The slowdown in India’s economic growth has bottomed out and the growth rate of gross domestic product (GDP) will accelerate to anywhere between 6.1-6.7 per cent in the coming fiscal after hitting a decade low of around 5 per cent in the year ending March 2013, according to the government’s Economic Survey.

The survey released on Wednesday has, however, cautioned that the positive projections assume a normal monsoon, further moderation in inflation, mild global economic recovery and better performance of all three key sectors including services, manufacturing and agriculture, compared to FY13.

There are two sources of downside risk – India’s exposure to shifts in the risk tolerance of international investors and the country’s dependence on imported oil and possible rise in oil prices because of geopolitical risks, which would mean increasing investor anxiety and slow world growth.

The annual survey, which precedes the Union Government’s Budget presentation, captures the state of the economy besides providing a short and mid-term outlook.

The survey has also stated that India may meet fiscal deficit target of 5.3 per cent of GDP in FY13 despite significant shortfall in revenues and added that headline WPI inflation may decline to 6.2-6.6 per cent in March 2013. Easing inflation will allow the central bank more headroom to cut interest rates which can boost investments, as well as big ticket consumer expenditure such as real estate and automobiles.

Giving its own prognosis of what punctured the bounce-back in the Indian economy with the onset of global slowdown in FY09, the survey said that the monetary and fiscal stimulus to boost demand was large and the result was strong inflation and a powerful monetary policy response which slowed consumption demand.

Starting in 2011-12, corporate and infrastructure investment started slowing, both as a result of investment bottlenecks and the tighter monetary policy. To make matters worse, the economy was hit by two additional shocks – a slowing global economy weighed down by the crisis in the Euro area and uncertainties about the fiscal policy in the US, and a weak monsoon, at least in its initial phase.

India has been caught in a vicious circle of falling growth and stimulus withdrawal that may well exacerbate the decline. Because of the slowdown and high levels of leverage, some industry and infrastructure sectors are experiencing an increase in non-performing assets (NPAs) and the overall gross NPAs of the banking sector increased from 2.36 per cent of the total credit advanced in March 2011 to 3.57 per cent of the total credit advanced in September 2012.

The increase is particularly sharp for industry and infrastructure sectors. Sub-sectors which are particularly under stress include textiles, chemicals, iron & steel, food processing, construction and telecom, the survey noted.

“The way out and the hope for starting a virtuous circle lie in shifting national spending from consumption to investment, removing the bottlenecks to investment, growth and job creation, in part through structural reforms, combating inflation both through monetary and supply-side measures, reducing the costs for borrowers raising financing and increasing the opportunities for savers to get strong real investment returns,” the survey stated.

In terms of government policy, this translates into containing the fiscal deficit, especially by shrinking wasteful and distortionary subsidies, reducing the impediments to investment such as delays in getting permissions, clarifying difficult and non-transparent processes for land acquisition, and increasing access to good infrastructure such as power and roads.

It also warrants reworking the regulatory and incentive structure that keeps small businesses tiny and prevents them from creating good productive jobs, reducing the entry barriers in various areas of business and allowing FDI while ensuring domestic companies are not disadvantaged.

According to the survey, policies should also provide incentives and means for the farmer to increase production, even while improving the management and the logistics of food procurement and distribution. And it necessitates continuing financial sector reform to increase the entry of new institutions, reduce transaction costs for investors, increase access for borrowers and savers to one another and improve the quality of regulation.

However, two potential positive developments are in sight including the much-delayed goods and services tax (GST) and the direct benefit transfer scheme that will allow the transfer of government benefits directly to the targeted recipients’ bank accounts – helping reduce transactions costs, preventing duplication, leakage and fraud, and improving choices for the poor.

India’s situation is difficult but steps have been taken to bring the macroeconomy back into balance and growth on track. What is important is to recognise that a lot needs to be done and the slowdown is a wake-up call for increasing the pace of actions and reforms.

The survey also says that lower interest rates may provide an additional fillip to investment activity for the industry and services sectors, especially if some of the regulatory, bureaucratic, and financial impediments to investment are eased.

It notes that India is creating jobs in industry but mainly in low-productivity construction and not enough formal jobs in manufacturing, which are typically higher productivity jobs. The high productivity service sector is also not creating enough jobs.

“Because good jobs are both the pathway to growth, as well as the best form of inclusion, we have to think of ways of enabling their creation,” the survey said.

(Edited by Sanghamitra Mandal)

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