|That magic 9%|
|Thursday, 24 February 2011 00:00|
What a difference a year, nay six months, make. Six months ago, the Prime Minister’s Economic Advisory Council (c) levels of $50 billion for 2010-11 and $55 billion for 2011-12—the latest projection, a few days ago, was $28 billion for 2010-11 and $40 billion for 2011-12! Yet, thanks to a change in some other projections, the GDP projections for 2011-12 still remain at 9%, a figure that even the World Bank has endorsed in its projections a few days ago. Apart from the obvious caveat that we would do well to revisit the numbers a few months from now (some would argue the BP investment in RIL is the turning point), it’s a good idea to delve a bit deeper.
Once you do that, it becomes clear that neither the PMEAC nor the World Bank are assuming the growth will come from a business-as-usual behaviour. There are, of course, differences in both projections. While both project a 3% growth in agriculture, the World Bank expects industry to grow a bit faster and services a little slower than the PMEAC does. Both have very different investment rates, which is what really props up GDP growth, but the similarity lies in the fact that both are looking at investment rates going up. How this is to be achieved is interesting. The PMEAC expects government consumption to fall from 12% of GDP in 2009-10 to 11.4% in 2010-11 and further to 10.3% in 2011-12—in other words, the combined state and central fiscal deficit probably has to come down by around one percentage point. It is this reduction in government expenditure that the PMEAC projects will translate into an increase in investment levels. The World Bank is of the view that increased public sector investments will come from the buoyancy in government revenues, probably due to the introduction of GST. Either way, the bottom line is that a 9% growth requires the Budget to take some big first steps.