At a time when there is pessimism and despondency all over at the prevalence of the status quo in our economic lives, the PMEAC has made optimistic projections on the state of the economy, which are slightly better than those made by RBI even though it has stepped down from the assumptions we worked with in March. It is well that we do have an official stock-taking of the economy considering that presently besides RBI’s own downward revisions of GDP growth and upward revision in inflation for the year, there are only private estimates available on the state of the economy. And most of them present a near doomsday picture. However, there could be areas of disagreement with some of the numbers presented by the PMEAC since the underlying conditions that could theoretically lead to such growth appear to be missing.
The GDP growth assumption of 6.7% is based on three numbers working out. Farm output is to grow by 0.5% in drought conditions and could still be attained, provided the rabi crop turns out to be better, which has happened in the past. While this may still be acceptable, the optimism on industrial output will be hard to share. It is assumed that growth will be 4.5% for manufacturing while the industrial sector will grow more at 5.3%. Given a negative growth in the first quarter, it will require a substantial shift in the next three quarters to warrant this growth number. Corporate sales and profits have been showing a continuous decline over the last five quarters and do not really inspire such feelings. The PMEAC has argued that the base effect will prop up this number as growth was high in the first half of last year and low in the second half. While this will work in favour of growth, in the absence of demand conditions improving and investment taking place, it is unlikely to fructify to this extent.The services sector is assumed to grow by 8.9%, which would probably be the best-off case, as sustained growth in this sector requires growth to be buoyant in the other two sectors—agriculture and industry—which is not the case today. Shortfalls may be expected in growth in industry and services unless something really radical happens in terms of policy shift. Even then, given the time lags involved, growth cannot be instantaneous.The take on fiscal deficit appears to be unchanged, notwithstanding everything that is going amiss right now—slippage in revenue, higher subsidy bill, demand for higher drought relief, limited movement on disinvestment, unsure collections on spectrum sale, and possible higher borrowings this year. This is something that few will agree with. The assumption probably is that even though growth has slowed down by 0.9% based on what was assumed during the Budget time, inflation is higher by a percentage point, thus making up for the denominator. But this may not be too convincing because it is the numerator that will carry the slippages and cannot be eschewed under the present circumstances. In this eventuality, a higher fiscal deficit number will definitely result.The other area where the PMEAC takes a bold stance is on the external front. While the call of 3.6% current account deficit is possible, given that international price of oil has been coming down, the recent trends indicate that this could be tenuous and a turnaround in prices is possible any time. This would actually pressurise the external account. However, the projection of an increase in capital flows is something that could be disagreed with. While the euro crisis and the global slowdown have a secondary impact on our economy insofar as we are more of a domestic-driven economy, the flow of foreign funds is bound to be impacted.The assumption made here is that FDI will be higher at $24 billion while FII will still be high at $14.2 billion as against $17.2 billion. Now, the World Bank has spoken of a gross amount of $16 billion flowing as portfolio flows to emerging markets in calendar 2012. Therefore, the assumption here is India will be the hottest destination for such funds even though the issue of GAAR has been deferred and not really resolved. Another assumption made is that our ECB account will increase to $21 billion, thus making up for the current account deficit. In fact, the implication is that the balance of payment will be in a net surplus position, adding marginally $4 billion to our forex reserves. This by itself should mean that the rupee will have to strengthen by the end of the year, which may not find too many supporters.The Economic Outlook then goes on to make several suggestions as to what has to be done to revive the economy—all are well known. As it is an advisory council, the role is evidently to provide the framework, but obviously the implementation requires support at the political level. This does not mention that it has assumed that any of these developments would come about to justify the higher growth number on GDP, and hence reads more like a routine Survey of the economy which comes through the ministry of finance or RBI in their quarterly reviews. As it does not outline what will be done in the course of the year, as that is the prerogative of the respective ministries, the document must be viewed as a set of forecasts made this time by an official agency which by touching on all aspects of the economy is comprehensive as compared with other official forecasts which stop at predicting or targeting a few indicators.
The GDP growth assumption of 6.7% is based on three numbers working out. Farm output is to grow by 0.5% in drought conditions and could still be attained, provided the rabi crop turns out to be better, which has happened in the past. While this may still be acceptable, the optimism on industrial output will be hard to share. It is assumed that growth will be 4.5% for manufacturing while the industrial sector will grow more at 5.3%. Given a negative growth in the first quarter, it will require a substantial shift in the next three quarters to warrant this growth number. Corporate sales and profits have been showing a continuous decline over the last five quarters and do not really inspire such feelings. The PMEAC has argued that the base effect will prop up this number as growth was high in the first half of last year and low in the second half. While this will work in favour of growth, in the absence of demand conditions improving and investment taking place, it is unlikely to fructify to this extent.The services sector is assumed to grow by 8.9%, which would probably be the best-off case, as sustained growth in this sector requires growth to be buoyant in the other two sectors—agriculture and industry—which is not the case today. Shortfalls may be expected in growth in industry and services unless something really radical happens in terms of policy shift. Even then, given the time lags involved, growth cannot be instantaneous.The take on fiscal deficit appears to be unchanged, notwithstanding everything that is going amiss right now—slippage in revenue, higher subsidy bill, demand for higher drought relief, limited movement on disinvestment, unsure collections on spectrum sale, and possible higher borrowings this year. This is something that few will agree with. The assumption probably is that even though growth has slowed down by 0.9% based on what was assumed during the Budget time, inflation is higher by a percentage point, thus making up for the denominator. But this may not be too convincing because it is the numerator that will carry the slippages and cannot be eschewed under the present circumstances. In this eventuality, a higher fiscal deficit number will definitely result.The other area where the PMEAC takes a bold stance is on the external front. While the call of 3.6% current account deficit is possible, given that international price of oil has been coming down, the recent trends indicate that this could be tenuous and a turnaround in prices is possible any time. This would actually pressurise the external account. However, the projection of an increase in capital flows is something that could be disagreed with. While the euro crisis and the global slowdown have a secondary impact on our economy insofar as we are more of a domestic-driven economy, the flow of foreign funds is bound to be impacted.The assumption made here is that FDI will be higher at $24 billion while FII will still be high at $14.2 billion as against $17.2 billion. Now, the World Bank has spoken of a gross amount of $16 billion flowing as portfolio flows to emerging markets in calendar 2012. Therefore, the assumption here is India will be the hottest destination for such funds even though the issue of GAAR has been deferred and not really resolved. Another assumption made is that our ECB account will increase to $21 billion, thus making up for the current account deficit. In fact, the implication is that the balance of payment will be in a net surplus position, adding marginally $4 billion to our forex reserves. This by itself should mean that the rupee will have to strengthen by the end of the year, which may not find too many supporters.The Economic Outlook then goes on to make several suggestions as to what has to be done to revive the economy—all are well known. As it is an advisory council, the role is evidently to provide the framework, but obviously the implementation requires support at the political level. This does not mention that it has assumed that any of these developments would come about to justify the higher growth number on GDP, and hence reads more like a routine Survey of the economy which comes through the ministry of finance or RBI in their quarterly reviews. As it does not outline what will be done in the course of the year, as that is the prerogative of the respective ministries, the document must be viewed as a set of forecasts made this time by an official agency which by touching on all aspects of the economy is comprehensive as compared with other official forecasts which stop at predicting or targeting a few indicators.
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