If wishes were...

EDITORIAL

GDP growth forecast for 2012-13 of between 7.5 per cent and 8 per cent projected by the prime minister’s economic advisory council (PMEAC) appears to be optimistic. The fact is that investment rate (called gross fixed capital formation) in the economy has been slipping for four years now. It has now fallen to 29.3 per cent of GDP, a decline of almost 4 percentage points over four years. Given the productivity of capital in India, it is highly improbable that such a low investment rate would deliver a GDP growth of 7.5 per cent, let alone 8 per cent. GDP growth dropped to less than 7 per cent this year as investment rates fell below 30 per cent. The investment rate is down in the post-crisis period since 2008 because of two factors: One, the government’s dis-saving has risen because it has been spending much beyond its means; and two, household savings in financial instruments have also declined because of inflation and negative return on such savings. It is unlikely that there will be a dramatic improvement in 2012-13 on either fronts. First of all, PMEAC itself has admitted that the centre’s deficit this year would expand beyond the budgeted level of 4.6 per cent of GDP. PMEAC has suggested a set of tough policy measures — raising the tax-GDP ratio to pre-crisis level, expansion of the service tax base, rollback of excise duty cut and hike in diesel and urea prices, among others — to bring down the government’s deficit. But how much of that can be actually accomplished remains a question mark. Next year, the centre’s deficit, by PMEAC’s calculations, could be lower than this year’s level, but it would still be way above 4.1 per cent marked out in the fiscal correction road map prepared by the finance commission. In essence, this implies that there are no immediate prospects of a decline in the government’s dis-savings. To that extent, there are no quick prospects for crowding in private sector investments either. The corporate investment cycle that has stalled is unlikely to restart soon. In so far as financial savings of households are concerned, it is hard to see a turnaround coming, especially since interest rates are likely to move downwards next year even though inflation could also stabilise. Other than lower savings and investment rates, growth is also constrained by infrastructure deficit and regulatory hassles of project clearances. PMEAC hopes that public investment in infrastructure, especially in coal, power, railways and roads, would be speeded up, but till that happens, it is hard to see how GDP growth next year would perk up to even 7.5 per cent. So, it seems that the outlook painted by PMEAC is an exercise in wishful thinking. PMEAC’s forecast for 2012-13 is important because it is the first such assessment by any professional agency and it comes weeks before the Union budget on March 16, but the outlook seems removed from present realities. For 2011-12 too, PMEAC had initially predicted a growth of around 9 per cent. That proved too optimistic. Growth in 2011-12, according to the advance estimates of the Central Statistical Organisation, would be only 6.9 per cent. PMEAC had to scale down its initial projection at least twice during the year and even then missed the mark. It seems to be now repeating the mistake of ignoring the domestic and external realities facing the economy.