Current Economic Situation and Policy Options - Standing Committee Report
YESTERDAY, the Parliamentary Standing Committee on Finance presented to Lok Sabha its 59th Report on the " Current Economic Situation and Policy Options ". The Committee studied several aspects of the economy and suggested solutions.
Some of the issues and recommendations:
Current state of the Indian Economy: The Committee are extremely concerned over the current gloom and doom scenario in the domestic economy and find almost all macroeconomic indicators disturbing during the financial year 2011-12. The Committee, urge upon the Government to take clear-cut measures in this direction and implement them speedily and without fail.
GDP growth: The Committee find that the GDP growth has decelerated over successive quarters from 9.2 per cent in Q4 of 2010-11 to 5.3 per cent in Q4 of 2011-12, bringing down the overall growth for the last fiscal to 6.5 per cent. The Committee, therefore, urge upon the Government to re-orient its efforts for better and more balanced reforms for achieving sustainable growth.
Inclusive development: In the context of economic growth and per capita income, the Committee are concerned to note the emerging ever widening gap between the rich and poor and the increasingly disproportionate distribution of assets in our country. The Committee would urge upon the Government to focus their energies and prioritise their expenditure on goals of inclusive development, namely in the areas of healthcare, education and shelter.
Savings and Investment: The Committee understand that savings and investment are the two critical macroeconomic variables with microeconomic foundations for achieving sustainable economic growth. They, therefore, are deeply concerned about the marked decline in domestic savings, domestic investments and demand in our economy. To achieve and sustain growth at high levels, the Government and RBI should take concerted efforts to increase domestic savings and investments through calibrated adjustments in policies.
Agriculture Sector: The Committee observe that the share of agricultural sector in the GDP has declined considerably over the last 60 years, from 53.1 per cent in 1950-51 to 13.9 per cent (Advance Estimates) in 2011-12. The Committee urge upon the Government to make larger public investment in the sector and infuse funds especially for post-harvest technologies, infrastructure support, massive programmes for extensive irrigations facilities and ensure enhanced yet cheap credit to the farmers so as to achieve the targeted 4 per cent average growth in agriculture.
Industry and Manufacturing: The Committee are disappointed to see the fall in industrial growth from 8.4 per cent in 2009-10 and 7.2 per cent in 2010-11 to 3.4 per cent in 2011-12, which has been the main reason for the fall in overall GDP growth in 2011-12. The Committee desire the Government to chalk out an action plan to create a positive investment climate, address supply-side constraints, provide incentives for capacity addition, rationalize interest rates on credit, step up the performance of the energy and transport sectors, bring down time and cost overruns in major infrastructure projects and create job opportunities by imparting skills to citizens.
Credit to productive sectors: The Committee note that the RBI's recent Statutory Liquidity Ratio (SLR) reduction from 24 per cent to 23 per cent of Net Demand and Time Liabilities (NDTL) with effect from August 11, 2012 is done to give banks a cushion to extend more credit to private sector than investing in Government securities. This reduction in SLR is expected to infuse around Rs.68,000 Crore in to the market which may encourage flow of credit to productive sectors of the economy. The Committee desire that the RBI should strengthen the mechanism to protect the financial health of the banking sector.
Services sector: The Committee are extremely disturbed to note that even the services sector which has been the vital force steadily driving the Indian economy for over a decade too has shown signs of moderation. In 2011-12 there has been a dip in the growth of services to 8.9 per cent from 9.3 per cent in 2010-11 and 10.5 per cent in 2009-10 though the advanced estimates expected it to realize a growth rate of 9.4 per cent in 2011-12. The Committee recommend that a study group be constituted to identify the maladies in the sector and action be taken on priority basis to cure them.
Exports and Imports: The Committee note that exports have recorded a growth of 23.6 per cent during 2011-12 as compared to 37.5 per cent in 2010-11. Our imports too have registered a growth of 31.1 per cent from 26.7 per cent during the same period. The Government should explore options like promoting austerity in oil consumption, maintaining a strategic storage pool of oil to offset the price fluctuations of crude in the international market, alternatives like electric and hybrid vehicles, etc. and discourage the import of gold and silver.
FDIs and FIIs: From the submissions of the Chief Economic Advisor, the Committee understand that the Foreign Direct Investment (FDI) gross inflows to our country in 2011-12 was an all time high at USD 46.8 billion as against USD 29.4 billion in 2010-11. Net FDI inflows of USD 22.1 billion and NRIs deposits at USD 11.9 billion were also higher in 2011-12 vis-a-vis USD 9.4 billion and USD 3.2 billion respectively in 2010-11. The Committee, therefore, recommend that the FDI policy may be reviewed by the Government to make India an increasingly attractive and investor friendly destination for foreign investors.
Fiscal Deficit: The fiscal deficit, which is estimated to be 5.9 per cent of GDP in 2011-12 as against a target of 4.6 per cent, is at an uncomfortable level and has become an issue of great concern. The Committee find that at the end of June 2012, fiscal deficit has touched 37.1 per cent of the budgeted amount as the Government struggled to curtail expenditure. According to the data released by the Controller General of Accounts, the shortfall between expenditure and revenue stood at Rs.1.9 trillion. Rationalize and monitor capital and revenue expenditures including subsidies; review the method of calculating notional under recoveries of oil companies on the basis of import parity pricing mechanism for petroleum products than on actual refinery costs; enhance gross revenue collection by plugging loopholes in the tax system to reduce tax avoidance, recovery of tax arrears and phasing out of tax exemptions/incentives for Corporates; optimise available resources and above all improve the quality of public expenditure.
Current Account Deficit: The Committee are also gravely concerned about the unsustainable Current Account Deficit (CAD) that has become a serious threat to the macroeconomic stability. In 2011-12, the country has reported an all time high CAD both in absolute terms as well as proportion to GDP at USD 78.2 billion (4.2 per cent of GDP) vis-à-vis USD 45.9 billion forming 2.7 percent of GDP in 2010-11. In this context, the Committee strongly feel that concerted efforts should be made by the Government to bring down the import of POL, discourage unproductive imports like gold and silver and boost competitive domestic production.
Dissent: In a dissent note, Mr.Gurudas Dasgupta stated, "The report is stereotyped, does not search for alternative policy which the nation is looking for."