THE ECONOMIC SURVEY 2009-10

India firmly on growth track

ECONOMIC Survey 2009-10 is very upbeat on India's growth prospects, urges commencement of fiscal consolidation, introduces 'skewflation' to sarkari jargon and admits, pretty much, that the government messed up on releasing food stocks to contain inflation. It calls for liberalising foreign investment in sectors such as higher education, health insurance and rural banking; usefully highlights there's a lot of sand in the transmission mechanism between RBI policy signals and the banks' lending behaviour; and exhibits considerable political naïveté in identifying the reasons why India ranks so low in any global survey on ease of doing business. 

    India is well on its path to achieving double-digit growth and becoming the fastest-growing economy, says the Survey, citing an entrenched shift to higher savings and investment rates (well above 30%), comparable to those of Asia's miracle economies. That Indian growth has found its feet again, after the slippage induced by the global crisis, automatically becomes proof that India's macroeconomic management has been sound. The Survey endorses the 13th Finance Commission's recommendations on fiscal responsibility by both the Centre and the states. 
    Fiscal consolidation, says the Survey, has to be calibrated to revival of capital formation. The IMF, incidentally, chose Wednesday to make its recommendation that fast-growing economies like India should kick off fiscal consolidation. And growth in the core sectors has been 9.4% in January, according to figures released on Wednesday, suggesting that investment growth is, indeed, robust. 
    The Survey makes the point that given the extremely low rates of interest in the developed countries, capital is likely to flood into a fast-growing country like India. And stops short with the bland observation that there could be problems if such inflows are in excess of the economy's absorptive capacity. At a time when even IMF economists are recommending capital controls in specific situations, it is perplexing that the Survey plays coy on debating whether India should levy a tax on capital inflows a la Brazil or adopt some other form of restriction. Survey points to skewed inflation 
THE Survey introduces a new chapter on the micro-foundations of macroeconomics. Its high is inducting an insight from the theory of industrial organisation to identify the right way to offload food from the government's stocks to have optimal impact on inflation — it turns out that the way in which the FCI has been carrying out openmarket sales has not helped. Frequent, geographically-dispersed sale to a large number is much superior to selling grain to a handful of large merchants, as has been the FCI practice. The chapter's low, arguably, is blaming political philosophy for Indian entrepreneurs' myriad difficulties while doing business: the Indian state wants to be provider, rather than enable the provision of, goods and services. 
    Why do Indian businessmen have to routinely bribe their way past dozens of hurdles, merely to carry on with their business, a fundamental right accorded by the Constitution? Does the failure to institutionalise political funding and the resultant need for every party and every politician to mobilise funds, making use of the opportunity to sell patronage and abusing the state machinery to extort money from the public, play a role in this? The question is not, obviously, genteel like a choice of political philosophy. 
    The Survey rightly argues for ending the unsustainable subsidies on petroleum fuels in a scenario in which global crude prices remain ever upwardly mobile. It argues for better ways to distribute subsidy as well, whether on food or fertiliser: transfer the subsidy directly to the beneficiary, leave product prices to be determined by a competitive market. 
    While this is eminently desirable, a design of implementation that the Survey explores has huge gaps. Give the poor food coupons, and let them choose to buy food from whichever PDS outlet they like, says the Survey. As if every village had multiple PDS shops that would compete to lure coupon-holding customers by offering good quality food at competitive prices! 
    The Survey highlights the skewed pattern of inflation in India of late. Food prices have risen sharply (17.8% for the week ended February 13, lower than the 19.5% reached early January, but still unacceptably high) but other prices have not. Similarly, retail price increase has been several times as high as wholesale price rise. But the Survey refrains from making the logical recommendation to reform the supply chain between the producer and the consumer by encouraging organised retail. The net contribution of this discussion is to add the term skewflation to the official jargon.

TIME FOR CHANGE 
Gradually roll 
back stimulus measures, including tax concessions to industry

DOLLAR DELUGE 
High FDI inflows in excess of the country's absorptive capacity could pose a problem

OPENING AVENUES 
Liberalise foreign investment in sectors such as higher education, health insurance & rural banking