The `Economic Survey for 2006-07' is a remarkably transparent document that brings into the open critical economic issues facing the country, such as the overheating debate, inclusiveness of growth and leveraging the demographic dividend. Deriving strength from the Survey, the Budget comes out strongly in favour of incentivising investments, especially in agriculture, and the social sector, with a vital emphasis on health-care. Deriving strength from the Survey, the Budget comes out strongly in favour of incentivising investments, especially in agriculture, the social sector and health-care.
The Economic Survey preceded the Budget by a day and it is optimistic to expect that the public could have digested the various observations of the Survey in time to appreciate their impact on the Budget. I recently had a chance to review at some leisure the `Economic Survey for 2006-07', a remarkably transparent document that brings into the open critical economic issues facing the country. I refer, in particular, to its stance on the overheating debate. The Survey makes no bones about the fact that the debate is overplayed. It comes out clearly in favour of the position that the economy appears to have decidedly taken off and moved from a moderate pace of growth to a higher trajectory.
I quote: "Achieving the necessary velocity to move from tepid growth to sustaining a high growth trajectory requires careful consideration of two issues. The two issues are: sustainability of high growth with moderate inflation and inclusive nature of high growth". The Survey stresses fiscal prudence together with high investment, besides improving the effectiveness of governance and intervention in critical areas.
On the first issue of sustaining high growth without running into inflation, the Survey states that various indicators suggest that the current pace of growth is sustainable, and that the higher growth target is achievable, especially in the context of the demographic dividend the expected growth of proportion of the population in the working age, which could lead to a rise in savings rate helping to finance more and more investments. There is already evidence of this virtuous and mutually reinforcing growth-savings-growth cycle.
Second, efficiency improvement in the economy since 1999-2000 reinforces confidence in the sustainability of the high growth pace. The ratio of capital stock to gross value added in the economy had gone down from 2.78 to 2.60 between 1999-2000 and 2004-05. This is an encouraging sign and supports a steady decline in the ratio of net capital stock to value added in the industry, indicative of higher productivity.
Third, it is not only the sustained increase in savings and investments but availability of labour at reasonable wage rates and efficiency increases, which endorse the Survey's view that there is tremendous scope for non-inflationary growth.
The Survey refers to the concerns expressed on whether the country is growing beyond its growth potential, thereby straining its labour force and capital stock and engendering inflationary instability.
The concerns about overheating are, in its view, connected more with capacity utilisation and skill shortages. The Survey states that rapid growth and capacity addition can avert the problem of capacity constraints. Another indicator of overheating merchandise import growth also appears to be within reasonable limits.
The Survey also stresses that infrastructure constraints to growth appear to be diminishing. It cites instances of tangible progress in areas such as power, roads, ports and airports. There is also increasing evidence of great scope for higher investment from abroad for improving infrastructure.
The Survey cites the declared intentions of renowned private equity groups, such as Blackstone, Citigroup, to invest in a fund of up to $5 billion to be deployed in infrastructure. The document comes out strongly in favour of continuing the present pace of growth while managing inflation with adequate supply-side actions and the necessary monetary policy guidance.
The Survey also refers to the issue of inclusiveness of growth. It points out that putting more people in productive and sustainable jobs lies at the heart of inclusive growth. But such success will depend primarily on achieving and sustaining high growth. There cannot be inclusive growth without growth itself. The Survey cites the experience of South-East Asia, which reveals that growth can eliminate poverty and transform a developing country into a developed one.
It is in this context that the Budget and its various steps must be viewed. The Budget comes out strongly in favour of incentivising investments, especially in agriculture and social services as also in education, with a view to improving the skill sets of our labour.
The Survey rightly stresses the need to exploit the demographic dividend arising from the increasing numbers of a younger workforce. The Budget stresses the development of skill-sets among the labour force through massive infusion of funds into scholarships.
"Inclusive growth on a non-inflationary basis is possible and desirable", stresses the Survey. The Budget has taken up efforts in favour of extending facilities for health, especially in AIDS control, as it realises the danger to the productivity of workforce if India faces an Africa-like epidemic. The Budget thus derives considerable strength from the directions indicated by the Survey.
Despite economic pundits the world over cautioning India against overheating, the Budget proceeds to specify high targets for investments in various areas. Especially in credit for agriculture, the Finance Minister has been bold to venture forth, based on the success of the last few years.
Credit at reasonable terms to agriculture is perhaps one of the main ingredients in his policy of sustaining high growth in the farm sector, with a consequent increase in food production and availability of commodities such as wheat, rice and vegetables for common consumption.
A sense of proportion
While the Survey points out that the tax-GDP ratio has been improving, it is important to stress that expenditure control is of increasing significance. In this context, I am worried about the implications of the Pay Commission and its recommendations.
It is always tempting for a Government to accept the populist recommendations of a Pay Commission hoping that revenues will rise to meet the expenditure increases on account of salaries. There is a tell-tale Table in the Economic Survey that shows the dangers of such an approach. Table 3.4, which highlights the emoluments of the public sector employees in relation to increases in the All India Consumer Price Index, is relevant in this context.
In 1971-72, the emoluments per capita of public sector employees were Rs 5,920. It increased to Rs 27,600 in the year 2005-06, an increase of 4573 per cent, or 45 times, whereas the consumer price index in the corresponding period rose only by 1292 per cent, or 12.9 times. This shows that the public sector has been rewarding its employees at a far higher rate than justified by consumer price inflation.
It is important that the Pay Commission should be imbued with a proper sense of proportion in making its recommendations. There is no justification for increasing emoluments at a rate higher than justified by consumer price indices.
The Finance Minister in his previous avatar had dealt with the Pay Commission. He is fully aware of the dangers and the challenges posed by the Commission. Here is to hoping that the prospects of high growth for sustaining non-inflationary conditions are not dissipated by too liberal promises to labour, in general, and particularly in the public sector. Growth will be the casualty if that happens.