Survey gung-ho on growth, but predicts higher inflation

The major downside risks to growth are weather, a 'disproportionate spike in the price of crude petroleum' and a slowdown of growth in developed industrial economies.

"Looking further, into the medium to long term, the expectation is that India's pace of economic development will pick up even more," says the Survey. This optimism is based on two factors: first, the new "momentum" in the savings rate (33.7 per cent of the gross domestic product, or GDP) and the investment rate (36.5 per cent of GDP); second, India's "demographic dividend".

Explaining the importance of the contribution of "human capital" for growth, the Union government's Chief Economic Advisor, Kaushik Basu, said that traditional growth models factored in only the impact of savings, investment and capital productivity in estimating growth. However, given the contribution of human capital, any growth model for India must factor in the impact of rising labour productivity on account of the demographic dividend.

Survey gung-ho on growth, but predicts higher inflation

This draws attention to the growth-enhancing impact of investment in human development, says the Survey, adding, "Growth then depends much more on skill development and innovative activity." While remaining concerned about inflation, the Survey outlines a new perspective on the medium-term nature of inflationary pressures in a growing economy and in the context of global monetary easing.

Given the Survey's upbeat tone on growth, expectations are that the finance minister will meet his fiscal targets. The estimate for the fiscal deficit for 2010-11 has been placed at 4.8 per cent of GDP (Budget Estimate 5.5 per cent).

Analysts expect the finance minister to stick to the 13th Finance Commission timetable on fiscal correction. practice started in last year's Survey, this year's document offers an analytical chapter titled "Micro-foundations of Macroeconomic Development" with a focus on explaining inflation in India. The Survey believes that, apart from high growth, the processes of financial inclusion and increasing 'monetisation of the economy' may have increased the propensity to hold cash, thereby increasing the overall money supply held by the general public.

Survey gung-ho on growth, but predicts higher inflation

Globalisation and greater openness to global money flows also reduce the effectiveness of monetary policy, with 'quantitative easing' by developed economies fuelling inflation in developing economies like India. The Survey forecasts an average annual inflation rate of 5 per cent over the next decade, with spikes around the average, for a variety of reasons outlined and suggests India may have to "revisit" its standard policy package to deal with inflation.

In another major innovation, the Survey puts forward a new Index of Government Economic Power, that shows China and India as 'rising powers'. The four components of the index are: government revenues, foreign currency reserves, export of goods and services, and human capital.

Underscoring the importance of fiscal consolidation, with reduced subsidies and higher tax/GDP ratio, investment in infrastructure and carrying forward economic reforms, the Survey says, "deepening the reform process would hold the key to sustaining the fiscal consolidation process".

Source: Business Standard