Frequent flip-flops in policy making do not help in creating a conducive environment
The Prime Minister's Economic Advisory Council (PMEAC), headed by C. Rangarajan, has just released its Review of the Economy for 2011-12. In many ways, the review flags off the budget season. Its views and analysis are bound to be echoed in the Economic Survey, the Union Budget and the Railway Budget. The Reserve Bank of India has scheduled a policy review in March. While its interest rate policy will remain in focus, the central bank's views on the macroeconomy count far more than they ever used to. In short, there is going to be no dearth of economic information in the coming weeks. The publication of the review is just the beginning.
It is always fashionable to look at what these official bodies say on economic growth during the current year and the next. But despite their headline grabbing nature, growth forecasts by the Council or the Finance Minister ought to matter less than the policy agenda that these institutions commend to achieve, among other objectives, a certain level of economic growth.
Therefore, the Council's expectations that the economy will expand by 7.1 per cent in the current fiscal and by a more impressive 7.5 to 8 per cent in 2012-13 are relatively less important despite the fact that these forecasts are among the more optimistic by any official agency. The CSO, in its recent advance estimate, has said that the economy will expand by 6.9 per cent this fiscal. For 2012-13, other official agencies, including the RBI, are unlikely to be as optimistic as the Council. Besides, it has been pointed out that the Council has, in the past, been ‘behind the curve' in spotting signs of economic slowdown and, hence, pitched for higher growth rate projections.
Whether that view will gain further credence, when other agencies' forecasts for next year's come in, seems irrelevant at this stage. That would be doing a great disservice to the Council, whose overall macroeconomic analysis is the most lucid of its kind anywhere.
Twin deficits
In its previous reports, the Council has been unrelenting in its focus on the ‘twin deficits' — the current account deficit and the budgetary deficit — that pose enormous risks to the macroeconomy. That approach continues.
The current account deficit (CAD) has been mounting amidst growing risks in the external sector. At 3.6 per cent of the GDP, CAD is clearly unsustainable and should ideally be capped at 2-2.5 per cent. Oil prices have been rising and exports have fallen, widening the merchandise trade deficit. The Council does not expect the eurozone crisis to go out of hand but as long as it remains, India and other emerging markets will face increased risks, besides those connected with shrinking export markets. Of particular concern are volatile capital flows.
These have become crucial for India's balance of payments. Already, diminished net flows have caused the rupee to depreciate sharply, a phenomenon that seems to be checked only recently. A large number of Indian companies have forex exposures. Managing the attendant risks in a highly volatile global environment has proved daunting.
Encourage foreign capital
While exports are unlikely to revive spectacularly in the short-term, the only feasible solution is to encourage the inflow of foreign capital. Here the official policy has not at all been conducive. In an earlier report, the Council has pointed to the paralysis in government decision-making. Frequent flip-flops in policy making such as the one concerning FDI in retail do not help in creating a conducive environment.
Containing the fiscal deficit is the other big perennial worry. The Finance Minister has admitted that the deficit will overshoot the budgetary target of 4.6 per cent of the GDP.
The question, therefore, is not whether but by how much. Direct tax collections have fallen by some Rs.40,000 crore. The disinvestment programme, despite being given a last minute push, will yield much less than estimated. On the expenditure side, the subsidy bill has mounted enormously. The Council has observed that the fiscal problem is not structural but remedying it will involve raising food, fertilizer and fuel prices. None of those will be poltically acceptable.
Meantime, there are new spending commitments — on food security and expanded health coverage programmers. Infrastructure, including railways, desperately needs massive investments. Any temptation to curtail infrastructure spending in the guise of fiscal consolidation will be highly detrimental to future growth.
Since 2007-08, there has been a steady fall in the tax-to-GDP ratio, the corporate investment rate and fixed capital investment. Apart from plugging loopholes, including the legal ones that were exploited by Vodafone's lawyers, tax collections will have to be stepped up. The Council has urged the government to restore Central excises and service tax to their pre-crisis levels. Around Rs.35,000 crore can be mopped up if that suggestion is implemented.
Comments:
The Leaders are not admitting that the huge subsidy of Rs 15 lakh
Crores to the Industry is reason for the Fiscal deficit...They are
trying to suffocate the Citizens with LIES on the diktats of the World
Bank,like in the deregulation of the price of petrol.
The government is not thinking holistically. Oil is the largest component of import that makes the CAD worse. Government does *nothing* to control the oil demand. It does not raise oil prices for political and economic (inflation) reasons. It does not encourage electric vehicle use by giving them tax breaks. It does not prioritize public transport and direct JNNURM funds accordingly. It does not deal with roadblocks to increasing domestic electric generation like coal shortages, bankrupt state electric distribution companies..
We like to feel good about the trouble Western world finds itself in. But we have no clue how thin an ice we ourselves are walking on.