The Mid-Year Economic Review of the Finance Ministry paints a pretty picture of the economy just prior to a series of elections. But indications are that the projected financial successes have not translated themselves into real growth.
IN a pre-election propaganda putsch, the National Democratic Alliance (NDA) government has taken credit for spurring an economic boom by managing everything from the monsoon to the speculative appetite of foreign institutional investors. The Mid-Year Economic Review released by the Finance Ministry on November 14 paints a hyped-up picture of an economy ostensibly on the roll, and promises more if reforms are kept on track.
As the media has been quick to note, the timing of the document's release, besides its content, establishes the real motives of its authors. The Fiscal Responsibility and Budget Management Act (FRBMA), enacted earlier this year, requires the government to place before Parliament a quarterly report on receipts and expenditures, as a means to monitor the government's effort at realising the inexplicable fiscal targets it has set for itself. The first of these (relating to April-June) was placed before Parliament on August 7. So it is indeed time for the second. But neither is the quarterly report meant to be a major event in the government's reporting calendar, nor is it expected to be released to the public if Parliament is not in session, as is the case at the moment.
This lends credence to the view that it is not the FRBMA but the impending elections in a number of States that have encouraged the government to stick to the reporting calendar. Using the FRBMA's mandate and the badly formulated excuse that "a pathological report" cannot wait, the Finance Ministry has chosen to contribute to the ruling coalition's election effort by rushing to the press with this document.
There is much the Finance Ministry has dredged up to crow about. The gross domestic product (GDP), it claims will grow by 7 per cent this financial year (2003-04) as compared with 4.4 per cent in the previous year. Inflation, which was a threat at the beginning of the fiscal, having risen to 6.6 per cent in April, has since shown signs of decline and is predicted to rule at just 4 per cent over the financial year. Mid-year results reported by a number of leading corporates point to a year of higher profits. Above all, India's foreign exchange reserves have risen by $17.2 billion during April-October to a record $92.6 billion, despite outflows of $5.18 billion on account of redemption of the Resurgent India Bonds.
While some of these figures may be more in the nature of optimistic projections, they are more or less in line with what other agencies like the Reserve Bank of India (RBI) have put out in recent times. The hype lies in the interpretation of these figures. Explanations for the current upturn in the graph of economic performance are not difficult to find. The year ending October 2003 is best characterised as one marking a transition from a drought-induced slump in the principal commodity producing sectors of the economy to a situation of modest, across-the-board revival. Agricultural marketing year 2002-03 saw a sharp fall in kharif output from a 112 to 91 million tonnes and in rabi production from 101 to 92 million tonnes. A poor monsoon during June-September 2002, when rainfall was 19 per cent below normal, was obviously the principal explanatory factor.
One remarkable feature of this period, however, was that unlike in the past a monsoon as poor as this, with its attendant effects on output, did not impact too adversely on prices. The most immediate explanation for this was of course the large grain stocks with the government that helped ensure that supply was well in keeping with demand. These stocks, however, have been attributed by many economists to an inadequacy of purchasing power resulting from an overall deflationary environment during the latter half of the 1990s, when hopes of a "new growth trajectory" promised by the reformers were belied.
It is in this background that signs of a recovery in growth over the last year have been received with some relief. But the recovery has been hesitant and far too slow to realise the 8-9 per cent growth targeted by the planners. Though rainfall figures point to a gradual end to the drought starting October 2002, and the fact that the monsoon during June-September was extremely good, with excess rainfall in more than 90 per cent of the subdivisions, the rise in agricultural production has been restricted. The revival in kharif production in 2003-04 by 20 per cent to a projected 108.5 million tonnes still keeps it below the level attained in the 2001-02 kharif season. Based on optimistic estimates of what the rabi crop would be, the review expects foodgrains production in 2003-04 to surpass its previous high of 212 million tonnes achieved in 2001-02. But even that would not imply that the trend rate of growth over time would be significantly raised.
Further, thus far, the good monsoon has not provided much of a stimulus to industrial growth. The most recent Index of Industrial Production (IIP) figures suggest that industrial growth during April-September was only 5.8 per cent and the manufacturing segment has recorded a marginally higher 6.3 per cent growth. If corporate earnings have been buoyant yet, it is primarily because of the "other incomes" of corporates, possibly derived from their treasury operations.
