The Economic Survey is integral to the budget process, bringing out the economic trends in the country on the eve of the budget presentation. This facilitates a better appreciation of resource mobilisation and allocation in the budget. If the Survey is a dissertation on the economy from a purely economic perspective, the budget is largely a political response to the economic issues it outlines. The difference is crucial and explains why so often in the recent past there has been such a wide disconnect between the two. On a few occasions, the Surveys have been more akin to visionary statements, outlining desirable but impractical goals. The latest Survey, fortunately, neither exaggerates nor downplays the causes and consequences of the current economic problems. The slowdown, characterised by low growth and high inflation, is rooted in domestic as well as external causes. During the two years 2009-10 and 2010-11, the post-crisis stimulus led to strong growth and boosted consumption. That, along with supply side constraints, led to higher inflation which, in turn, produced monetary tightening and sharply lower growth. The two obvious policy measures to regain a higher growth trajectory are, therefore, a softening of monetary policy and the easing of supply bottlenecks, especially relating to infrastructure.
Positing a “bottoming out” of the economy, the Survey optimistically predicts a growth rate of between 6.1 and 6.7 per cent during 2013-14, sharply higher than the 5 per cent during this year. It says headline inflation will fall to between 6.2 and 6.6 per cent by the end of next month. There are, however, good reasons why we may not meet those targets. Since growth is strongly correlated with investment, it is necessary to bridge the savings-investment gap which rose to minus 4.2 per cent of GDP at the end of last year. With savings by the government and private sector shrinking, the current account deficit — i.e. the investment that cannot be financed by domestic savings and has to be financed from abroad — widened. Together, the CAD and fiscal deficit threaten macroeconomic stability and are sure to figure high up in the budget’s list of prime concerns. The Survey’s suggestions for reining in subsidies are not new. It has emphasised the need for better targeting and reduced leakages in their delivery. These are areas which the Finance Minister will most likely address. Also certain are allocations to support the National Food Security legislation, a major socio-economic — and indeed political — initiative of the government in the run up to the next general election. Although the subsidy outgo might go up, the Survey is absolutely right when it calls for this important scheme to be supported.