Economic Survey 2005-2006

Economic Survey > General Review > Review of Developments > Issues and priorities


Review of Developments


Issues and priorities

1.49   The economy appears to have decidedly ‘taken off’ and moved from a phase of moderate growth to a new phase of high growth. Achieving the necessary escape velocity to move from tepid growth into a sustained high-growth trajectory requires careful consideration of two issues and three priorities. The two issues are: the sustainability of high growth with moderate inflation; and the inclusive nature of such high growth. The three priorities are: rising to the challenge of maintaining and managing high growth; bolstering the twin pillars of growth, namely fiscal prudence and high investment; and improving the effectiveness of Government intervention in critical areas such as education, health and support for the needy.

1.50   On the first issue of sustainability of high growth without running into high inflation, various indicators suggest that the current growth phase is sustainable.

1.51   First, higher growth together with the demographic dividend (from a growing proportion of the population in the working age group) is likely to lead to a rise in the savings rate to finance more and more investment. There is already evidence of this virtuous and mutually reinforcing growth-savings-growth cycle in the recently released savings and investment figures for 2005-06.

1.52   Second, efficiency improvements in the economy since 1999-2000 reinforce the confidence in the high-growth phase. The ratio of net capital stock to gross value added in the economy, according to the National Accounts Statistics, went down from 2.78 to 2.60 between 1999-2000 and 2004-05. While the ratio increased to 2.66 in 2004-05, the rise was primarily due to a corresponding rise in the ratio of net capital stock to value added in agriculture. There is an encouraging and almost steady decline in the ratio of net capital stock to value added in industry.

1.53   Third, it is not only the sustained increase in savings and investment, availability of labour at reasonable wage rates, and efficiency increases, but also the opening up of new avenues in services, beyond the already well-known IT and ITES, that bolster confidence in the new high-growth phase. For example, in a remarkable transition, the tourism industry has displayed buoyant double-digit annual growth rates in each of the last three years. Tourism contributes over 10 per cent of global GDP and its potential in India, given the country’s enormous natural, human and technological resources, is well-recognised. The sector, through its backward and forward linkages, can stimulate many others, particularly hotels, restaurants, and handicrafts. While a recent study by National Council of Applied Economic Research estimates tourism’s contribution towards GDP (both direct and indirect) in India at only 5.90 per cent, India has already emerged as among the fastest growing tourist destinations in the world. Given its bio-diversity, variety of unique destinations and natural locales, India can transform itself into a 365 days a year destination with increased emphasis on new products like medical tourism, rural tourism, and wellness tourism, and marketing India as a destination for Meetings/Incentives/Conventions and Exhibitions (MICE).

1.54   Fourth, concerns have been expressed about whether the country is growing beyond its growth potential thereby straining its labour force and capital stock, and hence engendering inflationary instabilities. In India, with unemployment, both open and disguised, concerns about over-heating are connected more with capacity utilization and skill shortages. Rapid growth in capacity addition through investments can avert the problem of capacity constraints. Another indicator of over-heating namely, merchandise import growth, also appears to be within reasonable limits.

1.55   Fifth, infrastructure, that constrained for years the growth performance of the economy, appears to be improving. There are signs of tangible progress in areas such as power, roads, ports, and airports. Following the road shows abroad for attracting global financial capital, the setting up of a US $ 5 billion fund to finance Indian infrastructure on February 15, 2007 by four major financial institutions (Citigroup, Balckstone, Infrastructure Development and Finance Corporation and India Infrastructure Finance Company), is an encouraging development.

1.56   The second issue is about the nature of this high growth in terms of inclusiveness. Putting more people in productive and sustainable jobs lies at the heart of inclusive growth. But such success, primarily, will depend on the success in achieving and maintaining high growth. There cannot be inclusive growth without growth itself. The experience of East Asia clearly reveals how high growth can eliminate poverty and transform a developing country into a developed one.

1.57   The results of the latest NSSO’s 61st Round clearly show how the annual growth rate of employment has not only accelerated from 1.6 per cent during 1993-2000 to 2.5 per cent during 1999-2005, but crossed the 2.1 per cent rate recorded during 1983-1994. Unemployment has gone up not because of high growth, but because growth was not high enough. It is important to avoid the misconception that inclusive growth, by necessity, will have to be low growth.

1.58   The inclusive nature of the growth itself will be conditioned by the progress that is made in the areas of education, health and physical infrastructure. A young girl, when denied the benefit of education, often grows up to be excluded from participating in the growth process. Similarly, villagers are literally left behind in the growth process, when their village does not have the benefit of connectivity, be it roads, electricity, or communication.

1.59   Among the priorities, first is rising to the challenge of maintaining and managing high growth. Phase-transition invariably throws up new problems and challenges. It is necessary to make the required adjustments in mindsets, economic behaviour, and policy making. There is no scope for uneasiness or nervousness about high growth. In the latter half of the 20th century, the East Asian ‘miracle’ has been followed by even more rapid growth in China in more recent times. Fostering the momentum of growth in India continues to be a top priority.