OVERALL, however, there is some evidence corroborating the assessment of a revival of growth in recent months. The quarterly estimate of GDP (at factor cost) relating to the first quarter of financial year 2003-04 released by the Central Statistical Organisation (CSO) suggests that the quarterly growth that stood at 2.3 and 4.9 per cent respectively during October-December 2002 and January-March 2003 rose to 10.5 per cent during April-June 2003. While these figures are provisional, they do suggest that monsoon-induced agricultural recovery, the modest industrial revival suggested by the IIP must have combined with some dynamism in services to help GDP along.
The government has, of course, been arguing that there are pieces of indirect evidence to suggest that industry too is turning buoyant. Growth in the capital goods sector has picked up sharply. And much is being made of recent signs of buoyancy in India's imports. Despite trade liberalisation, India's import growth in recent years, especially of its non-oil imports, had been subdued, largely as a result of the sluggishness of growth in the commodity producing sectors. However, recently released figures indicate that India's imports during the first quarter of fiscal 2003-04 was at $17.3 billion, the highest in a decade. In fact, since the third quarter (October - December) of fiscal 2002-03, imports have been growing at over 20 per cent relative to the corresponding quarter of the previous years. Since such high and sustained import growth rates were last seen in the mid-1990s, this revival in import growth is being attributed to the revival the economy is witnessing.
As a result of higher imports, the trade deficit has already touched $6 billion for the first five months of fiscal 2003-04 and the first quarter of that fiscal year has seen a current account deficit of $1.2 billion against a $4.1 billion surplus for 2002-03. Under other circumstances this would have been cause for some worry. But the revival that this is seen as signifying, has been received with some celebration as it is associated with three other signs of ostensible "robustness" of the Indian economy.
First, a sharp rise in the inflow of foreign institutional investor (FII) capital that touched record levels and established India as a favourite among emerging markets. Even by September 30, FII inflows at $3.09 billion had exceeded their previous full-year peak of $3.058 billion recorded in 1996. What is more, evidence suggests that inflows were accelerating with net inflows in October exceeding $1 billion, which is the highest for any single month since Indian markets were opened to these investors.
Second, an unusual strengthening of the rupee, especially vis-a-vis the dollar, leading to a situation where exporters and even the government have started worrying about the adverse impact this would have on the competitiveness of India's exports and the size of the balance of trade deficit. Export growth in dollar terms during April to September has fallen from 18.1 per cent in 2002 to 10 per cent in 2003. The recent surge in foreign capital flows into India, at a time when India's need for foreign exchange to finance its current account deficit is minimal, has obviously been responsible for this. In the more liberalised foreign exchange management system introduced post-liberalisation, wherein the availability or supply of foreign exchange relative to the demand for the same has a role in determining the exchange rate, this has led to an appreciation of the value of the rupee relative to the currencies of its trading partners. Between November 8, 2000 and October 10, 2003 the exchange rate of the rupee rose from 48.34 to 45.38 to the dollar and 47.87 to 53.12 to the euro. A sudden appreciation of the rupee renders exports more expensive and imports cheaper. This could result in sluggishness in export growth and an increased demand for imports, leading to a widening of the balance of trade deficit, a process of domestic de-industrialisation and a subsequent weakening of the currency that may be difficult to halt because of a panic withdrawal by foreign portfolio investors.
Third, to prevent such developments, RBI has been forced to purchase dollars from the market and adjust the imbalance between the demand and supply for foreign exchange in order to reduce the pace of appreciation of the rupee, even if not to reverse the process. The consequence has been a massive acquisition of foreign currency by RBI, which resulted in the accumulation of record foreign exchange reserves, in excess of $90 billion by mid-October 2003.
The government's "feel-good" propaganda blitz, reflected in the Mid-Year Review, is driven more by these factors then the modest revival in the commodity producing sectors. However, it should be clear that these signs of "buoyancy" are double-edged in nature. While nationalist sentiment may be buoyed by a stronger rupee and a large foreign reserve, indications are that these financial successes have not translated themselves into real growth; that India is finding it difficult to "absorb" the huge inflow of speculative portfolio investment into the country; and that there is a danger of the rupee's appreciation having adverse balance of trade and growth effects. All of these could result in international financial investors' view of India changing rapidly from being today's favourite to tomorrow's feared destination. But such caution is hardly material to support a document seeking to paint a pretty picture of the economy just prior to a series of elections.
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