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What advice is the Prime Minister getting?
The prime minister of India is advised by renowned experts on economic matters. The prime minister’s economic advisory council (PMEAC) headed by C Rangarajan, former Reserve Bank of India governor, recently reviewed the state of the economy for the year 2012-13. The council suggested steps that the government needs to take to stimulate economic growth.
Here are pointers on key recommendations made:
Speedy project clearances:For an economy to grow fast, it is important for businesses to expand or build new capacities. In the current context, the economic council suggested achieving the production and capacity creation targets in the key infrastructure sectors such as coal, power, roads, railways and ports. The idea is to push government companies in these sectors to invest more. The government has already set up a cabinet committee on investment to clear projects but needs to do more, the panel said.
Reduce current account deficit:Experts have asked the government to reduce gold and oil imports. The economic council believes that the appetite for gold among Indians could go down if inflation is controlled. A current account deficit occurs when a country spends more foreign exchange than it receives. This is largely seen in economies that import more than export. India’s current account deficit is expected to grow to $ 100bn or 4.7% of gross domestic product or GDP in 2013-14 against $ 94bn or 5.1% of GDP in 2012-13. A high current account deficit lowers rupee value and stokes inflation. The government also needs to encourage capital flows into the country. This is well understood by the government as finance minister P Chidambaram travelled to US and Canada recently to address foreign investors’ concerns over investing in India.
Make savings attractive: Indian businesses and government need to invest more to stimulate growth. The new investment is also financed through domestic savings. Over the past few years, Indians have saved less though. The savings rate fell to 30.8% of GDP in 2012-13 from well over 38% five years ago. The council observes that there is a fall in savings by individuals in mutual funds and insurance products. “There is a need to reverse this decline in investment in financial assets through more attractive savings products and environment,” the economic review report recommends.
Inflation: While the wholesale price inflation is following a declining trajectory, food inflation continues to stay around 10%. The PMEAC has said that the Agricultural Produce Marketing Committee Act (APMC) limits the freedom of farmers to sell directly to consumers. Farmers are forced to sell cheap and consumers are forced to pay high for fresh produce like - vegetables, fruit, eggs, meat and fish. This creates distortion in food prices. The existing system also discourages any investment in cold storage and modern supply chain management.
In 2013-14, the prime minister’s economic advisory council expects headline whole sale price inflation (or WPI) to be around 6%, with primary food inflation around 8%, fuel at about 11% and manufactured goods at around 4%. For the year ended 2012-13, WPI stood at 5.96%. This means the expert panel does not expect the trajectory of WPI to fall. This is bad news for those expecting sharp cuts in benchmark rates from Reserve Bank of India. The prediction on inflation suggests that RBI may not be in a hurry to reduce rates.