The Hindu Business Line : Economic Survey pointers

The Budget exercise aims at taking the national economy forward from the way it has been in the preceding year. This is why the Economic Survey serves as a vital document.

The Survey suggests what should be done in the future — not necessarily in the next Budget — to ‘set things right’.

Ranabir Ray Choudhury

The Budget, prepared by the second Government of Dr Manmohan Singh, will be presented today, the air being thick with the possibilities and probabilities which may find a place in the document. Of course, there is nothing new in all this because, ever since Union Budgets began to be presented by Governments at the Centre since the first one by Shanmugham Chetty in November, 1947, the run-up to Budgets and the day itself have been charged with tension, most of it being dri ven by stock market speculation.

The present occasion is no exception, and like all other such events in the past, within the next few hours all the rabbits will be out of the Finance Minister’s bag, drawing plaudits from one set of people and sighs from another. And, yet, to intelligent minds, the Budget document usually does not come as a big surprise (unless political interjections abound, as was the case with this year’s Railway budget) because it is not produced in a vacuum. On the contrary, the exercise (normally) aims at taking the national economy forward from the way it has been in the preceding year, its contours and requirements being known in detail to analysts, both official and non-official.

State of the economy

This is where the Economic Survey of the year just passed comes in, the document (the quality of which has progressively improved with time) setting out in detail the achievements and drawbacks of the preceding 12 months and, what is most important, suggesting officially what should be done in the future — not necessarily in the next Budget — to “set things right”. Briefly, since the Budget for the next year will be presented shortly, what does the Economic Survey for 2008-2009 say about the state of the economy which, ordinarily, should form the setting for Mr Pranab Mukherjee’s document (drawn up under the general supervision of Dr Singh)?

More specifically, Chapter Two of the Survey appears to be the most critical because it deals with “Challenges, Policy Response and Medium-term Prospects”, issues which should form the core of any body of views on the immediate future of the economy and what needs to be done. In the chapter’s summing-up, the Survey says that the previous document for 2007-2008 had extolled the virtues of the satisfactory growth rates chalked up since 2003-2004 but had also underscored the warning that “while globalisation provided new opportunities, it also gave rise to new challenges”.

It says, sensibly, that “a balanced perspective suggests that neither should one rest on the past laurels nor should the present setback weaken the determination to return the economy to the high growth path at the earliest”, adding that such growth “is critical to generate the revenues needed for meeting our social welfare objectives on a sustained basis and ensuring inclusive growth”.

As the Survey sees it, what have the laurels been like? The document says that by relaxing the Fiscal Responsibility and Budget Management Act targets for 2008-09, “in order to provide the much needed demand boost to counter the situation created by the global slowdown, the Government may have succeeded in arresting the decline in the growth rate of GDP to around 7 per cent”. This apart, the rabi harvest has been good and the agriculture sector “has recorded a growth of 1.6 per cent in 2008-09 over a high growth of around 5 per cent in 2007-08”.

According to the Survey, the monsoon this year has been “normal though its progress so far seems to be behind the usual schedule”.

The flow of FDI during 2008-2009 has been higher than in the previous year. Further, “there are signs that Foreign Institutional Investors who had recorded net outflows in 2008-09 may have returned to the Indian market in the last two months”.

Need to usher in reforms

There is no shortage of liquidity in the economy and inflation is no longer an area of concern. Given the performance of the Index of Industrial Production, which has shown a “clear sign” of revival in April, the Survey says that it is likely that “the two worst quarters since the global financial meltdown in September 2008 are behind us”. The movement in the stock market seems to corroborate this reading of the situation.

Even so, there are certain downside risks for the economy in the post-September 2008 global environment which need constantly to be kept in mind, and which, in fact, focus attention even more on the need to usher in reforms in certain areas of the economy.

In the Survey’s prioritisation, a prominent position has been accorded to fiscal and monetary issues. In the fiscal sector, attention has been drawn to maintaining and improving the transparency of the tax structure, a return to the FRBM deficit schedule being recommended on a priority basis.

The Survey says that it would be imperative to restore the fiscal deficit to “the FRBM target of three per cent of GDP at the earliest”. As regards monetary reforms, an assault on the “structural rigidities” of the credit market has been suggested which, the Survey feels, “have now come in the way of cutting lending rates at a pace which is consistent with the current outlook on inflation and the need for stimulating investment demand”.

On reform in the financial markets and intermediation, the Survey cites the volatile nature of certain capital flows and says that these flows “create a negative externality for the real sectors in the short term”, its suggestion being the implementation of measures to overcome the negative externality “by internalising this externality through some form of Pigouvian taxation”.

On the energy front, the Survey has argued for decontrol of petrol and diesel prices in order to make buyers aware of the “opportunity cost of oil imports” and thereby make them contribute “their mite to economising on the use of refinery products” (prices of petrol and diesel were in fact raised substantially last week).

Accountability mechanisms

All these elements of reform relate to macro policy measures, that is, to the framework within which the economy operates in various sectors. However, the implementation involves governance at the grassroot level, and it is here that the Survey has an important point to make.

Among other things, it refers to the view which says “that the government at the cutting-edge level, where it interfaces with individuals and economic agents, is the most important constraint on raising and sustaining the growth rate of the economy”. The Survey mentions the “legitimate” concern that, in view of the scale of resources being mobilised to fuel the growth of the economy, “every bit of the public effort should count and yield better results”.

Certainly, accountability mechanisms in the public domain should be strengthened and given more teeth. But is that enough, especially when it is an established fact that policies can be altered much more easily than people being made to change their behaviour and habits, in short becoming more responsive to the people at large, and particularly when these have been etched over long years in the asphyxiating tones of officialdom?

Related Stories:
Survey ‘janaaha sukhino bhavantu’?
A roadmap for reforms

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