Economic Survey 2012-13: Expecting Turnaround: Civil Services Mentor Magazine May 2013

Economic Survey 2012-13: Expecting Turnaround

Economic Survey is presented every year, just before the
Union Budget. It is a flagship annual document of the Ministry of Finance,
Government of India. Economic Survey reviews the developments in the Indian
economy over the previous 12 months. It summarizes the performance on major
development programmes, and highlights the policy initiatives of the government
and the prospects of the economy in the short to medium term. The economic
survey 2012-13 was prepared by a team of economists led by Chief Economic
Advisor Raghuram Rajan, and pitches for speeding up economic reforms to activate
a sluggish economy. It serves as an indicator of what is likely to be contained
in the General Budget proposals.

According to Economic Survey 2012-13 Indian economy likely to
grow between 6.1% to 6.7%. 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. Following the slowdown induced by the global
financial crisis in 2008-09, the Indian economy responded strongly to fiscal and
monetary stimulus and achieved a growth rate of 8.6 per cent and 9.3 per cent
respectively in 2009-10 and 2010-11, but due to a combination of both external
and domestic factors, the economy decelerated growing at 6.2% and an estimated
5% in 2011-12 and 2012- 13 respectively. The Economic Survey 2012-13, presented
by the Finance Minister Shri P. Chidambaram in the Lok Sabha predicts that the
global economy is also likely to recover in 2013 and various government measures
will help in improving the Indian economy’s outlook for 2013-14. While India’s
recent slowdown is partly rooted in external causes, domestic causes are also
important. The slowdown in the rate of growth of services in 2011-12 at 8.2%,
and particularly in 2012-13 to 6.6 percent from the double-digit growth of the
previous six years, contributed significantly to slowdown in the overall growth
of the economy, while some slowdown could also be attributed to the lower growth
in agriculture and industrial activities. But despite the slowdown, the services
sector has shown more resilience to worsening external conditions than
agriculture and industry. For improved agricultural growth, the survey
underlines the need for stable and consistent policies where markets play an
appropriate role, private investment in infrastructure is stepped up, food
price, food stock management and food distribution improves, and a predictable
trade policy is adopted for agriculture. FDI in retail allowed by the government
can pave the way for investment in new technology and marketing of agricultural
produce in India. Fast agricultural growth remains vital for jobs, incomes and
food security.

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. Moreover, in the current fiscal, foreign exchange
reserves have fluctuated between US$ 286 billion and US$ 295.6 billion, while
the rupee remained volatile in the range of Rs 53.02 to Rs 54.78 per US dollar
during October 2012 to January 2013.

The survey had a special chapter focusing on jobs. The future
holds promise for India provided we can seize the “demographic dividend” as
nearly half the additions to the Indian labour force over the period 2011-30
will be in the age group 30-49. India is creating jobs in industry but mainly in
low productivity construction and not enough formal jobs in manufacturing, which
typically are higher productivity. The high productivity service sector is also
not creating enough jobs. As the number of people looking for jobs rises, both
because of the population dividend and because share of agriculture shrinks,
these vulnerabilities will become important. Because good jobs are both the
pathway to growth as well as the best form of inclusion, India has to think of
ways of enabling their creation.

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. This along with demand compression and augmented
agricultural production should lead to lower inflation, giving the RBI the
requisite flexibility to reduce policy rates. Lower interest rates could provide
an additional fillip to investment activity for the industry and services
sectors, especially if some of the regulatory, bureaucratic, and financial
impediments to investment are eased. On financial sector reform, it takes note
of the high level of gross NPAs (non-performing assets) of the banking sector
which increased from 2.36 percent of the total credit advanced in March 2011 to
3.57 percent of total credit advanced in September 2012. The survey suggests
that revival of growth will help contain NPAs, but more attention will have to
be paid to whether projects are adequately capitalized up front given the risks.
Expenditure on social services also increased considerably in the 12th Plan,
with the education sector accounting for the largest share, followed by health.
In the 11th Plan period nearly 7 lakh crore rupees has been spent on the 15
major flagshipprogrammes. A number of legislative steps have also been taken to
secure the rights of people, like the RTI, MGNREGA, the Forest Rights Act, AND
THE Right to Education. However, the survey notes that there are pressing
governance issues like programme leakages and funds not reaching the targeted
beneficiaries that need to be addressed. Direct Benefit Transfer (DBT) with the
help of the Unique Identification Number (Aadhaar) can help plug some of these
leakages. With the 12thPlan’s focus on ‘environmental sustainability’, India is
on the right track. However, the challenge for India is to make the key drivers
and enablers of growth-be it infrastructure, the transportation sector, housing,
or sustainable agriculture-grow sustainably.

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