Economic Survey: Low and Stable Inflation Regime sought

India Infoline News Service | Mumbai |

The key reasons for poor performance have been contraction in mining activities and deceleration in manufacturing output

GDP at constant prices is expected to grow in the range of 5.4 – 5.9% in 2014-15. There are downside risks to the economy arising from a poor monsoon, the external environment and the poor investment climate.GDP growth slowed to below 5% for two consecutive years, i.e. 2012-13 and 2013-14. The combination of domestic structural constraints, inflationary pressures, particularly food inflation and uncertainty in the global economy, has affected growth and posed challenges for macroeconomic stability. The growth slowdown was broad based, affecting in particular the industrial sector. Aided by favourable monsoons, the agricultural and allied sector grew at 4.7% in 2013-14.

In 2013-14 industry grew at 0.4%. The key reasons for poor performance have been contraction in mining activities and deceleration in manufacturing output. Manufacturing and mining sector GDP declined by 0.7% and 1.4% respectively in 2013-14. The underlying cause of the poor performance of these two sectors has been considerable deceleration in investment, particularly by the private corporate sectorduring 2011-12 and 2012-13. In infrastructure delays in regulatory approvals, problems in land acquisition & rehabilitation, environmental clearances and time overruns in the implementation of projects are matters of concern.

Consumer price inflation declined from 10.21% during FY 2013-14 to about 9.49% in 2013-14. However, food inflation remained stubbornly high during FY 2013-14. Contribution of the commodity sub-groups, ‘fruits and vegetables’, as well as ‘egg, meat and fish’ to the food inflation has been very high.

India’s balance-of-payments position improved in 2013-14 with current account deficit (CAD) at US$32.4bn (1.7% of GDP) as against US$ 88.2bn (4.7% of GDP) in 2012-13. India`s exports at US$312.6bn grew by a positive 4.1% compared to the previous year’s negative growth of 1.8 percent. Import growth decelerated from 0.3% in 2012-13 to a negative (-) 8.3% in 2013-14, owing to fall in non-oil imports by 12.8% primarily due to restrictions on gold imports. POL imports grew marginally by 0.7%. Services grew at 6.8% in 2013-14. The growth rate of the combined category of trade, hotels, and restaurants and transport, storage, and communications decelerated to 3.0% while financing, insurance, real estate, and business services grew robustly at 12.9%. Challenges to the external environment remain as the global environment remains uncertain.

In 2013-14, public finances faced serious challenges. With a shortfall in tax revenues and disinvestment receipts and higher than budgeted subsidies, interest and pension payments, fiscal consolidation was mainly achieved through a reduction in grants for creation of capital assets and capital expenditure. An important factors in the increase in the Centre’s fiscal deficit after 2008-09 has been the sharp increase in subsidies from 1.42% of GDP in 2007-08 to 2.56% of GDP in 2012-13. For 2013-14 (RE) the subsidy bill is 2.26% of GDP.

In the financial sector, leverage by infrastructure firms and deteriorating asset quality of the banking sector emerged as a major concerns. Gross NPAs of banks increased from 2.36% of total credit advanced in March 2011 to 4.40% of total credit advanced in December 2013 with infrastructure, iron and steel, textiles, aviation and mining emerging as the stressed sectors.Reforming the financial sector would involve reducing financial repression through which the state usurps a large share of household financial savings, financial sector regulatory reform and changing the laws and regulations governing the flow of foreign capital into India. The passage of the PFRDA Act, the shift of commodity futures trading into the Ministry of Financeand the first steps towards adoption of improved consumer protection and better regulatory practices proposed by the Financial Sector Legislative Reforms Commission were the milestones in financial sector reform in 2013-14.

The Survey identifies the need to address long run problemsto improve the investment climate. It emphasizes the need for creating a framework for low and stable inflation, setting public finances on a sustainable path by tax and expenditure reform, and creating the legal and institutionalframework for a well-functioning market economy.It calls for legislative and administrative reform for building state capacity to allow businesses to operate in a stable environment and improve the ease of doing business.

The Survey calls for putting public finances on the sustainable path through fiscal correction, a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, greater transparency and improved budgetary management. It argues that improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment.

It calls for a tax regime that is simple, predictable and stable consisting of a single-rate goods and services tax (GST), fewer exemptions in direct taxes, and a transformation of tax administration. Government expenditure reform should involve three elements: shifting subsidy programmes away from price subsidies to income support, a change in the focus of government spending towards provision of public goods, and a focus on outcomes through an improvement in systems of accountability. For example, a focus on health and education outcomes, rather than inputs and expenditure must be a priority.

The Survey recommends that the government needs to move towards a low and stable inflation regime through fiscal consolidation, establishing a monetary policy framework, and creating a competitive national market for food. Initiation of reforms on these fronts should reduce inflation uncertainty and restore a stable business environment. Further lower inflationary expectations should increase domestic household financial saving and make resources available for investment.

The Survey calls for reforming the food market. Restrictions on farmers to buy, sell and store their produce to customers across the country and the world imposed by Indian laws enacted in the 1950s and 60s have not been removed, even though restrictions on industry were removed long ago. Restoring economic freedom of farmers and allowing them to be part of a competitive national market is essential for controlling food inflation. There is a huge opportunity today for Indian agriculture to be transformed through creation of markets and well as state intervention in public goods such as rural infrastructure and training as well as setting up modern regulatory frameworks for warehousing and commodity futures. Rationalisation of subsidies on inputs such as fertilizer and food is essential. Government needs to eventually move towards income support for farmers and poor households, so that market forces are able to respond to changes in consumption and technology.

The Survey also discusses the need for revamping some of the social sector schemes such as MNREGA, NRHM, SSA, etc. It is felt that the outlays for the different schemes have not often translated fully into outcomes owing to the poor delivery mechanism. Leveraging modern technology for efficient delivery of programmes, removing the multiple layers of governance, simplifying procedures, and greater participatory role by the beneficiaries can help in creating a better delivery mechanism. There is a need for greater degree of accessibility to information for the public, especially about the role, rights, and entitlements of the PRIs. Focused attention on raising the awareness levels and capacity-building activities at gram sabha level and devolution of powers in real terms, i.e. funds, function, and functionaries to the PRIs will lead to better and more effective planning, execution, monitoring and social audit of panchayat centric programmes.
 

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