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Monday, 02 January 2012 03:48
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Reconciling fiscal stability with food Bill is key


Enough has been said over the last year about the reforms that didn’t happen, so prime minister Manmohan Singh has done well to say he doesn’t want to dwell on the year gone by and would rather focus on the challenges ahead. While doing so, however, it is important to keep in mind that, despite everything, India still invested around $480 bn in 2011 and consumers spent upwards of a trillion dollars. It was a year in which college enrollment rose to around 20%, from 5% in 1980 and 12.5% in 2007-08, proving like nothing else, that the market is functioning well — higher wages to college graduates got individuals to realise that going to college was their best way to get paid more. Though there is no data for 2010-11 as of now, data for 2009-10 (http://epaper.financialexpress.com/20789) shows there has been a large fall in poverty levels for poorly-performing groups like Muslims and STs — since wages have risen hugely, that augurs well for all-round poverty reduction. So, 2011 hasn’t been anywhere near the complete write off most think it was.

How 2012 will pan out will depend on a variety of factors. The US is looking a lot more stable, but Europe’s crisis still has a way to go before it plays out. China looks stable and on course to grow at 7-8%. In which case, the world looks good for a 3.5% growth and India for around 7%. That means investments of around $550 bn in 2012 and around $1.2 tn in terms of consumer-spending, not numbers to scoff at.

If the PM is able to ensure India moves back to fiscal correction, as he has said it will in his New Year speech, this will be a big boost to the economy since it will mean lower interest rates as the government will no longer be pre-emptying as many resources. Add to this, the impact of lower inflation levels, and it means RBI will lower interest rates, giving a further stimulus to growth. Of course, wanting to move back to fiscal stability and actually doing so are two different things. Just the Food Security Bill, going by the estimates made by Ashok Gulati who heads the Commission for Agriculture Costs and Prices (CACP), will add around 2 percentage points to the fiscal deficit! The saving grace here is that the pipeline for investment projects is very good — which is why, despite new investment announcements falling by half in 2010-11, the dip in completed projects is very small. If the government just focuses on execution of projects in the new year, that may be good enough.



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