Getting into the Super Six

Despite food and foreign exchange mountains and low inflation rates, this is the NDA government’s singularly most important macroeconomic failure, something it refuses to acknowledge. Hence, when this year’s Economic Survey has a graph that depicts the post-reform economy’s takeoff in the nineties, the graph ends in ’96-’97. Growth retardation is blamed on cyclical factors and unfavourable exogenous and endogenous circumstances. There has been no dearth of bogeys — both exogenous and endogenous. The latest in the first lot of excuses is Iraq, while that in the second, drought.

Actually, we aren’t supposed to do 8 per cent in 2003-04, even if we adhere to the annual average target of 8 per cent during the Tenth Plan. Growth picks up gradually. So 6.7 per cent in 2002-03, 7.3 per cent in 2003-04, 8.1 per cent in 2004-05, 8.7 per cent in 2005-06 and 9.2 per cent in 2006-07. Those are the targets. Will we do 7.3 per cent in 2003-04, now that the budget has been presented? Let’s be fair. All kinds of things are necessary to get there and the budget cannot provide all of them. Let’s ask a different question. How well does the finance minister think we will do in 2003-04? You might find this a bit difficult to believe, but the budget doesn’t stick its neck out in answering this question. Forget real, no nominal GDP growth figure is given. Instead, you have a fiscal deficit/GDP ratio given for 2002-03 and 2003-04. Since you know the absolute fiscal deficit figure, you can plug this in and work out nominal GDP figures for 2002-03 and 2003-04. This is what budget analysts have done and, thanks to them, you know the budget expects a nominal GDP growth rate of 11.3 per cent in 2003-04, using the revised estimates for 2002-03 and budget estimates for 2003-04. This is nominal. That is, it is real plus inflation. The budget won’t give you separate figures for real and inflation components. The more aggregated your projection, the lower the chances of your going wrong. Ignoring the odd decimal place, the budget probably expects around 6 per cent as real growth and around 5 per cent as inflation.

Independent of an Iraq war, as opposed to speculative increases in global oil prices in anticipation of the war, the inflation target seems reasonable. Fuel prices have tended to increase and will increase a bit more. Despite the spectre of drought, agro prices haven’t increased, barring the odd bajra or groundnut. With some revival in demand, manufactured prices have increased a bit. But there is still excess capacity and competition, not to forget excise duty cuts following the budget. If you expect inflation of 4 per cent in 2003-04, you won’t be far wrong.

What about real growth? That’s an impossible question to answer, because no one yet knows what GDP was in 2002-03. If you use budget figures the way I suggested earlier, you find nominal growth of 6.7 per cent in 2002-03. That’s clearly impossible. Both the Economic Survey and the budget speech mention CSO’s (Central Statistical Organisation) advance estimates of 4.4 per cent growth in 2002-03. What with advanced, revised, quick, provisional and final estimates, you won’t know what GDP growth in 2002-03 really was for at least two years. It’s fashionable to blame CSO for this mess. But there are problems with our data collection system and you will find a long litany of woes mentioned in the National Statistical Commission’s report, submitted in August 2001. All three sectors (primary, secondary, tertiary) that contribute to GDP have data problems. The 4.4 per cent advance estimate for 2002-03 is driven by 3.1 per cent decline in agriculture.

Figures on decline in kharif sowings have been ascribed to the entire primary sector, quite apart from states trying to maximise impact of drought. Eventually, 2002-03 will probably have marginally over 5 per cent growth and 2003-04 will have marginally over 6 per cent growth. Many budget initiatives like infrastructure are long-term. Short-term consumption driven and “feel good” driven growth is the answer for 2003-04. If this doesn’t materialise, growth and revenue projections will go haywire and we will have a fiscal/deficit GDP ratio that crosses 6 per cent.

How contingent is this Super Six growth assumption on Iraq? We don’t know what will happen in Iraq. Despite near universal opposition, the US will probably bamboozle the UN into a war. A war in Iraq won’t be short. Iraq is not Afghanistan. Oil prices will shoot up in the short-term to 40 dollars a barrel or more. Who knows? Repatriation costs for NRIs stranded there, no remittances from that region, loss in exports to that region, higher crude prices. But there are four related reasons why 2003-04 is not 1990-91. First, reserves of 75 billion dollars and better debt indicators. Second, no reason for international credit rating agencies to lower external ratings. Third, reduced reliance on NRI deposits. Fourth, a market-determined exchange rate. The balance of payments (BOP) is comfortable, too comfortable. One suspects the government would like some pressure on the BOP, so that the rupee depreciates. The Iraqi connection will be more through its impact on global growth and adverse effect on exports. Shave off that 20 per cent dollar growth in exports and you lose 2 per cent GDP growth. Instead of 6 per cent, we get 4 per cent and, certainly, projections go haywire. But Economic Survey will still say very few countries in the world get 4 per cent growth. And, but for Iraq, we would have got into the Super Six.