That’s the message from PMEAC to government
Given how the PMI indices and even the advance estimates for 2011-12 show growth has begun to pick up over the past few months, it's hardly surprising that the Prime Minister's Economic Advisory Council expects 2012-13 growth to be marginally higher at 7.6% than the 6.9% for 2011-12 which the Advance Estimates have projected. While the Advance Estimates showed consumption grew 5.6% in the first half of 2011-12, it projects a 6.4% growth for the full year – PMEAC expects consumption to grow 6.7% for 2012-13. In the case of investments, where 2011-12 growth is expected to be 5.6% (as compared to just 3.5% in the first half of the year), PMEAC projects 2012-13 growth at 9%.
What is important than the projections, though, is what PMEAC has to say about what led to growth contracting in 2010-11 and how this will play out in 2012-13. The biggest reason for the 2011-12 contraction, PMEAC says, is a sharp fall in investment rates – gross domestic fixed capital formation
fell from 32.3% of GDP in 2007-08 to a mere 30.4% in 2010-11. Within this, PMEAC points out, the largest fall has been that in investments by the private corporate sector where this ratio fell from 14.4% to 9.9% – in real terms, this fell from Rs 637,139 crore (at 2004-05 prices) to Rs 599,790 crore. Given that private corporate sector accounts for around 45% of investment in the economy, a sharp fall is a matter of serious concern and will affect 2012-13 growth. This is directly related to the sharp fall in savings rate, from 36.8% of GDP in 2007-08 to 32.3% in 2010-11 – 3.3 percentage points of this was contributed by a fall in public sector savings. This is due to the rise in fiscal deficit and the fall in savings of PSUs (think of the Rs 1 lakh crore-plus of subsidies being borne by oil PSUs for instance) and of departmental enterprises like the railways (think of the Rs 15,000 crore of subsidies on passenger trains, going by the Anil Kakodkar report last week). Then there's another 1.4 percentage points of a decline in savings of the private corporate sector as a result of the fall in profit margins.
In other words, PMEAC has a clear message: savings and investment levels, and therefore growth, are not going to go up unless the government fixes not just its deficit but policies on fuel and railway subsidies as well. Two, the government has to make a concerted effort to boost investor confidence – right now, in contrast, investors have enough stories of how the government is arm-twisting them, starting from Cairn-Vedanta and going on to Vodafone. It is because PMEAC believes this will happen that it projects higher economy-wide savings and investment levels for 2012-13 as well as lower growth in government expenditures. While PMEAC expects a huge jump in FDI levels – again, a function of the government's ability to enthuse investors with reforms – in 2012-13, it makes an interesting point about government policy – it points to how investments in life insurance and mutual funds have fallen as a lack of arbitrary changes in policy. It reiterates the get-your-act-together message when it says, on inflation, that RBI interest rate policy is contingent on the government trimming its expenditure and borrowings in 2012-13.