The Economic Survey 2006-07 presented by the Finance Minister P Chidambaram in the Parliament on Tuesday says that growth of 9.0 per cent and 9.2 per cent in 2005-06 and 2006-07, respectively, by most accounts, surpassed expectations.
Vigorous growth with strong macroeconomic fundamentals has characterised developments in the Indian economy in 2006-07 so far, yet there are some issues and priorities before the nation, the survey said.
The economy appears to have decidedly 'taken off' and moved from a phase of moderate growth to a new phase of high growth.
Achieving the necessary escape velocity to move from tepid growth into a sustained high-growth trajectory requires careful consideration of two issues and three priorities.
The two issues are:
- The sustainability of high growth with moderate inflation; and
- The inclusive nature of such high growth.
The three priorities are:
- Rising to the challenge of maintaining and managing high growth;
- Bolstering the twin pillars of growth, namely fiscal prudence and high investment; and
- Improving the effectiveness of Government intervention in critical areas such as education, health and support for the needy.
On the first issue of sustainability of high growth without running into high inflation, various indicators suggest that the current growth phase is sustainable.
First, higher growth together with the demographic dividend (from a growing proportion of the population in the working age group) is likely to lead to a rise in the savings rate to finance more and more investment. There is already evidence of this virtuous and mutually reinforcing growth-savings-growth cycle in the recently released savings and investment figures for 2005-06.
Second, efficiency improvements in the economy since 1999-2000 reinforce the confidence in the high-growth phase. The ratio of net capital stock to gross value added in the economy, according to the National Accounts Statistics, went down from 2.78 to 2.60 between 1999-2000 and 2004-05. While the ratio increased to 2.66 in 2004-05, the rise was primarily due to a corresponding rise in the ratio of net capital stock to value added in agriculture. There is an encouraging and almost steady decline in the ratio of net capital stock to value added in industry.
Third, it is not only the sustained increase in savings and investment, availability of labour at reasonable wage rates, and efficiency increases, but also the opening up of new avenues in services, beyond the already well-known IT and ITES, that bolster confidence in the new high-growth phase.
Fourth, concerns have been expressed about whether the country is growing beyond its growth potential thereby straining its labour force and capital stock, and hence engendering inflationary instabilities. In India, with unemployment, both open and disguised, concerns about over-heating are connected more with capacity utilization and skill shortages. Rapid growth in capacity addition through investments can avert the problem of capacity constraints. Another indicator of over-heating namely, merchandise import growth, also appears to be within reasonable limits.
Fifth, infrastructure, that constrained for years the growth performance of the economy, appears to be improving. There are signs of tangible progress in areas such as power, roads, ports, and airports.
The second issue is about the nature of this high growth in terms of inclusiveness. Putting more people in productive and sustainable jobs lies at the heart of inclusive growth. But such success, primarily, will depend on the success in achieving and maintaining high growth. There cannot be inclusive growth without growth itself. The experience of East Asia clearly reveals how high growth can eliminate poverty and transform a developing country into a developed one.
Among the priorities, first is rising to the challenge of maintaining and managing high growth. Phase-transition invariably throws up new problems and challenges. It is necessary to make the required adjustments in mindsets, economic behaviour, and policy making. There is no scope for uneasiness or nervousness about high growth. In the latter half of the 20th century, the East Asian 'miracle' has been followed by even more rapid growth in China in more recent times. Fostering the momentum of growth in India continues to be a top priority.
Inflation in recent times has been triggered by the rapid rise in the prices of primary articles all over the world. In India, prices of essential food items have come under pressure. Why? Because of shortcomings on the supply side and poor and inefficient intermediation between the producer and the consumer.
For managing inflation, supply side policies are critical, particularly in agriculture. Such policies will not only help in fighting inflation but also reinforce growth. What is important to note is that international experience shows that troublesome inflation need not be the price to be paid for favourable high growth.
The fight against inflation has to be calibrated so that policies contain inflation without compromising growth. With appropriate policies, it should be possible to maintain and manage high growth without inflation.
Finding immediate answers to inflation induced by commodity-specific supply shortfalls is difficult. A durable solution to such inflation problem has to be found in increasing yields and domestic output for products such as pulses, edible oils, rice and wheat. There is tremendous scope for increasing yield levels through technology diffusion.
Simultaneously, there is a need to recognize that there could be a potential contradiction between a 'remunerative' price for the farmer and a 'fair' price for the consumer in the short run. The same contradiction arises in the case of pricing of petroleum products. The reconcilitation of such a contradiction ought not to be in terms of an expensive compromise of fiscal rectitude.
The second priority is bolstering the twin pillars of high growth, namely, fiscal prudence and high investment. The growth resurgence observed in the economy is not an accident but the result of sound policies and several reform measures.
The third priority is improving the effectiveness of Government intervention in critical areas especially in the social sector. The goal of inclusive growth can be achieved only through effective government intervention in the areas of education, health and support to the needy.
