The Hindu Business Line : Economy has moved decisively to higher growth phase

Optimism on growth laced with caution on the inflation and external sector fronts. This, in essence, is the outlook conveyed in the Economic Survey tabled in Parliament ahead of the Finance Minister, Mr P. Chidambaram, presenting his Union Budget for 2008-09 on Friday.

“The economy has moved decisively to a higher growth phase,” the Finance Ministry’s annual report card on the Indian economy has declared.

With the country’s gross domestic product (at constant market prices) growing at eight per cent plus for an unprecedented five years in a row — 8.4 per cent in 2003-04, 8.3 per cent in 2004-05, 9.2 per cent in 2005-06, 9.7 per cent in 2006-07 and a projected 8.7 per cent this fiscal — the average per capita income of its people has risen by 7.2 per cent per annum during this period.

This is against 3.1 per cent over the 12 years from 1980-81 to 1991-02 and 3.7 per cent during the subsequent 11 years to 2002-03.

The sharp acceleration witnessed since would mean that “average income would now double in a decade, well within one generation, instead of after a generation (two decades).”

The Survey has noted that if growth is maintained at the targeted nine per cent for the Eleventh Five-Year Plan period (2007-08 to 2011-12) and stepped up to 9.5 per cent in the succeeding year, it would make India in a select league of medium/large countries that have averaged a GDP growth or more for a decade.

These include the likes of Japan, China, Taiwan, Hong Kong, South Korea, Singapore, Portugal and Greece. But achieving this, it admits, “will be a challenge,” requiring additional economic policy reform measures.

‘Reform options’

Among the “reform options” that the Survey has prescribed are permitting “regulated private entry” into coal mining and “free entry” in the case of private and public-private partnership rail freight companies; selling old oil fields and coal mines to the private sector to effect enhanced recoveries; raising the foreign equity cap in insurance from the existing 26 to 49 per cent; phasing out of controls on sugar, fertiliser and drug industries; amending the Factories Act enabling a 60-hour work week with a 12-hour daily limit to meet seasonal demand through overtime; and enacting a new bankruptcy law to facilitate exit of old/failed management “as expeditiously as possible”.

Further — in what would obviously not please the Left — the Survey has recommended the listing of all unlisted public sector undertakings (Bharat Sanchar Nigam Ltd, Coal India, and so on) and auctioning all loss-making non-revivable units, including allowing negative bidding in the form of debt write-offs for those with zero net worth.

Allowing a “share” for foreign equity in all retail trade and 100 per cent in respect of luxury brands and other specialised retail chains is another proposal that could encounter political opposition.

Fiscal concerns

The Survey has, however, not made any strong case for doing away with subsidies on food, fertilisers or oil.

Unlike in the past — when fiscal concerns prompted detailed observations on subsidies — the latest Survey has made a passing mention of the issue of bonds to oil companies, fertiliser units and the Food Corporation of India, without going into their deeper financial implication.

Meeting the fiscal deficit target of three per cent of GDP by 2008-09 (as per the Fiscal Responsibility and Budget Management Act) “may not be very difficult,” it has claimed.

The Survey has, instead, chosen to focus on more pressing concerns pertaining to inflation and slowdown in exports and consumer goods production. While the overall inflation is projected to decline from 5.6 per cent in 2006-06 to 4.1 per cent this year, “the behaviour of agricultural prices, including essential consumption items, will be critical,” it has warned. Also, “the ability to meet shortfalls at affordable prices is being eroded by global shortages and rising prices”.

Export outlook

According to the Survey, the outlook for exports in 2008-09 “may not be as bright as in the past few years”, the main reason being the slowdown in the US. This could lead to a further widening of the trade deficit. “As such, goods and services balance might also worsen to the extent that the rise in acquisition costs of petroleum are not matched by an increase in non-factor service exports…(There could also be) increased risk aversion on the part of developed country investors,” it has warned.