The Indian economy is expected to grow at 8.75-9.25% in financial year 2012 according to the Economic Survey for the year 2011-12 announced on Friday.Robust growth and steady fiscal consolidation have been the hallmark of the Indian economy in the year 2010-11 so far. The growth rate has been 8.6% in 2010-11 and is expected to be around 9% in the next fiscal year.
The growth has been broad-based with a rebound in the agriculture sector which is expected to grow around 5.4%. Manufacturing and services sector have registered impressive gains. Savings and investment are looking up while exports are rising.
However, food inflation, higher commodity prices and volatility in global commodity markets have been a cause of concern underscoring the need of fiscal consolidation and stronger reserves.
In an interview with CNBC-TV18, Siddhartha Sanyal, Chief India Economist, Barclays Capital, Sonal Verma, India Economist, Nomura and Amit Mitra, FICCI, speak about the Economic Survey and give their outlook going forward.
Below are excerpts of the interview. Also watch the accompanying videos.
Q: Did you get anything different so far?
Sanyal: Actually the survey is pretty much on expected line. To some extent, everyone expected this one to be on optimistic assumptions. You can see that in the growth numbers, in the tax revenue numbers as well as in case of the overall fiscal deficit number.
Q: Fiscal consolidation plan is on track this financial year. The fact that it is on track is not good enough, when you get too much of one off, isn’t it?
Sanyal: Basically this year was a bonanza year. What will happen in the next year? Our own assessment says though the government is coming out with 4.8% kind of a number, we are penciling a number as high as 5.3% of the GDP. This is on the new revised very high nominal GDP. Had that not been the case, it would be somewhere in the range of around 5.6% on the old GDP basis. And that would mean a significant slippage compared with full 4.8% target.
Q: What are you penciling in by way of a nominal GDP growth, is it around 15-16%? What is the kind of tax revenue that you are expecting? What is the exactly fiscal deficit number that you are looking at?
Sanyal: In terms of the nominal GDP growth, we are taking a number around 14.5% to 15% kind of a growth. So, the nominal GDP for the next fiscal year comes to around Rs 90 trillion or Rs 90 lakh crore.
In terms of the fiscal deficit, the 5.3% number is somewhere around Rs 4.73-4.74 lakh crore. Out of that, we think that net borrowing requirement will be as high as Rs 4,20,000 crore. Next year will be a year where the small saving will not be a significant chuck any more of financing fiscal deficit because already the bank deposit rates are higher than the small savings rate. That at times has rescued the government, but that is not going to be the case.
The joker in the pack for tomorrow is perhaps whether the government manages to carry forward a significant part of the surplus which they are maintaining today, whether they can carry it forward and reduce the borrowing.
Q: You had enough time to read through, key parts of the economic survey. Is there anything to give you a feeling that the fiscal issue is going to be better tackled, more responsibly? I saw some nervous statements like auto fuel prices will also to be capped, if crude oil spurts which means they are not going to be entirely passed on right away?
Verma: Looking at the document, it does say that the medium-term prospects for fiscal consolidation look bright. This financial year, they will be able to better the fiscal deficit number because of an inflation tax because of the higher nominal GDP growth that we have seen.
We will be very surprised if they don’t show the 4.8% number, that the thirteenth finance commission has talked about. The other part is achieving fiscal consolidation in reality versus fiscal consolidation on paper, which are two different things. But on Monday, we do think they will show fiscal consolidation.
Q: Anything key that you picked up from the economics survey which gives you a feeling that reform could be back in the budget agenda?
Mitra: Very importantly, skill development which is a significant area for human capital formation and promotion of innovation, these have been two demands of FICCI for a long time. We haven’t seen it in this survey before but primacy has given to this and that will create the long-term sustainable growth engine of this country. We don’t want demographic dividend replaced by demographic deficit. These two are very significant in that direction.
The second area which is of interest to us is the primacy given to agricultural sector which calls for greater attention and most interestingly for higher investment in farm sector. This investment has significantly fallen in India compared to China asking for greater investment in farm sector and ushering in a second green revolution.
As a critique, yes, fiscal consolidation is okay but not squeezing out the growth potential. The survey speaks about fiscal consolidation. We hope that that does not mean that you go ahead aggressively like in developed economies where markets are complete, where there are no structural changes happening, you go tong and have a fiscal consolidation.
If push down the fiscal deficit quickly, you will definitely get a great hit on growth and that will lead to huge employment issue. Twelve million Indians joined the labour force; nine fresh ones and three who have not got jobs before. Every year we have to create 12 million jobs. Now, fiscal consolidation should not squeeze out the potential for job development in the future.
Q: Did you pick up anything which is seriously anti-inflationary in the budget? From the survey, would you say that the budget may be an anti-inflation budget or a pro-growth budget?
Verma: If the economic survey is talking about a baseline GDP growth forecast of 9%, between growth and inflation, inflation is the bigger focus. Now, one of the things that the survey accepts is that this inflation is because of structural factors, because of the big push that the government has given on the rural side, which means that the solution to inflation that this budget may try to tackle is also through structural measures.
Those measures primarily would include the reforms mentioned, in terms of agricultural development. Other than that there is not much that the budget can do in tackling inflation apart from supply side focus on agriculture and fiscal consolidation.
There are areas on infrastructure, agriculture and on education which the government needs to focus on. The question is quality of expenditure and the amount of spending on subsidies etc which to be rationalized, which is what we are going to look at.
Q: What would be the one or two things that you can expect from the budget given the mood that the survey has created? What would you very much want the budget to do?
Verma: It is very important for us to recognize that last year there was a lot of excitement on reforms out of the survey. Interestingly, in the budget there was very little of it. I am somewhat concerned that does the survey point to the nature of the budget at least in the last year or two years experience?
We found that it is not necessarily a big connect. The survey is a big vision document. I personally think that the headroom is very little and within that headroom you can’t see big reforms where it should be done but I don’t see that in the survey and I don’t expect it in the budget. What we need is a steady state budget which maintains growth, which controls inflation to the degree of supply side possibilities.
On the whole, I would expect better to preserve growth, preserve employment, contain a bit of the inflation and let the economy run its course at this point in time. The survey I think last year was a disappointment vis-à-vis what came later in the budget. This year it is more restrained, more realistic and we are thankful for that.