1.60   Inflation in recent times has been triggered by the rapid rise in the prices of primary articles all over the world. In India, prices of essential food items have come under pressure. Why? Because of shortcomings on the supply side and poor and inefficient intermediation between the producer and the consumer. For managing inflation, supply side policies are critical, particularly in agriculture. Such policies will not only help in fighting inflation but also reinforce growth. What is important to note is that international experience shows that troublesome inflation need not be the price to be paid for favourable high growth. The fight against inflation has to be calibrated so that policies contain inflation without compromising growth. With appropriate policies, it should be possible to maintain and manage high growth without inflation.

1.61   Finding immediate answers to inflation induced by commodity-specific supply shortfalls is difficult. A durable solution to such inflation problem has to be found in increasing yields and domestic output for products such as pulses, edible oils, rice and wheat. There is tremendous scope for increasing yield levels through technology diffusion. Simultaneously, there is a need to recognize that there could be a potential contradiction between a ‘remunerative’ price for the farmer and a ‘fair’ price for the consumer in the short run. The same contradiction arises in the case of pricing of petroleum products. The reconcilitation of such a contradiction ought not to be in terms of an expensive compromise of fiscal rectitude.

1.62   The second priority is bolstering the twin pillars of high growth, namely, fiscal prudence and high investment. The growth resurgence observed in the economy is not an accident but the result of sound policies and several reform measures. The experience of the past few years has clearly demonstrated the benefits of fiscal prudence along the FRBMA lines. Reforms, along with the high growth, have brought about a surge in investment in the past few years. While accelerating growth and the demographic dividend will continue to boost savings and investment, simultaneously, policies have to be designed in a flexible manner to enhance investments in the economy to lay a robust foundation for growth. There is need for investment, both public and private, domestic and foreign. But it is important to resist the temptation of fiscal profligacy in the anxiety to enhance public investment. Adhering to fiscal rectitude has never been easy in any country at any time. Like going up a hill, the adjustments become harder as the destination gets closer. India’s investment grade sovereign rating reflects not only the perceived strong economic prospects, strength of its balance of payments and the capital markets, but also its improving fiscal position.

1.63   The third priority is improving the effectiveness of Government intervention in critical areas especially in the social sector. The goal of inclusive growth can be achieved only through effective government intervention in the areas of education, health and support to the needy. Value for every tax rupee spent has to be ensured by emphasizing the outcomes and avoiding any wastage or leakages in the delivery mechanism of public goods and services. Appropriate design of programmes and placing effective monitors over the programmes are critical in this regard.

1.64   A comparison of two alternative schemes to generate self-employment opportunities among the rural poor, namely the Prime Minister’s Rozgar Yojana (PMRY) and SHG-Bank linkage, illustrates the importance of programme design. Recovery under PMRY has been around 35 per cent in the three years ending in 2005. The programme of linking self-help groups (SHG) of the rural poor with the banking system (SHG-Bank linkage), to strengthen the credit delivery in rural areas was launched in 1992 through NABARD as a pilot project and mainstreamed in 1996. The focus of SHG-Bank linkage is largely on small and marginal farmers, agricultural and non-agricultural labourers, artisans and craftsmen. The uniqueness of the programme is zero subsidy. It has been reported that the recovery rates under the SHG-Bank linkage programme are close to 90 per cent. The contrast leads to obvious conclusions. A loan programme with poor recovery cannot be sustained over a long period.

1.65   To make significant progress in social infrastructure, mere expansion of the coverage or the number of programmes is not enough. With the launch of the National Rural Employment Guarantee Scheme (NREGS), which provides the country with a potential social safety net, there is need to revisit the multiplicity of poverty alleviation schemes. The effective implementation of NREGS is critical for improving inclusiveness. It should reduce poverty and improve rural infrastructure; and any failure to do so will be an indicator of its ineffective implementation.

1.66   Improvement in the quality of social services is an urgent necessity for all social sector programmes. While a large number of school-age children still remain to be enrolled in primary schools, an independent survey has revealed that many students learn by Class 8 what they should have learnt by Class 2. However, there are success stories also in different parts of the country that wait to be replicated.

1.67   Subsidies are an important fiscal policy tool for correcting market failures, particularly under-consumption of basic essentials such as food. By the end of the Eleventh Five Year Plan, with the need to feed an estimated additional 150 million people, the system will confront new challenges. Such challenges will include changing dietary patterns with increasing income and changes in lifestyle. The NCMP mandate of targeting all subsidies sharply at the poor and the truly needy like small and marginal farmers, farm labour and urban poor remains to be implemented. The inconclusive debate on subsidies needs to be resumed, and tangible progress made for cost-effective income transfers to the truly needy. Alternative mechanisms for the delivery of subsidy are available. They must be tried atleast on a pilot basis, and the experience should lead to the invention of alternative and more effective mechanisms.

1.68   A sense of optimism characterizes the current economic conjuncture. Fostering the momentum of growth continues to be a top priority. Sustainability of such growth will depend on carefully calibrating policies to tame inflation without dampening growth; formulating appropriate supply-side measures, particularly in agriculture; better design and more effective delivery of social services, such as education, health and poverty-alleviation, to make growth more inclusive; and putting fresh impetus behind infrastructure. Downside risks from a rapid unravelling of global macroeconomic imbalances, volatile oil prices, and delays in the completion of the Doha Round remain, but, for the present, they appear to be limited.




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