Despite the fact that the Indian economy, is confronting threats of WPI inflation remaining in the double-digit terrain, increasing crude oil price, and widening fiscal deficit; the Economic Survey for 2010-11, revealed the Government in power is still exuding confidence on the growth of the Indian economy, thereby ruling out chances of contraction in economic growth, especially caused by inflationary pressures creeping in.

 

The finance ministry's economic survey said the country's economic growth is expected to be faster in next two years. The Government expects an 8.6% economic growth in the current fiscal year ending in March 2011, and expects the Indian economy to grow at 8.75% - 9.25% in financial year 2011-12 according to the Economic Survey for the year 2010-11. The robust agriculture growth from 0.4% (a year before) to 5.4% has renewed expectations of the 9.0% mark GDP growth rate. Moreover, the growth is broad based with manufacturing and services sector registering smart gain thereby increasing the chances of a turnaround thus taking the economy to the pre-crisis level, and lowering the chances of double-dip recession.

 

However, the India Economic Survey also displays cautiousness due to following economic factors:

 

• Blessings from Rain God
  
  For the Indian economy to trail on the growth path and to achieve the targets set above, it is important that we have good monsoons this year, and moreover not have unseasonal showers as this may negatively impact the harvest. Also, this would become very vital for the Government to control the risk of food inflation and to maintain (and also elevate) the agriculture growth as seen so far.



 
• High crude oil prices
  
  Brent crude oil prices are on a sky rocketing journey with them touching so far U.S. $ 112 per barrel. Also with Libyan and Middle East crisis the chances of them escalating further are higher. It is noteworthy that India imports 80% of its crude oil requirements.
   
• Inflation
  
  WPI Inflation is a “dark cloud” (Average for period April 2010 to December 2010 was 9.40%) and clearly a dominant concern for the Government for quite some time and despite the monetary actions taken by the RBI it hasn’t shown sufficient signs of relief. Moreover, food inflation too remaining in the double-digit terrain (since past 76 weeks from June 5, 2009) is also a cause of concern, where demand pressures are expected to drive the outlook for inflation on account of rise in purchasing power of people. With the rise in prices of crude oil, fuel inflation (12.14% for the week ended February 12, 2011) too poses a threat, and overall elevates the chances of inflation getting more generalised. Moreover now, to worsen the situation inflationary pressures are also seen exacerbated by global prices.
  
  But despite the scenario presented above, the Government is confident that inflation would moderate due to monetary steps taken by the RBI. Their estimates for March end inflation is 7.00%, but expects it to further come down 5.00% by June – July 2011. Also in order to preclude inflationary pressures, the Government intends to cap fuel prices even if crude oil prices spurt up, and furthermore plans to offer cooking fuel at affordable prices.



 
• Fiscal Deficit
  
  Maintaining a balance between growth and fiscal deficit has been a challenge for the Government which is facing various economic challenges. However, the centre’s fiscal is broadly on a consolidation track for the period April 2010 to December 2010. India’s fiscal gap is seen 4.8% (on higher GDP base) and revenue gap at 3.8% of GDP.
  
  Recently the RBI had raised a red flag on the widening current account deficit (caused due to imports being greater than exports), and hence realising the same the Government intends to lower the current account deficit. They have also said that a slowdown in foreign direct investment inflows as well as tepid growth in developed countries could hit the country's exports and strain its balance of payments.
  
  However, they are of the view that the spurt in exports, would help in moderating the same. Also they believe that buoyant tax revenue will be a key driver for fiscal consolidation along with inflow of 3G auction money. The Government is of the view that deepening reforms are a key to sustain fiscal consolidation.



 
• Present liquidity situation
  
  The tight liquidity situation prevailing in the banking system since October 2010 has been a major challenge for the RBI to adopt hawkish policy stance to control spiralling inflation. Moreover, delivery of credit has also been impacted due to the excessive cash crunch. However, to control inflation the Centre realises the need for persistent anti-inflation monetary stance.



 
• Dismaying industrial growth
  
  Decelerating industrial output (IIP at 1.6% in December 2010) is a cause of concern for the Government. The Government has warned that there has been no significant capacity expansion in core industries. "Likewise, slow rate of capacity edition in physical infrastructure sector is constricting industrial sector growth. Capacity edition in core sectors and renewal of bottlenecks would spur industrial sector output in the medium to long term," it said.
  
  However, they see it to be a temporary as the medium-term outlook for industrial growth is seen positive.

 

In the Governments agenda for deepening the banking system and promote inclusive banking, the economic survey expressed that industrial houses, business houses and NBFCs can obtain full banking licenses, but with a provision for avoiding conflict of interest issues; thereby not compromising on the robustness of the banking system. The survey also suggested variable capital requirement for banks based on the operation. “Minimum capital requirement for banks should be graded. Having two types of licenses namely one for providing basic banking to fulfil the obligation of financial inclusion and the other for full banking encompassing all activities of a commercial bank could be considered,” it said.

 

In order to give a much needed impetus to the infrastructure space, the survey said, the infrastructure sector needs a whopping 41 lakh crore investment in the 12th Plan period. And out of the proposed investment, it is projected that at least 50% would have to be come from private sector against about 36% anticipated during the 11th Plan.

 

The Survey also pointed out a slew of non-financing problems (such as the ones mentioned below) to avoid time and cost overruns.

 

• Tendering unviable projects
• Bad quality of engineering and planning at the Detailed Project Report stage
• Lack of standardised and sub-optimal contracts
• Land acquisition delays
• Slow approval processes and weak performance of management in nodal agencies and PSUs among others
• Inadequate availability of skilled and semi-skilled manpower

 

The survey also hinted at the Environmental Ministry for speedy clearances by saying, “There is urgent need to streamline land acquisition and environment clearance for infrastructure projects. A national forest land bank, with clear paperwork and titles, could significantly reduce the approval time for forest clearances.”

 

In order to address concerns of consumers and farmers, the survey favoured opening of foreign direct investments in multi-brand retail segment. Even as the debate over FDI continues, the survey said during 2011-12, projects worth 24,143 crore are expected to be completed adding a capacity of 168.6 lakh square feet. At present India allows 100% FDI in cash and carry wholesale trading, while it is prohibited in multi-brand retail. Up to 51% FDI has been allowed in single-brand retail since 2006. The survey pointed out that FDI in retail may also help bring in technical know-how to set up efficient supply chains which could act as models of development.

 

Interestingly this would also lead to global giants such as Wal Mart , Carrefour and Tesco entering into India – in fact they have been pitching opening FDI in multi-brand retail so that they can tap the immense potential this country offers. Globally, FDI in retail is permitted in countries such as Brazil, Argentina, Singapore, Indonesia, China and Thailand without any limit on equity participation, while Malaysian has equity caps.

 

In our opinion the Economic Survey 2010-11 exudes cautious optimism taking into account the various economic and political challenges which the country is facing at present. The agenda for deepening the banking system by providing more banking licenses without a compromise on the robustness of the banking system will be taken care of by the clause of non-conflicting interest. Also, in order to attract FDI flows in our country appealing infrastructure facilities would be needed, and the survey caters to that too. Increase in multi-brand FDI, which is intended to offer better products to consumers, will also solve the problems of several farmers’ as they too would benefit once included in the supply chain management.

 

Overall, in our opinion Economic Survey 2010-11 reveals the pragmatism of the Government in power.

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