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Economic Survey 2005-2006
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Issues and Priorities (contd)
The Survey calls for a shift in emphasis and focuses attention on the quality of outcome of the various social sector programmes dealing with health and education rather than their quantity or mere coverage.
While the worry about rapidly growing imports and the burgeoning current account deficit appears to be somewhat misplaced, the possible risks to an otherwise rosy outlook arise from: inflation; interest rate; and fiscal stance. In a capital-scarce economy like India, a current account surplus is symptomatic of insufficient investment. There is clear need to enhance investment. Higher investment is likely to result in higher imports of basic, intermediate and capital goods and trade and current account deficit. Such a deficit, however, is unlikely to pose a balance of payments problem as the commodity composition of non-oil imports, with the exception of gold and silver, is biased in favour of capital and other essential inputs and is likely to add to the export momentum in the future.
High and volatile international petroleum prices impart an element of uncertainty in the inflation outlook not only for India but also the world economy. With increasing dependence on imported crude and growing openness, India is no longer insulated from the rest of the world in price developments. This inflation uncertainty, together with the unresolved global macroeconomic imbalances, casts its shadow on the interest rate scenario. A continued firming up of global interest rates beyond a point poses the risk of dampening the domestic investment boom. The fiscal risk, both at the Central and State levels, arise from the argument that the fiscal adjustment process in India has led to expenditure compression of the wrong kind. It is important to safeguard against this argument as the solution lies in not increasing the deficits, but in meeting squarely the challenge of improving the quality of expenditure. Expansionary fiscal policies of the past have resulted in the present expenditure profile and any solution for correction of the same through higher fiscal deficit is reductionism. The journey for sustained economic growth and stability is a long one and quick fix solutions for higher fiscal deficit to temporarily prop up growth through expansionary policies, albeit in increasing productive capacity, would prove to be counterproductive. Instead, there is much scope for better productivity in expenditure and greater growth dividend through deepening the reform process that could harness higher savings and investment.
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