The end of bad times

The Economic Survey 2014-15 marks the end of three years of growth pessimism, pegging a growth rate of 8.1-8.5 per cent for 2015-16 and bringing back memories of the 2003-08 years. The reasons for this change in situation are not far to seek. According to the new national accounts data, growth this year has been above 7 per cent, with inflation and current account deficit at decidedly benign levels. The rupee is stable, equities are upbeat and 10-year yields are moderate. A combination of reform moves, low oil prices and a favourable climate for monetary easing (thanks to low inflation and a stable currency) point to a growth rate of 8 per cent sustaining itself over the next few years. Compare this with the situation in the third quarter of 2013-14, when the rupee took a beating, inflation was raging at double-digit levels and the government of the day failed to inspire confidence, and it is clear that we have come a long way — without actually realising it. An inflation rate of 5-5.5 per cent is just right to spur investment, without the danger of overheating. The Survey rightly points to the need to maintain fiscal discipline and yet keep the engines of growth going by switching from consumption to investment. Fiscal rectitude, intelligently managed, is a precondition for growth.

Yet the concerns of yesterday haven’t entirely evaporated. An investment rate of 32 per cent of GDP yielding a growth of 6.6 per cent in 2013-14 points to a higher incremental-capital output ratio than the trend rate of 4. While the current fiscal might have seen an improvement in ICOR, the need to clear administrative and other supply bottlenecks remains. The Survey’s emphasis on the quality of fiscal consolidation entails a shift away from price-distorting, input-based subsidies towards income support-based ones, with direct benefit transfers coming into play. As the Survey says, fiscal consolidation will have to be expenditure-driven at least in the short run. The IMF’s January update of its World Economic Outlook observes, “the decline in oil prices driven by supply factors — which, as noted, are expected to reverse only gradually and partially”. This is a window of opportunity to phase out urea subsidy. The Survey should have flagged this as a priority concern which, along with restricting LPG subsidy to the needy, can trim the subsidy bill by 30-40 per cent. Moves to rationalise food subsidy must be taken forward by political consensus, requiring “more effort”, as mentioned in the Survey.

As the Survey says, the rationalisation of taxes through GST can act as a game-changer (along with direct benefit transfers on expenditure side), spurring growth and long-term revenues. The government has initiated labour law changes, put archaic laws under the scanner and expedited environmental clearances, even as its land acquisition ordinance hangs fire. But the Survey, full of the achhe din spirit, is gung-ho about big-bang reforms. And perhaps not without some reason: the big picture does not look all that bad, after all.

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