From a perusal of the Economic Survey presented on Tuesday and the budget presented a day after that by Union finance minister Arun Jaitley it is clear that three crucial issues confront the Indian economy at this juncture. By a long margin the most pressing is the issue of inflation. According to the Economic Survey, inflation in food grains in terms of the wholesale price index was 12.2% in the past five years ending 2013-14. This is too high for comfort. The credibility of the budget proposals would have to rest on whether the government can bring about a trimming of the rate of price rise in as short a time period as is feasible. This is particularly relevant in a context where about 30% of the population is below the poverty line, according to the latest estimates.
The second critical issue concerns the growth rate of the economy. At a sub-5% rate it is clear that the economy is performing well below its potential. A number of factors seem to have contributed to this state of affairs. A large number of projects have failed to take off because of lack of administrative or legal clearances. But there have been other reasons as well. They have to do with infrastructure constraints and a high interest rate regime, which has been regarded as necessary to keep inflation under control.
Some other structural factors too have contributed to the economywide slow growth. From a high of 36.8% in 2007-08, the gross savings rate had fallen by 6.7% of GDP in 2012-13. The bulk of the drop in savings was in the public sector but there was a significant drop in corporate savings as well. Along with this, there has been a drop in the investment rate of the private corporate sector. The end result has been a poor performance of the industrial sector, which has in fact experienced negative growth in the past year. According to the current projections of the government, the growth rate is expected to go up to 5.4-5.9% in the coming year, and further increase to 7-8% in three to four years. The test of the government would be on achieving these targets.
The third issue concerns the imperative of fiscal consolidation. Along with the slow overall growth rate, tax revenue collection has been sluggish, while revenue expenditure, particularly on untargeted subsidies, have continued unabated, contributing to a critical fiscal situation. There is great urgency to move ahead on the goods and services tax, which has been announced to be implemented by this year end. The increase in the income tax exemption limit to `2.5 lakh, as well as the increase in the allowable investment under Section 80C from `1 lakh to `1.5 lakh, will certainly bring cheer to all tax payers. It is also certainly right to think of retrospective tax only with extreme caution, for this would invariably discourage potential investors.
The overall tax to GDP ratio in the country is still in the range of around 17%, and this needs to be urgently raised to a 20% threshold range to finance the massive infrastructural projects in energy, transportation and other myriad sectors that are crying out for immediate attention. More than anything else the need of the hour is simplification and a much stricter implementation and enforcement of both direct and indirect taxes.
Under the circumstances the declaration by Jaitley to limit the fiscal deficit figure to the target of 4.1% of GDP, to be reduced to 3.6 and 3% in subsequent years, is welcome. He has rightly stressed that fiscal prudence is of paramount importance, and that the government must not leave behind debt for future generations.
In recent weeks there has been a marked dissonance between the poor performance of industry in particular and the record heights that the stock markets have scaled. What is evident is that there is a kind of irrational exuberance that has been generated in the corporate sector and business circles generally, which are hopeful of some major sops. While there is no denying that the industrial growth rate has to be stepped up, particularly to generate jobs, it would be unfortunate if the focus were to be turned away from employment and poverty alleviation programmes that are targeted to the bottom rungs of the population in the rural agricultural sector and in the tribal belts.
Despite some major allocations in the health and education sectors, one must note that there is an unmistakable trend towards a withdrawal of the State in these two vital sectors. Public expenditure on health is a pitiable 1.3% of GDP in India, which needs to be urgently stepped up.
The Union finance minister has announced a large swathe of policies for SC/ST schemes, watershed programmes, MGNREGA, rural drinking water, urban renewal, sanitation and so on. One cannot but stress that the worth of any of these initiatives is only as good as the quality of its implementation. Regrettably, the government’s record in this sphere has not been particularly good. One would now have to see how far the new political-bureaucratic set-up is able to deliver.
Pulin B Nayak is a professor of economics at the Delhi School of Economics
The views expressed by the author are personal