increase in the price of diesel in one or more steps, and a cap on the level of consumption of subsidised domestic LPG close to what is now being consumed by poorer households (that is, foru cylinders).” The initiatives to check petroleum subsidy would help contain fiscal deficit and deal with rising problem of crude in the international market, he said.
As for other major sectors, while the PMEAC made a case for focused attention on liberalising tenancy arrangements, reforming domestic markets for agricultural produce and reducing input subsidies, it said the manufacturing sector growth rate was likely to accelerate to 4.5 per cent, up from 2.5 per cent in the previous fiscal. The mining sector is expected to grow at 4.4 per cent due to growth in the coal and lignite sector and some recovery in iron ore. Electricity generation is expected to continue to grow at an average pace of around 8 per cent.
However, as for the global scenario, Dr. Rangarajan held out a warning.
“There is a dark mood in the advanced economies, especially in Europe. The slower growth in the U.S. and in the EU will have an adverse impact on the expansion of these markets for India's exports, both of goods and services.”