Fiscal Consolidation Focus: Economic Survey '11-12
The Indian economy has emerged as a strong and resilient contender on the global economic front despite the uncertainties accentuated by the developed markets in the Euro Zone and the United States of America (U.S.A). The Economic Survey 2011-12 states that, as per the International Monetary Fund (IMF) at a growth rate of 7.00% India is projected to be the second fastest growing major economy after China. The Survey infused confidence in India's economy by reiterating that even if the emerging economies, including India,witnessed a slow growth in 2011, growth prospects of most of these economies remain robustin the medium to long run due to various factors such as demographics and size of thedomestic market, apart from high rates of investment and savings.
According to the Finance Ministry's Economic Survey 2011-12 estimates the Indian economy is expected to grow at 6.9% in 2011-12 mainly due to weakening growth of the industrial sector as seen in the Index of Industrial Production (IIP) growing at 3.6% for the period April 2011 - December 2011 as against 8.3% for the same period last year. Though this indicates a slowdown compared not just to the previous two years,when the economy grew by 8.4%, but from 2003 to 2011, (except 2008-09 economicdownturn, when the growth rate was 6.7%), the Gross Domestic Product (GDP) is expected to grow at 7.6% in 2012-13 and 8.6% in 2013-14.
However, the Survey's ambitious GDP estimate for the years ahead rests on the following assumptions along with some challenges to be faced are noted below:
Financial inclusion has been cited as the most critical component for the development of the financial sector. The Survey states that to achieve financial inclusion, banks need to take intoaccount various behavioural and motivational attributes of potential consumers for a financialinclusion strategy to succeed. Moreover, access to financial products is constrained by lack ofawareness, unaffordable products, high transaction costs, and products which are notcustomized and are of low quality. All these challenges have to be taken up by the banks in order to achieve effective financial inclusion.
The WPI inflation was a stumbling block throughout the year 2011 due to increase in global commodity prices and high crude oil prices. Food inflation too remained high for most part of the year before plunging down to the negative terrain (-0.52% for the month of January 2012). However, the actions taken by the RBI in its monetary policy reviews to control inflation and inflationary expectations has slowed down the growth of the country. Thus according to the Survey, these effects, coupled with a favourable base effectin prices and continued global slowdown, are expected to moderate inflation to around 6.5% to7.0% by March 2012 and further moderate in the months ahead, barring unexpected shocks,such as oil prices in international markets.
The Survey observes that, "Looking at, vigilance is called for in getting back to a lowinflation/sustained high growth path in India, by renewed focus on supply side measures andinclude fiscal consolidation, including stepped up regular adjustments in domestic energy prices."It says that high level of food stocks and producers' responses to higher protein andother food prices should help to maintain overall price stability in the country.
- Agriculture growth
The Economic Survey 2011-12 is assertive that the higher levels of agricultural output and ample food stocks as on date (as on February 1, 2012 it was 55.2 million tonnes comprising 31.8 milliontonnes of rice and 23.4 million tonnes of wheat) and thelevels of reservoir storage this year will augur well for bringing down headline inflation in the next fiscal. However, despite this assertion, the Survey expressed its concern over the growth rate in the agriculture sector which has fallen short of planned target inspite of record food grain production.The Survey expects the agricultureand allied sectors are estimated to achieve a growth rate of 2.5% during 2011-12.
The Survey also cited that for improving the management in agriculture commodities certain steps like improving 'mandi' governance, promoting inter-state trade by eliminating multiple levies,taking perishables out of the ambit of the Agricultural Produce Market Committees (APMC) Act, developing a 'farm-to-fork' retailsupply system, and addressing the investment gaps related to post harvest infrastructure foragricultural produce through FDI in multi-brand retail.
India's Comparative Rating Index for Sovereigns' (CRIS) has risen to 24.52 in 2012 from 23.81 in 2007. This indicates that the vis-à-vis the rest of the world,India's rating has risen by 2.8%, the Survey observed.The share of India in the global merchandise exports has increased from 0.5% in in 1990 to 1.5% in 2010. Moreover, the extent of financial integration, measured by foreign capital flows as a share ofGDP has also increased dramatically and the role of India in the World Economy hascommensurately expanded along with the other major members of emerging markets, whichas a whole now account for one-half of world output. Indian corporations that rarely venturedout of India are suddenly investing all over the world and some even in the industrializedcountries. Thus, this shows that the Emerging Economies like India are moving into centre stage and becoming drivers of the global economy.
