Pre-Budget Economic Survey

The pre-budget Economic Survey says GDP growth is going to pick up from this year’s 5% to range between 6.1% and 6.7% in 2013-14. Wholesale price inflation will fall to 6.2-6.6% by March despite hike in diesel prices and higher rail fares and freight rates, and the medium-term price trend is distinctly downward, especially for nonfood manufactures. Even better, the World Bank predicts that global commodity prices (including oil but excluding metals) will keep falling in 2013 and 2014. This should facilitate interest rate cuts by RBI.

The Survey says fiscal deficit is being brought under control, combating both inflation and current account deficit. Recent reforms and fast-track clearances will help revive infrastructure and industrial production. And agricultural output, hit by a bad monsoon last year, should revive with normal rainfall.
The Survey emphasises that India must tackle its twin deficits, fiscal deficit and current account deficit. Dependence on global finance has gone up because of the high current account deficit. But this carries risks of insufficient or even reverse flows. Sputtering growth in rich countries is worsening the risks, and the hung election in Italy raises fresh misgivings about the future of the Euro zone.
Oil prices remain a risk. Export growth will remain muted if the global economy remains muted. To reduce dependence on foreign inflows, India must improve economic management, especially fiscal management.
Fiscal consolidation is the need of the hour. It is the key to restoring investor confidence, improving credit available for the private sector, curbing inflation, improving the savings rate, and improving the trade balance by curbing import demand.

The Survey notes that efforts are finally in place to cap the subsidy on fuel, disinvestment of government stakes in public sector undertakings is proceeding, and targeting of welfare measures will improve with the proposed Direct Benefit Transfers (using Aadhar, biometric identification and universal bank accounts through banking correspondents).
After reaching a peak of 11.9% of GDP in 2007-08, the tax to GDP ratio has fallen and needs to return to the old level. The Survey says this will be better achieved by broadening the tax base than by increasing tax rates.  The Survey is clear that record imports of gold should not be blamed for current account deficit. In our inflationary environment, gold has provided an average annual return of 27% since 2007, against just 7.3% for the Nifty and 8.2% in savings deposits. So, the rising demand for gold is a rational response to economic incentives, not a sign of black money run amuck.
Indeed, rising gold imports are symptoms of more fundamental ailments that have caused high inflation and sluggish growth. The solution lies in curbing inflation and reviving GDP growth, not in quick fixes to try and lower gold imports.
Structural reforms are needed to ensure higher productivity, better returns for savers, and higher investment. This means shrinking wasteful and distortionary subsidies; speeding up clearances of every sort; increasing the access of people to finance and decent infrastructure; improving the quality of regulation, including the reduction of corruption; and reducing barriers to the entry of new business, not just foreign investment but also small and medium enterprises.

In a special chapter on “Seizing the Demographic Dividend”, the Survey highlights both India’s coming advantage in having a high share of the population of working age, as well as the steps needed to maximum this advantage.
The proportion of people studying has risen considerably, and this is welcome although it has delayed an increase in labour-force participation. This phenomenon has also occurred in other countries passing through a demographic transition. Policies must help accelerate the shift of workers from agriculture to industry and services, where productivity is inherently higher. Industry is creating new jobs, but most of these are in the unorganised sector, offering low incomes and little social protection. Service jobs have relatively high productivity, but these are not being created fast enough. The big shift seen so far is out of agriculture into construction.
To harness the demographic dividend, India needs to lower barriers to investment and growth.
Too many firms stay small because they lack access to finance or infrastructure, or because they want to steer clear of the regulatory burden of entering the formal sector. Rigid labour laws discourage employment (although some economists have argued that these are less formidable in practice than they appear at first sight).
Skill development is key to harnessing demographic dividend, implying better education. It also requires rapid growth of formal apprenticeship schemes. This will mean converting industrial enterprises into training grounds — the best training is done on the job.
India has already recorded substantial gains in total factor productivity, more than Korea or Indonesia at a similar stage of development.