The Indian economy grew
by 8.5 % during 2005-10 - the period which includes the Great Recession of 2009
and the worst draught India faced in recent memory - making it the second
fastest growing economy in the world. The remarkable resilience shown by the
Indian economy during the global financial meltdown and the Great Recession was
widely appreciated.
The good growth rate of
the crisis years was achieved thanks to the fiscal and monetary stimulus
provided by the government and the RBI. However, the macro situation is very
different now. For FY 2012 India is likely to clock only 7% growth. There is no
room for fiscal stimulus; inflation still above the comfort zone precludes the
possibility of sustained and sharp interest rate cuts.
If India is to achieve its economic and social objectives, sustained high growth is a must. But we are facing major headwinds here. Our savings rate has fallen from 36.8% in 2007-08 to 32.3% in 2010-11. Consequently, our capital formation has fallen from 38.1% to 35.1% during this period. The main reason for this sharp cut is the rising fiscal deficit. Fiscal deficit of the centre rose from 2.8% in 2007-08 to 5.6% in FY 2012 (projection).
Slowdown in the economy has also been caused by the savage monetary tightening by the RBI which raised interest rates 13 times since March 2010. The RBI has been fighting inflation without any help from the government through fiscal deficit reduction. Excessive reliance on monetary tightening, ignoring fiscal consolidation, is a sub-optimal solution.
The bottom line is very clear: India can return to its high growth path only if we achieve reduction in fiscal deficit. Therefore, fiscal consolidation should be the number one item on the agenda of budget 2012-13. Action on the fiscal front will give the RBI the much needed room to maneuver interest rates down. To accelerate growth, the government will have to move fast on DTC, GST, the land acquisition bill, the mining bill etc. There are expectations from the government on these fronts.
It would be desirable if the government initiates some measures to encourage financial savings and investment. Some concessions to first time investors in the stock market would be a welcome step.
This budget is crucial from the reforms perspective. Since general elections are due in 2014, the 2013-14 budget is likely to be more populist. Also, since the coming budget is being presented after the assembly elections, the finance minister can afford to be pro-active. Therefore, the government should seize this last major opportunity during its present tenure to announce bold reforms and shake off the criticism of governance paralysis.
If India is to achieve its economic and social objectives, sustained high growth is a must. But we are facing major headwinds here. Our savings rate has fallen from 36.8% in 2007-08 to 32.3% in 2010-11. Consequently, our capital formation has fallen from 38.1% to 35.1% during this period. The main reason for this sharp cut is the rising fiscal deficit. Fiscal deficit of the centre rose from 2.8% in 2007-08 to 5.6% in FY 2012 (projection).
Slowdown in the economy has also been caused by the savage monetary tightening by the RBI which raised interest rates 13 times since March 2010. The RBI has been fighting inflation without any help from the government through fiscal deficit reduction. Excessive reliance on monetary tightening, ignoring fiscal consolidation, is a sub-optimal solution.
The bottom line is very clear: India can return to its high growth path only if we achieve reduction in fiscal deficit. Therefore, fiscal consolidation should be the number one item on the agenda of budget 2012-13. Action on the fiscal front will give the RBI the much needed room to maneuver interest rates down. To accelerate growth, the government will have to move fast on DTC, GST, the land acquisition bill, the mining bill etc. There are expectations from the government on these fronts.
It would be desirable if the government initiates some measures to encourage financial savings and investment. Some concessions to first time investors in the stock market would be a welcome step.
This budget is crucial from the reforms perspective. Since general elections are due in 2014, the 2013-14 budget is likely to be more populist. Also, since the coming budget is being presented after the assembly elections, the finance minister can afford to be pro-active. Therefore, the government should seize this last major opportunity during its present tenure to announce bold reforms and shake off the criticism of governance paralysis.
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