GREEN SHOOTS of recovery in full bloom

THE ECONOMIC SURVEY'S BENT ON SWEEPING REFORMS AND AUGURY OF GLAD TIDINGS TO COME ARE NICELY LARDED WITH CLUES TO OVERCOME THE EXPECTED STUMBLING BLOCKS

 PRAKASH Karat would approve. The survey pooh-poohs the dire, sub-6% growth forecasts of western, capitalist outfits such as the World Bank and the OECD for India. The economy is poised for a U-shaped recovery, with the last two quarters of the last fiscal and the first two quarters of 2009-10 forming the trough.
    And growth thereafter would be robust enough to push up the overall growth rate for 2009-10 to anything between 6.25% and 7.75%, depending on how well the world economy fares. And economy-wide inflation was only 6.2% for 2008-09 and is expected to remain muted this fiscal as well.
    The upbeat mood continues when it comes to suggesting reforms across the board, including labour reform, disinvestment to raise Rs 25,000 a year and a ban on foreign institutional investors bringing in anonymous investors through sub-accounts. The survey prognosticates sustained growth in foreign capital inflows.
    The only place where it suggests a less-thanhappy story is in the balance of external payments: India could turn a net exporter of capital, running up a current account surplus in 2009-10, instead of absorbing foreign savings in the net, as over the last five years.
    The survey has sensibly devoted separate chapters to the state of the economy and to policy options on what is to be done. A key suggestion is to aim for deficit targets over the business cycle, rather than at every point of it, recognising the counter-cyclical potential of the fiscal policy. However, a target of 0% over the cycle seems too severe.
    The survey claims the fiscal deficit would shrink sharply beginning 2010-11. By then, it would shed two burdens: farm loan waiver and arrears of the Sixth Pay Commission award to civil servants, which jacked up the contribution of government consumption in overall growth to 32.5% in 2008-09 from an average of 7% for the previous three years. Fiscal consolidation would have to be aided by sharp curtailment of fuel subsidies, deregulation of oil prices when crude prices are below $80, reorganisation of subsidy by making most transfers directly to the beneficiary using smart cards.
    When ministers change, the survey too changes its tune. It suggests that taxes introduced over the last five years, such as the securities transaction tax, the commodities transaction tax, fringe benefit tax and cesses are ill-advised. Instead of a dividend distribution tax on companies, dividends should be taxed in the hands of investors. In the world of demat accounts, this is not a difficult scheme to implement, and would be fairer to minority shareholders.
    Indeed, the survey calls for pressing ahead with financial sector reform, on the ground that this is the only way to ensure that funds are intermediated to dynamic entrepreneurs and that they will have sufficient means to hedge assorted risks.
    To its credit, the survey is big on governance reform to achieve institutional efficacy and accountability. An innovative suggestion to this end is a web-based Public Accountability Information System that puts in the public domain all data on projects, funds and those employed so that anyone can challenge it and hold the system accountable.
    The survey endorses the inclusive growth agenda but wants better ways of spending the money to ensure that the intended benefit is achieved. If the survey were a horse, all reformers would ride.
    Will the FM?
High Lights
Decline in growth rate in private consumption and gross fixed capital formation a key concern for the economy
Per capita income & consumption at Rs 31,278 and Rs 17,344 in 2008-09, but survey says there is a slowdown in growth rates
Domestic food prices still a worry. Survey suggests a pricing regime for food grain to balance interest of producers and consumers
Moots a return to FRBM targets for fiscal deficit at the earliest, possibly by 2010-11. Estimates fiscal stimulus at 4.8% of GDP
Challenges and outlook: Worst may be behind us
THE survey says the palpable fallout of the global financial crisis on the industry and trade sectors has permeated to the services sector. It, however, argues that the worst may be over and the monetary and fiscal measures taken by the government could facilitate a quick 'U'-shaped recovery. Subject to some caveats such as policy reforms, a normal monsoon and the US economy bottoming out by September 2009, it pegs the GDP growth in 2009-10 at 7.0+/- 0.75%. In the event of prolonged global slump, the survey warns the recovery could be delayed to early 2010. PRIME numbers 6.7%
GROWTH IN 2008-09. SLUMP ONLY SPARED MINING & GOVT
BOOSTED SOCIAL SERVICES 27%
SHARE OF PVT CONSUMPTION TO AGGREGATE GROWTH, DOWN SHARPLY FROM 53.8% IN 2007-08. A MAJOR WORRY 6.2%
THE OVERALL RETAIL
INFLATION IN 2008-09, AS MEASURED BY THE GDP DEFLATOR 75%
DEPENDENCE ON IMPORTED CRUDE. SURVEY SEES ANY SHARP HIKE IN GLOBAL OIL RATES A BIG RISK TO ECONOMY

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