The Budget lays out opportunities and challenges that the economy is currently facing. The opportunities include revival of economic growth now and in future based on fiscal consolidation, institutional reforms, and dynamism in the rural economy.

The challenges include further fiscal consolidation, improving supply response of agriculture, leakages from public programmes, improving regulatory standards and administrative practices and transition towards transparency in managing the economy.

Continuation of fiscal consolidation is imperative for growth of the economy. Equally important are the issues of tax and subsidy reforms, agricultural procurement and public distribution, boosting labour-intensive manufacturing units as well as the share of manufacturing in GDP, strengthening agricultural supply chains and improving export competitiveness of the economy.

Does the Budget provide indicative potential solutions to myriad challenges and bottlenecks that the economy is currently facing? Among the positive aspects of the budget are the soon-to-be-introduced National Food Security Bill, strengthening MGNREGA, Bharat Nirman and increased expenditure on social sectors including health and education, strengthening financial inclusion and extending benefits to unorganised sector. Though there is mention of reforms of APMC-regulated agricultural markets, the real action is yet to be seen.

Serious Action Points

The National Manufacturing Policy needs serious action plans on the ground. The aim of increasing the share of manufacturing in GDP from the current 16 per cent to 25 per cent by 2021 sounds too ambitious.

The share has remained stagnant around 17 per cent for more than three decades. All the economic reforms of the last 20 years could not improve it further.

The issue of deteriorating balance of merchandise trade is, in fact, more serious than it seems. The current account deficit to GDP (CAD-to-GDP) ratio has been increasing since 2007-08. It was 1.4 per cent in 2007-08, 2.5 per cent in 2008-09 and 3 per cent 2009-10. It is not likely to cross the 3 per cent mark during 2010-11.

The worry is on account of the fact that it may move up during the years to come unless merchandise exports grow fast enough to counter the weakening surplus on invisibles.

Exports of services (Mode-1) may not be expected to keep growing at the rates posted during 2002-2007. It seems to have hit a plateau, at least for the time being.

There is marginal surplus on ‘trade in travel' services (Mode-2) which is between 5 and 10 per cent of total surplus on trade in services.

However, there are no reliable data available on trade in services on Modes-3 (commercial presence) and Mode-4 (movement of natural persons)

Thus, there is all the more reason for manufacturing sector to grow faster and become more competitive so as to reduce deficit on merchandise trade. This would require serious reforms of labour law and provision of world class infrastructure.

Labour-intensive manufacturing units, particularly in primary food processing, would provide jobs to the rural unemployed as well as give more returns to the farmers through minimising loss due to supply chain bottlenecks

Capital inflows

Another major concern refers to quality of capital inflows. Despite fragile global economic recovery, the world foreign direct investment (FDI) flows have been brightening up since mid-2009. (World Investment Report, 2010).

It is expected that FDI flows would cross $1.2 trillion in 2010 and rise up to around $1.4 trillion in 2011. 2012 might push FDI flows somewhere in the range of $1.5 -2.0 trillion though not yet to its 2007-level. Such recovery would be subject to various risks and uncertainties

Further, the 2010 A.T. Kearney FDI Confidence Index Report cheers up the developing countries. It states that the emerging markets remain attractive to foreign investors. The Index tracks the FDI intentions surveyed from the senior executives based on likely political, economic and regulatory changes.

China, India and Brazil are among the top five countries based on FDI Confidence Index. China tops the list while India is ranked third.

FDI flows into India have declined during H1 2010. Gross FDI inflows, at $16.9 billion, are 21.7 per cent less than inflows in H1 2009.

While it may not be easy to mentor FII inflows and outflows, the reasons for decline in FDI must pose serious challenge before the policymakers.

(The author is a Senior Fellow, NCAER.)

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