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BW Businessworld

Growth Engine Sputters

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There are two key issues before the finance minister at this stage. First is to take the economy to a higher growth trajectory, and the second is to maintain macro-economic stability. The current budget proposals viewed from the above perspective clearly indicate that given the political compulsions, ability of the government to take a breakthrough step is somewhat limited. A fiscal deficit of 5.9 per cent of GDP is indeed unsustainable, nevertheless it provides a candid picture of the current economic reality.  The ability of the government to bring it down to less than 5.1 per cent would normally call for harsher steps which the compulsions of coalition politics may not allow.

The economic survey as well as the first part of the finance minister's speech clearly suggest that India's economic slowdown is on account of weak industrial growth, coupled with a decline in fixed capital investment. The rising cost of money and higher price of raw materials have compounded the problem of the corporate sector by reducing their profit margins. In fact, overall fixed investment in the country came down from a level of 32.9 per cent of GDP in 2007-08 to 29.2 per cent of GDP in 2011-12. If one has to accommodate five per cent-plus fiscal deficit one will also have to accept high levels of government borrowings, a crowded private investment kitty and high cost of money. The market is sensitive to this development and G-Sec yields have already started going up. Our econometric estimation indicates that one per cent increase in the fiscal deficit brings down private investment by 0.65 per cent.  This is indeed a cause for concern.

In order to expand the kitty available for financing the requirements of both government sector and the private sector, one has to increase  domestic financial savings, which have now come down to about 10 per cent of GDP and foreign savings inflows which are around 3 per cent of GDP. Hence, the total savings amount to just 13 per cent of the GDP  whereas the total requirement hovers around 13.5 per cent to 15 per cent. This shortfall creates a resource stress which, in turn, pushes the interest rates upward. I expected that the budget would introduce structural measures to increase domestic savings across sectors. However, this has not happened. Consequently, the private sector will continue to be confronted with higher cost of money, suppressed investment and less than potential growth.

Before the budget the corporate sector had strong expectations that one would see a major thrust on infrastructure and national manufacturing policy as  both are essential to rev up growth. Some of the steps taken, particularly for power sector, are indeed far sighted and welcome. However, in the 12th Plan, 50 per cent of total infrastructure investment of Rs 50 lakh crore must come from private sector, but there is no clear roadmap indicating how the private sector will have access to funds of such large magnitude. Raising domestic debt or foreign debt for projects which cannot be completed on time due to regulatory and land acquisition-related hurdles can be potentially dangerous.

National manufacturing policy had raised high hopes once, but there are no concrete steps in the current budget specially related to the benefits for manufacturing zones or removal of minimum alternate tax for SEZs. For immediate investment growth, accelerated depreciation could have been introduced in this budget but it has been ignored. Luckily, the budget has taken a long term view of skill formation, R&D and power sector.

(This story was published in Businessworld Issue Dated 26-03-2012)