Thursday, 5 February 2015

Daily News Mail - News of 05/02/2015

Review of economic slowdown

A very good article by Dr. C. Rangarajan, former Chairman of the Economic Advisory Council to the Prime Minister. (Source - The Hindu)

The Indian economy growth rate at 2013-14  has been revised from earlier estimate of 4.7% to the new estimate of 6.6%. This new estimate is not suspicious(vindicative) as much of the pessimism seen during the year.
Ministry of Statistics & Programme Implementation (MOSPI), India's statistical body, has released a new series of national accounts, revising the base year from 2004-05 to 2011-12 (April to March period). This has significantly revised upward, the real GDP growth rates. The revisions are also expected to improve the data quality, due to availability of more data. The base year of national accounts was last revised in January 2010. This change is in keeping with the recommendation of the National Statistical Commission of changing the base year of National Accounts Statistics every five years.
While the investment rate did show a sharp decline during the last three years, a greater part of it was due to the decline in the investment rate of households rather than the corporate sector. Thus, the slowdown in the economy was not as severe or extended as was feared earlier. Nevertheless, it is useful to review the developments so that the errors can be corrected and the country can move on to the high growth path.

Slowdown and its causes

  • When there was global financial crisis in 2008-09, the Indian economy registered a growth rate of 6.7% after growth rate of more than 9% for three consecutive years. Being a severe drought condition in 2009-10, the economy registered a growth of 8.6%, then 8.9% in 2010-11. Then the economy began declining with growth rate came down to 4.5% according to old estimate and 4.9% as per the new estimate. In 2013-14 growth rate was 4.7% according to old estimate and 6.6% as per the new estimate.
  • The slowdown has been attributed to supply side bottlenecks, price shocks and weak investment demand. Agricultural output declined in 2009-10. Coal output fell and the output of iron ore also fell, partly because of certain court decisions. International commodity prices, particularly that of oil remained high, despite the poor performance of the advanced economies. The investment sentiment was affected by various factors including non-economic. Perhaps one policy action which affected investors was the decision to apply certain tax laws with retrospective effect. The stability of the tax system became a cause of concern. Moreover, many good decisions of the government were either delayed or postponed. The energies of the government were also absorbed in dealing with issues such as graft. All these created an element of uncertainty in the minds of investors.
  • There was also decline in corporate investment rate. According to a study done by the Reserve Bank of India, the total project cost of new investments in 2011-12, 2012-13 and 2013-14 were Rs.2,120 billion, Rs.1,963 billion and Rs.1,340 billion respectively. Contrast this with new investments of Rs.5,560 billion in 2009-10.
short and medium-term solutions
  • The fact that stands out is that the decline in the output growth was much stronger than the decline in investment. The investment rate in 2007-08 was 38.1 per cent of GDP. By 2013-14, it had come down to 32.3 per cent, even according to revised estimates. With the incremental capital output ratio of 4, which has been normal for almost a decade even, this lower investment rate should have given us a growth rate of 8 per cent. But the actual growth rate turned out to be less. The rise in the incremental capital output ratio could have been either because projects were not completed in time or because complementary investments were not forthcoming. In some cases, this could also be due to non-availability of critical inputs such as coal and power. This then points to the fact that, in the short run, speedy completion of projects by itself can raise the growth rate. In the medium term, we however need to ensure that the investment rate goes up and the productivity of capital remains high. Only then can the country get back to the high growth rate path.
  • Incremental capital output ratioA metric that assesses the marginal amount of investment capital necessary for an entity to generate the next unit of production. Overall, a higher ICOR value is not preferred because it indicates that the entity's production is inefficient. The measure is used predominantly in determining a country's level of production efficiency.
  • Hence efforts should be made to remove administrative bottlenecks and speedy completion of projects at the micro and at the policy levels. Issue related to environment and land acquisition also needs attention. However, concerns relating to land acquisition and environment are genuine and consensus should be made for them. 
  • Sustained high growth requires macroeconomic stability which has three dimensions --low inflation, low current account deficit and modest fiscal deficit. The moderation in inflation has occurred only recently. The Current Account Deficit has again come under control. We will be the beneficiaries of the fall in oil prices. The fiscal deficit continues to remain above the level of 3% that is mandated in the Fiscal Responsibility and Budget Management (FRBM) Act. The commitment to bring down the fiscal deficit must be honoured. It is in this context that subsidies require a relook. The subsidy regime needs reform in three directions. First, there has to be a fix on the total quantum of subsidies as a proportion of GDP, second, they need to be targeted and only directed towards vulnerable groups and, third, there has to be a rethink on the appropriate delivery system. Government’s expenditures need to be reoriented more towards investments and less towards subsidies.
Make in India
 “Make in India” is a good guiding principle. It should imply producing for India and for the world. Making only for India will convert it into a form of import substitution. Making for the world makes the system more efficient. On the other hand, people wonder whether making for the world is even meaningful in the changed world context. It is true that extreme dependence on the external world can cause serious repercussions on the domestic economy, when the world environment suddenly changes, as in 2008 and 2009. India however is not in any such danger. India’s exports as a percentage of GDP is still modest at 25 per cent. Besides, India’s exports of goods do not constitute more than 2 per cent of the world’s exports. In this situation, making India the base for the production of goods and services for export to other countries is not a bad idea. But to convert this idea into reality, the Indian economy has to be much stronger in terms of infrastructure and the availability of good human capital. Productivity of capital must increase which implies a more efficient system of production.

Reform agenda
Reforms must be part of a continuing agenda. The basic principle guiding reforms must be to create a competitive environment with a stress on efficiency. There are still several segments where controls dominate. A classic example is the sugar industry. We need to dismantle controls in a phased manner. The pricing of products should normally be done by markets. Exceptions should be made transparent and must be clearly articulated.

In many ways the coming decade will be crucial for India. If India grows at 8 to 9 per cent per annum, it is estimated that per capita GDP will increase from the current level of $1,600 to $ 8,000-10,000 by 2025. Then, India will transit from being a low income to a middle income country. We need to overcome the low growth phase as quickly as possible. In the recent period, a number of schemes have been launched aimed at broadening the scope of social safety nets. These include the employment guarantee scheme, universalisation of education, expansion of rural health, and providing food security. It has been possible to fund these programmes only because of the strong growth that we have seen in recent years. Growth is and must be the answer to many of our socio-economic problems.

France welcomes civil nuclear agreement between India and U.S.
  • France welcomes the civil nuclear agreement between India and the U.S. as it offers a way forward to nuclear cooperation without changing the nuclear liability law.
  • Reiterating the stated French position that “France would work within the framework of Indian law”, French Embassy sources said on 04 February, 2015.
  • India and France finalised a civil nuclear deal in 2010, under which the French are to set up a total of six reactors of 1,650 MW each at Jaitapur in Maharashtra.

US President Barack Obama's Siri Fort speech not a "parting shot" at BJP : White House
  • U.S. President Barack Obama’s comments on the need to respect religious diversity in India, delivered during his speech at Siri Fort in New Delhi last month, did not comprise a “parting shot” even though it had since “been somewhat misconstrued,” said a top administration official here.
  • The speech that the President delivered on January 27, the last day of his three-day India trip, in its entirety was about the "core democratic values and principles" of both the US and India, the White House said.

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