- Infrastructure Investment
Despite slippages in some sectors the overall performance in creation of infrastructure in physical terms during the 11th Five Year Plan has been remarkable as compared to previous Five Year Plans. This can be attributed to the success in garnering private sector investment in infrastructure through the public-privatepartnership (PPP) route. PPPs are expected to augment resource availability aswell as improve the efficiency of infrastructure service delivery.
In order to give much impetus to the cash-starved infrastructure space, the Planning Commission has projected an investment requirement of over Rs 45 lakh crore (about US $ 1 trillion)during the Twelfth Plan (2012-12). It is projected that at least 50% of this investment willcome from the private sector as against the 36% anticipated in the Eleventh Plan.At the same time publicsector investment will need to be increased to over Rs22.5 lakh crore as against an expenditure ofRs. 13.1 lakh crore during the Eleventh Plan. Financing infrastructure will, therefore, be abig challenge in the coming years and will require some innovative ideas and new models offinancing.Moreover, we believe that since the interest rates are expected to reduce from the next fiscal year (i.e. 2012-13), right amount of funding at the right time is imperative for the growth of the infrastructure sector.
The Survey has indicated that there is a need for introducing more innovative schemes to attract large-scale investment into infrastructure. Inview of the massive requirements of funds, all efforts need to be made to attract big ticket long-terminvestors such as strategic investor, private equity funds, pension funds, and sovereign funds.
- Export-Import Growth
According to the Survey, India's cumulative exports grew at a rate of 23.5% reaching U.S. $242.8 billion. During the same period the imports were valued at U.S. $391.5 billion taking the trade deficit to U.S. $148.7 billion. More importantly, the Survey observes that India is a success story in terms of diversification of export and import markets. The U.S. which was in the first position in terms of trade with India in2007-08 has been pushed down to third position in the following years and has been replaced UAE becoming India's largest trading partner. This change in direction of trade has helped India weather the global crisis emanating from the U.S. and Europe (Europe still has a 19.5% share in India's exports).
Though some of the challenges for India on the trade front are due to the current emerging global situation, others are systemic and long-term in nature. Thus, if the global situation worsens due to the turmoil in the Euro Zone or the USA, the pressure for stimulus measures couldagain resurface and protectionist measures from trading partners could increase. This in turn may negatively affect our already limited export product basket.
- Forex Reserves and External Debt
After reaching an all-time high of U.S. $322.2 billion at the end of August 2011, India's forex reserves declined to US $292.8 billion at the end of January 2012. The fall in the reserves can be partly attributed to the RBI's intervention to stem the deprecation of Indian Rupee against the U.S. Dollar. Moreover, the due to high commercial borrowings and short-term debt, India's external debt increased to U.S. $326.6 billion as on September 2011.
Also, with the increase in the international prices of imported commodities like oil, gold and silver, the current account deficit (CAD) stood at U.S. $ 32.8 billion (3.6% of GDP) in H1 of2011-12, as compared to U.S. $ 29.6 billion (3.8% of GDP).
In our opinion with export growth remaining subdued and imports on a rise, the CAD may widen further.
Another area of importance is the priority sector lending which banks both private and public need to adhere in order to boost overall growth of the economy. The Economic Survey observed that the banking sectorboth public and privateshowed impressive increasein priority sector lending during 2010-11. The flow of agricultural credit headed north as the banking system disbursed credit of Rs 4,46,779 crore to theagriculture sector as against a target of Rs 3,75,000 crore in-2010-11, withclose to 127.26 lakh farmersbrought under the banking system.
The Survey also pointed out that the service sector growth of nearly 10% helped the Indian economy to ward off ill-effects of the global recession to a greater extent.
In an effort to play its role in sustainable development and addressing the issue of climate change the Government, for the first time has introduced a chapter on 'Sustainable Development and Climate change'. It is noteworthy that India has already taken a number of actions on voluntary basis in pursuance of a sustainable development strategy like adoption of theNational Action Plan on Climate Change (NAPCC) in 2008 which has both mitigation andadaptation measures, an announcement of a domestic goal of reducing the emission intensityof its GDP by 20% 25% of the 2005 level by 2020 is commendable.
Outlining the challenges on this front, the Survey states "the 2009 State of the Environment Report by the Ministry of Environment and Forests (MoEF) clubs the issues under five key main challenges faced by India, which are climate change, food security, water security, energy security and managing urbanization. Broad-based economic and social development is ultimately the answer for greater environmental sustainability. Economic pricing of energy and other resources will be a key to switching to more sustainable development path. New technologies will be crucial, mostly in the private sector. But social justice will also require stepped-up public spending on energy access and other elements, the Survey suggests."
