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Unusual business

March 18, 2012

THE Economic Survey 2011-12 indicates that the Chief Economic Adviser is very optimistic about the Indian economy. GDP growth for the year 2012-13 is projected to rise to 7.6 per cent, compared to the current level of 6.9 per cent. Since the growth rate in the third quarter of 2011-12 was barely 6.1 per cent, it expects quite a revival in growth. At the same time, on the other big macroeconomic indicator, inflation, the survey argues that the Reserve Bank of India’s policy of inflation control has worked. It expects RBI to start easing monetary policy. The Indian economy, it argues, remains among the fastest growing economies in the world....

The two planks on which higher growth depends — fiscal consolidation and lower inflation — appear more of a hope and a dream than a realistic estimation. While a cap on subsidies is desirable, it is a view of the CEA rather than a decision by the government to raise diesel prices, cut fertiliser subsidy or reduce the food subsidy bill. The lack of political consensus on these issues even within the [governing coalition], and [coalition member] All India Trinamool Congress opposition to even the smallest price increases, suggests that while this is a desirable goal, it will not be easy.

If the Economic Survey were to paint two scenarios, one a baseline, most realistic scenario, and one an optimistic one, it seems that its projections are based on the latter. Given the marginal influence of past Economic Surveys on Union budgets the following day, it would be a good policy for the CEA to also present to the government a baseline scenario in which he should say what would happen to growth and inflation if the government were to continue with business-as-usual. ...— (March 16)