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ECONOMIC SURVEY: CHALLENGES, POLICY RESPONSE AND MEDIUM TERM PROSPECTS
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The Economic Survey 2007-08 presented by the Finance Minister, Shri P. Chidambaram in Parliament today says that with the Indian Economy moving to a higher growth path, the new challenge is to not only maintain growth but also raise it further to double digit levels. To meet the demand for infrastructure services, there is a heightened urgency to augment and upgrade infrastructure both physical as well as social and in particular power, roads and ports. This requires mobilization of unprecedented amounts of capital with macroeconomic stability, which can only happen if both the public and private sectors have the incentive and the motivation to perform at their best. According to the Economic Survey, the public sector requires the effective addressing of the persistent institutional weaknesses and implementation constrains at different levels of government in the country. The private sector on the other hand requires policy and regulations that are comprehensive but simple and clear and credible.
The Economic Survey identifies several challenges, policy response and medium term prospects. These may be summed up as follows:
· If the upwardly trend in the GDP growth rate persists in the medium-term, the economy would average over 8.9 per cent per annum over the Eleventh Five Year Plan period. If we achieve the GDP growth target of the Eleventh Five Year Plan and step up the growth rate to 9.5 per cent in the succeeding year, the Indian economy would have averaged 9 per cent over a decade. This achievement would put India among the select group of about a dozen medium-large economies.
· On the demand side the growth acceleration has been driven by investment and supported by private consumption. The economy is likely to remain domestic demand driven in the medium term.
· The two inter-related macroeconomic challenges in maintaining high GDP growth on a sustained basis are capital inflows and inflation. The surge in the capital inflows, including FDI will continue in the medium term. The change in the structure of the economy and its more globalized nature have made management of inflation a complex task. The reduction in the tariffs on non-agricultural products has played an important role in the convergence of Indian to global inflation rages and needs to continue.
· The interaction between high tariffs on agricultural products coupled with the large share of food in the consumption basket and the slow modernization of Indian agriculture and agro-processing, coupled with the high dependence of the population on agriculture may play a role in future inflation.
· A further convergence of both inflation and real interest rates is possible if we liberalise and develop India’s debt and currency markets and remove the constraints on agriculture modernization and urban land supply.
· Though our exports to the US have already been slowing in 2006 and 2007 a further slowdown may be unavoidable but may be relatively modest. The deceleration in world imports will also lead to a deceleration in growth of demand for commodities. The balance of these two factors will likely result in a modest increase in the goods and services trade deficit as long as a severe recession is avoided in the US.
· On the supply side, the most critical challenge is the availability of adequate physical and financial infrastructure. It is instructive to look at the infrastructure in terms of public and private goods and a grey area in between - the "quasi-public good".
· The medium term plan for road connectivity should target a network of highways linking all cities in the country, a network of State highways linking all towns at state level and connectivity of all villages with all weather district roads in every State.
· For urban infrastructure, there are a number of policy measures that need to be urgently addressed. The Central sector programme, JNNURM and SEZs have imparted some impetus in this direction, but the states, particularly poorer ones, need to do more on their own.
· While 20 states have presented revenue surplus budgets in 2007-08, 15 States have budgeted for higher GFD over the previous year. The fiscal position of some states continues to remain weak and there are concerns regarding the sustainability of high level of debt in some of these states.
· There is much that still needs to be done in terms of improving social sector and human development outcomes at state level which highlight inter state variation in important socio economic indicators.
· The outcomes in the health sector also show significant disparities across states. A successful policy framework to bridge outcome gaps in this sector would require a strategic focus on public goods like vector borne and epidemic diseases, public health education and drainage.
· For the success of the programmes such as NREGP, Bharat Nirman and the Right to Information Act, it is necessary that ground level implementation is efficient.
· Decentralization in planning and implementation of programmes based on the principle of subsidiary is an essential supplement to enhance resource flow in achieving balanced regional development and participation and empowerment of the poor. The success stories of participatory project implementation and devolution of plan and non-plan funds must be systematically studies, recorded and replicated elsewhere with appropriate region-specific adaptations.
· Though expenditure is an important indicator of the progress of plan implementation, it does not measure the effectiveness of the expenditure undertaken in generating the desired outcomes. It is, therefore, important to move systematically from financial monitoring to output and outcome monitoring.
Conclusion
The challenges and opportunities arise at two levels. It is incumbent on the Central Government to provide a conducive investment climate and manage the macroeconomy to facilitate non-inflationary growth. The Central Government and the Planning Commission can in certain areas and sectors also play a leadership role in setting an agenda of policy and institutional reforms that will sustain high growth for several decades. At a second level, the States must refocus their efforts on the provision of public goods, some of which have been neglected by states, and improve the quality of the service provided by these goods. As the bureaucratic capacities to deliver these goods and services in sufficient quantity and adequate quality are heavily constrained, they must shed other activities that are best done by private profit and non-profit organizations and focus on excellence in these areas. Only then can they satisfy the majority of their citizens and meet their legitimate aspirations.
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