Seeking to explain why its projections on GDP growth and current account deficit (CAD) for 2012-13 went awry, Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan, on Tuesday, indicated that it was policy inertia and not low investments that stalled economic progress.

In its review in August, 2012, the PMEAC had projected a GDP growth rate of 6.7 per cent for 2012-13 along with a CAD level of 3.6 per cent of the GDP (gross domestic product). Official estimates now reveal that while the economic growth is likely to be about five per cent, the CAD is way higher at about 5.1 per cent.

At a press conference here to release ‘Review of the Economy 2012-13’, Dr. Rangarajan conceded that in its review in August last year the PMEAC had underestimated the impact that delayed projects could have on economic output. He also pointed out that the level of investment during 2011-12 and 2012-13 has been quite high and, therefore, should have translated into higher output, but for the delay in clearances of projects.

“The extent to which delays in projects — mostly on account of delays in the issuance of clearances and lack of fuel for power plants — were impacting the generation of incremental income in the current period was not fully appreciated. The ground situation was that projects with large sums of capital invested in them were not getting completed and therefore not yielding expected current output,” the PMEAC said in its latest report.

This rationale now falls in line in that while the general perception was that high interest rates were the main factor holding back investments, bankers and corporates had been repeatedly pointing out that the bigger problem was the lack of regulatory approvals.

“If the conversion of investment to yielding assets and the improvement in investment and confidence conditions is greater, it is even possible that growth could be slightly higher,” the report said, while noting that the political uncertainty related to the impending general elections in 2013-14 would impact investment decisions to some extent. “Considering this, we see achievable growth in 2013-14 to be around 6.4 per cent,” the report said. But the key to getting to a higher growth trajectory would be the removal of investment and implementation bottlenecks through speedier clearances, the report said.

The report also maintained that the country’s domestic savings rate for 2012-13 could be around 30.8 per cent of the GDP, the same level as it was in the previous fiscal year, and way lower than the peak of 36.8 per cent touched in 2007-08 after which the savings rate has been steadily declining as the decline in net financial savings of households has been one of the key factors. In fact, net financial savings of households has now come down to around eight per cent from 11-12 percent in the years prior to 2010-11.

“The sharp drop in net financial savings of households is linked to another unfortunate development, which is the enormous increase in the import of gold,” the PMEAC said in its report.

“When a household buys gold, it reduces its financial assets (bank deposit, cash in hand etc.) and since the product is imported, the payment eventually leaves the country, leading to an export of a potential financial saving. If instead of buying gold, the household exchanges its cash for financial assets like a bank deposit, insurance policy, mutual fund, bond, share or real estate, (a) financial resources remain in circulation within the economy, and (b) the asset is included as part of domestic savings and to that extent enhances domestic capital formation.

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