By Anjan Roy
The index of industrial production (IIP), on March 12, can be viewed as a pointer to what the forthcoming budget should do. Even if the overall IIP has shown a jump in January, the disaggregated figures reveal the underlying shortcomings and failings. An analysis of the disaggregated IIP figures will give a cause for alarm, not rejoice at the sharp jump in the overall index.
The disaggregated numbers show that growth of the industrial sector has been totally skewed. The big jump in the IIP has been due to a spike in production of consumer non-durables and some food products and tobacco products. However, the figures reveal that the mining sector, intermediate goods and capital goods still continue to shrink. The only silver lining has been that the rate of shrinkage is less now than earlier, say, in December.
Thus the capital goods industry continues to languish. Mining segment of industry has continued to show negative trends and this is surely a cause for concern. As we grow the demand for minerals and metals are sure to rise. Coal or iron ore demand should rise. However, if the mining and metals production capacity do not keep pace with rising demand, the obvious impact will on their Prices. Something like this seem to be happening in the Indian economy. The price of coal, steel and intermediate goods are rising thus pushing up the manufactured goods prices.
What the IIP shows is the fall in investment in the economy and the primary task before the budget should be to encourage investment. This is what drives growth and development. Encouraging overall investment has two principal dimensions: first budgetary and secondly, extra budgetary. Let us look at these briefly.
Within the budgetary exercise, the finance minister can offer some investment incentives. Since most of the investment now comes from the private sector, the finance minister can give the private sector more favourable treatment for their investment outlays. Depreciation allowance for investment already made can be raised. Some further tax holidays for investments can be extended to encourage the corporate sector to commit their funds. No less than 85 per cent of the GDP is generated in the private sector. Therefore, the bulk of investment will have to be from the private sources and particularly the private corporate sector.
In this context, the observations of the Prime Minister’s Economic Advisory Council are also relevant. The PMEAC has pointed out that gross fixed capital formation (GDCF) has dropped drastically and this needs to be improved. Let us see what the PMEAC has observed: GDCF has declined to 30.4 per cent in 2010-11 from 32.9 per cent and 32.3 per cent in 2007-08 and 2008-09. Further, “the most significant decline has occurred in the private corporate sector where the ratio has fallen from 14.3 per cent in 2007-08 to 9.9 per cent in 2010-11. It has ascribed the fall in GDFC to the slowing down of fixed capital formation in the private corporate sector post-crisis period.
Secondly, gross domestic savings rate has fallen from 36.8 per cent of GDP in 2007-08 to 32.3 per cent in 2010-11. Of this 4.5 per cent decrease in gross savings rate, as much as 3.3 per cent is accounted for by the decrease in public sector savings. Slower growth in market and margin pressures contributed, on the other hand, to fall of at least 1.4 per cent in the private corporate savings.
These are structural factors which determine the growth of an economy. High savings and investment rate pushed until recently the Indian growth story and unless these are restored,Indiacannot return back to a high growth trajectory. Admittedly, these do not change overnight. It took many years of steady growth in the post reforms period for the gross domestic savings and investment rates to reach these high levels. Unfortunately, the shock of the global crisis, high domestic inflation and contractionary monetary policy all combined to impact on these factors and bring down savings-investment rates.
The finance minister should now attempt to reverse these trends. The task has become all the more difficult in view of the mounting fiscal deficit this year. Against a target of 4.6 per cent of GDP, the fiscal deficit is anticipated to cross 6 per cent threshold. So what should the finance minister do: encourage savings and investment and thereby growth or embark upon a plan for fiscal correction through stringent measures for revenue collection and expenditure control?
This is a dilemma which can be resolved only with some political will. How?
Of all the expenditure over-runs during the current year, it was the huge slippages in the subsidy bills that landed the fiscal situation in the current straights. By not covering the landed price of imported petroleum, the government has incurred an increasing fuel subsidy bill. For whose benefit though? It is well known that the fuel subsidy means the owner of a large car gets so much more subsidy every time he buys his petrol. This is in the name of protection of the poor.
Only by revising the domestic fuel prices to cover the landed costs, the deficit could be addressed to a large extent. Similarly, the fertilizer subsidies for the rich farmers could also be revised down. The food subsidy bill has also gone up, with massive leakages and misdirected supplies of subsidized food. These should rationally be addressed and subsidization brought down. However, these are option hardly exercised by the finance minister, more so as the coalition partners will oppose any such moves.
Nevertheless, the union finances are fast approaching a point of no return when these hard decisions will have to be tackled as the burden will become more than can be absorbed. The finance minister has to take these intransigent bulls by the horns and settle the imbalances once. Will Pranab Mukherjee be able to do that? (IPA Service)