Economic Survey: Without Significant Reforms Growth Story Is Bleak

The finance ministry delivered a report on the state of the economy today, a day before Finance Minister P Chidambaram unveils what is expected to be the most austere budget in years.

“Indian economy is likely to grow between 6.1% to 6.7%  in 2013-14 as the downturn is more or less over and the economy is looking up,” said the report which was  prepared by Raghuram Rajan, the former chief economist to the International Monetary Fund (IMF) who became the top adviser in the finance ministry last year.

The Economic Survey sees sluggish industrial growth likely to improve in FY14. “The overall economic environment remains fragile,” the survey said.

According to the report, to rein in current account deficit focus has to be on curbing imports, making oil prices more market determined.

The survey points out that the priority for the government will be to fight high inflation by reducing the fiscal impetus to demand as well as by focusing on incentivizing food production through measures other than price supports. But unlike the previous year, when food inflation was mainly driven by higher protein food prices, this year the pressure has been coming mainly from cereals.

On the Balance of Payments and External Position, the survey highlights that with net exports declining, India’s balance of payments has come under pressure.

The survey calls for a widening of the tax base, and prioritization of expenditure as key ingredients of a credible medium term fiscal consolidation plan.

The survey also said that lower interest rates could provide an additional fillip to investment activity for the industry and services sectors  if some of the regulatory, bureaucratic, and financial impediments to investment are eased.

The survey, however, was optimistic of the government meeting its fiscal deficit target of 5.3 percent  despite “significant” shortfall in revenues in 2012/13.

“These are difficult times, but India has navigated such times before, and with good policies it will come through stronger. 

Slowdown is a wake-up call for increasing the pace of actions and reforms. The way out lies in shifting national spending from consumption to investment, removing the bottlenecks to investment, growth, and job creation, in part through structural reforms, combating inflation both through monetary and supply side measures, reducing the costs for borrowers of raising finances and increasing the opportunities for savers to get strong real investment returns,” wrote Raghuram G. Rajan, Chief Economic Adviser, Ministry of Finance.

Here are the highlights:

• Economic Survey projects 6.1 to 6.7 per cent growth rate for 2013-14.
• WPI inflation may decline to 6.2-6.6% by March
• Lower inflation will create room for rate cuts
• Government’s priority will be to fight high inflation.
• Revival Of Investment In Industry, Infra Key Challenge
• FY13 Tax mop-up significantly lower than budget estimate
• Food Inflation Mainly Driven By Cereal Prices
• Revival of growth expected to be slow
• Medium-term Fiscal Consolidation Plan ‘Credible’
• Need To Stay On Path Of Indicated Fiscal Consolidation
• Need to curb gold imports to cut CAD
• Need to raise diesel and LPG prices to bridge
• Oil subsidy key risk to fiscal deficit, food subsidy bill may push up subsidies
• Economic slowdown a wake-up call for stepping up reforms
• Fund flows to Be influenced by risk perception Of investors
• April-December Data Shows 5.3% Fiscal Gap Aim ‘Achievable’