This pace, make it a habit

THE MONSOON EFFECT

If the economy is seemingly doing well, none gets more credit than the monsoon. The anticipated ‘‘high’’ growth rate of nearly 7 per cent is, partly, a statistical illusion. The GDP growth rate in 2002-03 was only 4.3 per cent. So, even if the growth curve returned to the normal trend line, the growth rate will appear to be impressively high. The MYR itself acknowledges that, in the agricultural sector, this is exactly what will happen this year as it happened following the drought years of 1966-67, 1974-75, 1979-80 and 1987-88.

Look at the figures of Kharif production. 2001-02 was a normal year and 2002-03 was a drought-affected year. Rice production in 2001-02 Kharif was 79.76 million tones, it declined to 66.51 mt in the following year. In 2003-04 (the good monsoon year) rice production in the Kharif season will increase to 75.05 mt, but it would still be lower than the production in 2001-02. Yet, for statistical purposes, there will a growth of 13 per cent! Coarse cereals production was 26.92 mt in 2001-02, 20.13 mt in 2002-03 and is expected to be 27.96 mt in 2003-04. That means coarse cereals production will return to normal in the current year; yet in terms of growth, the record will show a growth rate of 38 per cent! Therefore, when the MYR talks about a double-digit rate of growth in agriculture (propelling a 7 per cent GDP growth), it would be prudent to do a reality check.

The sectors that are showing remarkable results are Industry and Services. Against a growth rate of 6 per cent in 2002-03, Industry has recorded a first quarter growth of 5.8 per cent. The growth in the Index of Industrial Production (IIP) stands at 5.8 per cent for the period April to September, compared with 5.4 per cent in the same period last year. Similarly, the Services sector, after recording a growth rate of 7.1 per cent in 2002-03, has maintained a growth of 6.9 per cent in the first quarter of this fiscal year. Thanks to the good South-West monsoon, the second quarter demand would have got a boost. Hence both Industry and Services ought to have done better in the second quarter. If these two sectors maintain these growth rates, the economy will indeed grow by nearly 7 per cent this year.

THE WORRYING FACTORS

There are, however, some worries. Firstly, inflation. The fiscal year began with an annual point-to-point inflation rate of 6 per cent. After rising to 6.6 per cent in April, it has shown a downward trend, but the MYR estimates that it will remain through the year at 4 per cent. Some time ago, the Government, the Planning Commission and the Reserve Bank of India had agreed that inflation should be kept below 3 per cent. Has that goal been given up? In Indian historical terms, an annual inflation rate of 4 per cent seems a remarkable achievement, but it is nevertheless a loosening of the resolve to fight the long-term enemy and push it to below 3 per cent.

The second worry is oil prices. The MYR notes that the recent OPEC decision to cut crude oil production from November 1 may push crude oil prices beyond the current level of $31 per barrel and could exert an upward pressure on domestic energy prices. It also notes that the subsidy burden on kerosene and LPG may also rise. (Mr Ram Naik will ensure that!)

The third worry is the decline in Foreign Direct Investment (FDI). The first quarter ended with a current account deficit of $1.2 billion, but that was more than made up by a capital account surplus of $6.1 billion. Of this, foreign investment accounted for $ 2.8 billion. Of foreign investment, FDI accounted for only 0.8 billion and the remainder ($2.0 billion) was through Foreign Institutional Investment (FII). The trend has continued into the second quarter as well. According to the MYR, it has been estimated that in the first six months of this fiscal, FII inflow was $ 3.44 billion, whereas FDI inflow was a dismal $ 0.99 billion. This should be a matter great concern for the Finance Minister.

The fourth worry is the sluggish growth in bank credit. Upto October 17, 2003, non-food credit recorded a growth of 5.7 per cent (compared with 15.8 per cent last year). Food credit growth was negative. These are inexplicable trends. There is abundant liquidity. Interest rates are at a historical low. PLR of commercial banks has declined to 10.5 to 11.5 per cent. Businesses are reporting healthy toplines (sales) and healthier bottomlines (profits). So, why is there not a greater demand for credit and why is there not greater investment?

The last — and perennial — worry is the deficit. Both revenue deficit and fiscal deficit as a percentage of the budget estimates are running higher than, at this time, last year. Wasteful expenditure continues, notwithstanding the Fiscal Responsibility and Management Act.

If elections are held on schedule, Mr Jaswant Singh has one more year at the wheel. It is not enough to ‘‘feel good’’ this year, it is necessary to revive the engine of growth so that the pace of growth, at 7 per cent or more, will be maintained through the next five or ten years. In the recent past, we achieved a high growth rate once, but we could not maintain the momentum beyond three years (1994-95, 1995-96, 1996-97). India cannot afford to scale the mountain once again and slide down once again.

The ‘‘feel good’’ should not turn out to be a false dawn. The key to high growth is to curb wasteful expenditure, tame inflation and boost investment. When that happens, we can all truly feel good.

Write to the author at
pc@expressindia.com