Intensify reforms, cut subsidies for economic recovery: Rangarajan

Underlining the need for pump-priming the economy by intensifying reforms and trimming subsidies, Prime Minister's Economic Advisory Council Chairman C Rangarajan on Monday said if India grew at 8 to 9 per cent each year, per capita GDP would rise to $10,000 by 2025.

He said that if this growth rate was achieved "then India will also transit from being a low income to a middle income country".

The eminent economist and former RBI governor was speaking on the subject "Indian Economy: Immediate Challenges and Medium Term Concerns" while delivering a lecture on NALCO's foundation day.

Emphasising the need to overcome the current low growth phase as quickly as possible, Rangarajan said growth was the answer to many of the country's socio-economic problems and several schemes aimed at broadening the base of growth had been launched recently.

Stating that raising savings and investment could take India back to the very high levels of growth seen earlier, he said taming inflation, containing current account deficit and ensuring fiscal consolidation were the major tasks requiring immediate attention.

While efforts must be made to raise revenue-GDP ratio, it is imperative to check expenditures, particularly subsidies which need to be pruned, well focussed and prioritised," Rangarajan says adding "it is upto the government to decide which subsidies must take preference over others."

What is needed is to have a fix on the quantum of subsidies to be provided as a proportion of GDP or of government revenue, he said referring to government's hint at reducing subsidies from 2.6 per cent of GDP in 2012-13 to 1.6 per cent of GDP in 2015-16.

"This calls for several policy actions which may not be popular, but such actions are needed," he said.

Regarding high inflation, Rangarajan said that for sustained high growth, price stability was a pre-condition and added that monetary policy and fiscal policy had to play their part in containing overall demand pressures.

India's Current Account Deficit (CAD) remained low till 2008-09, but started rising thereafter, he pointed out adding despite a strong growth in export of goods and services CAD rose from $46 billion to $78 billion in 2011-12.

Observing that gold imports remained high at 54 billion dollars, Rangarajan said, "We must need to dissuade people from being attracted to the yellow metal."

Rangarajan said over the next few years India needs to keep the CAD at a more comfortable level of 2.5 per cent of GDP. The level of comfort, he said, was related to capital flows that can come in without any extraordinary efforts.

Pointing out that economic growth declined more steeply than warranted by the decline in investment, he said that this might be because projects had not been completed in time or complementary investments had not been forthcoming.

"The fact that even today savings and investment rates are at high levels reassures us that if we are able to find ways to complete projects speedily, the country will be able to usher in rapid growth in income even in short run" he said.

"Nevertheless, while existing level of investment rate should enable us to grow at 7.5 per cent in the short run, a return to higher level of savings and investment can take us back to the very high levels of growth .. this is the potential and to achieve it we must also take actions to remove constraints that may come in the way," he said.

Highlighting some medium-term concerns before Indian economy, Rangarajan says that two sectors which posed a major challenge are the farm economy and power sector.

Noting that the last three years have clearly shown how a decline in agricultural production can cause serious distortions in the economy, he said necessary steps must be taken to revitalise traditional crop agriculture which is vital to food security and farm income.

It is imperative to aim at GDP originating from agriculture and allied activities growing at 4 per cent per annum, he said adding steps should also be taken to strengthen agri-marketing and infrastructure.

On power, he said, to add 75,000 mw generation capacity, an aggressive path is the answer while constraints like availability of coal, land acquisition and environmental issues need to be tackled for capacity expansion.

Stressing on growth and equity, Rangarajan said economic growth implies improvement in the material well-being of people which necessarily includes better health, education and sanitation. "On the other hand enhanced social development expenditures cannot be sustained over a long period unless supported by accelerated economic growth," he said.

Growth would have no meaning unless it brings in its scope the bulk of the population, he said adding "in effect, the country must learn to walk on the two legs of growth and social development."

It was also important to note that in the recent period environmental and land acquisition issues had assumed a certain urgency, he said adding "we need to have a compromise between compulsions of growth and concerns for environment."

In a bid to broaden the growth base, a number of schemes like employment guarantee scheme, universalise education, expansion of rural health and providing food security have been launched.

Development had many dimensions, he felt saying it had to be inclusive, poverty reducing and environment-friendly and there was a need to incorporate all this in the growth process.