ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Scrutinising the Economy

Will the combination of fiscal conservatism and lower interest rates revive private investment?

The official scrutiny of the economy on an annual basis, which is what the just released Economic Survey 2012-13 does, has never been authentic. Nevertheless, here is its macroeconomic assessment. The monetary and fiscal stimulus in the wake of the global financial crisis in 2008-09 revived growth in 2009-10 and 2010-11 but it brought on high inflation, and with the Reserve Bank of India (RBI) then raising interest rates, private consumption and private investment (especially outlays by the private corporate sector) were adversely affected in 2011-12 and 2012-13, in turn slowing down the growth rate to 6.2% (first revised estimate) and 5.0% (advance estimate), respectively in these years. Of course, the slowing global economy and a weak monsoon added their bit. The slowdown is broad-based – it has affected the primary, secondary and tertiary sectors, especially manufacturing. The reduction in private investment, besides being due to an anti-inflationary monetary policy and lower demand for the country’s exports, has also been brought on by a whole gamut of “policy bottlenecks”. With inelastic oil imports and huge international purchases of gold to meet domestic demand, the merchandise trade deficit has soared. Services exports and remittances have not filled the gap, and so the current account deficit has reached a huge 4.6% of the gross domestic product (GDP) in the first half of the current financial year with no signs of getting better in the second half.

With the recovery in 2010-11, the government did resort to fiscal consolidation but could not sustain it when growth faltered in 2011-12 – the fiscal deficit widened to 5.7% in that year. But now it is wedded to following the fiscal consolidation road map drawn up by the Kelkar Committee – 4.8% of GDP in 2013-14, which will be corrected further thereafter to reach 3% of GDP in 2016-17. Overall, with the return to fiscal prudence, the RBI can relax its tight monetary stance, and with the removal of “policy bottlenecks” and a mild global recovery, the economy is then expected to grow in the range of 6.1% to 6.7% in 2013-14.

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