In order to reap the benefits of the demographic divided of the country in the future; the expenditure by General Government has increased to 3.11% in 2011-12 as against 2.72% in 2006-07.As per the Survey the Sarva Shiksha Abhiyan (SSA) norms have been revised tocorrespond with the provisions of the RTE Act including norms for sanctioning additionalteacher posts, classrooms, teaching-learning equipment to enable states to move to an eight-yearelementary education cycle, enhancement of academic support for better schoolsupervision, and expansion of Kasturba Gandhi Balika Vidhyalaya (KGBVs). The NationalCouncil for Teacher Education (NCTE) has been notified as the academic authority forteacher qualifications. Also, a country wide campaign has been launched for raising publicawareness about Right to Education (RTE) and to ensure all schools become RTE compliant.The number of out-of-school children has come down from 134.6 lakh in 2005 to 81.5 lakh in2009 as per an independent study conducted by the SRI-IMRB.
Major development during the year was the launch of Aakash, the low cost access-cum-computing device that was launched on 5 October, 2011.Besides so far nearly 400 universities have been provided 1 Gbpsconnectivity or have been configured under the scheme and more than 14,000 colleges havealso been provided VPN connectivity. Creation of e-content for 996 courses in Phase II inengineering, sciences, technology, humanities, and management has been undertaken by IITMadras. The Consortium for Educational Communication (CEC) has been tasked withcreation of e-content for 87 undergraduate subjects. More than 2000 e-journals and 55,000ebooksfrom 297 publishers have been made available online under this programme.
Speaking about the employment in the country, the upward trend in the employment has been maintained since July 2009. According to the survey conducted by the Labour Bureau, the overall estimated employment in all selected sectors has experienced a net addition of23.58 lakh during the period October, 2008 (first survey) to September, 2011 (twelfthsurvey).The shareof women in organized-sector employment was 20.4% in March 2010 andhas remained nearly constant in recent years.
Further the coverage under the Mahatma Gandhi National Rural Employment Gurantee Act (MGNREGA) has consistently increased from 4.51 crore households during 2008-09 to 5.49 crore households during 2010-11 with averaged employment of 47 person days per household.Women person days have been 48% duringthe last three years against the stipulation of 33.33% as per the Act.
The Government has also been active in supporting the public health issues like medical help, water supply, sanitation and family welfare. The combined revenue and capital expenditure of the Centre and States has increased to Rs 96,672.79 crore in 2010-11 from Rs 53,057.80 crore in 2006-07. The Survey highlights that the Janani Shishu Suraksha Karyakram (JSSK) waslaunched on 1st June, 2011 to give free entitlements to pregnant women and sick new-borns for cashless delivery, C-Section, drugs and consumables, diagnostics, diet during stay in thehealth institutions, provision of blood, exemption from user charges, transport from home tohealth institutions, transport between facilities in case of referral, and drop back fromInstitutions to home.A sum of Rs 1,437 crore has been allocated to the states during 2011-12 under the JSSK. Moreover, the Janani Suraksha Yojana (JSY), which targets lowering of Maternal Mortality Ratio by ensuring that deliveries are conducted by skilledbirth attendants, has shown rapid growth in last three years, with number of beneficiaries rising to 106.96 lakh in 2010-11 from 90.37 lakh in 2008-09. The issue of governance,transparency, and grievance redressal mechanisms are now the thrust areas for the JSY.
Empowerment of women have been undertaken through various programmes such as Sarva Shiksha Abhiyan (SSA)for girl child education; Implementation of the National Rural Health Mission (NRHM) aiming to reduce maternal mortality and infant mortality rates; micro-finance facilities for women in order to make them self-independent; National Mission for Empowerment of Women (NMEW), an umbrella mission to strengthen inter-sectoral convergence and facilitate the process ofcoordination of all the women's welfare and socio-economic development programmesacross ministries and departments, (launched on 8 March 2010) to ensure economic andsocial empowerment of women.
The Economic Survey 2011-12, in our view has well laid out the aspects pertaining to the India's growth story. Apart from the growth numbers, for the development of our nation as a whole, the Survey cites concerns over, financial inclusion, FDI, education reforms and reforms for empowering women, etc. which is commendable.
However, the key lies in the effective implementation and execution of the reform measures for achieving the ambitious growth figures of 7.6% in 2012-13 and 8.4% in 2013-14 as we have witnessed earlier what policy paralysis can do the overall economic health of the nation.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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