Drifting south

Print edition : August 15, 1998

The policy-straitjacket created by the BJP-led Government's ideological inclinations and the constraints generated by its own hawkishness have virtually incapacitated its economic-policy arm, and this has added to a deepening recession.

BY focussing attention on nuclear tests, Ram mandirs and border skirmishes, the Bharatiya Janata Party has managed thus far to divert public attention from the national economy, which has been on a downward slide. Consider the figures for the first quarter of 1998-99: the annualised growth rate of industry during April-May 1998 (as per the revised index of industrial production, or IIP, with 1993-94 as base) stood at 5.04 per cent. This comes in the wake of a decline in industrial growth rate from 12.7 per cent in 1995-96 to 5.6 per cent in 1996-97 followed by a marginal recovery to 6.6 per cent in 1997-98. Thus, even the revised IIP, which is supposed to have captured recent changes in industrial structure, shows that industrial performance is heading for a new low.

The trend reflected in these figures has been corroborated by a review of industrial performance during the first quarter (April-June) of 1998 by the Associations Council (Ascon) of the Confederation of Indian Industry (CII). Based on information provided by members of the CII and 61 affiliated associations, the review argues that as many as 38 industries registered negative growth rates going up to 60 per cent relative to the same period of the previous year, and that another 54 industries registered growth rates of less than 10 per cent. The industries most severely affected by recessionary trends, as per the review, are caustic soda (-60 per cent), heavy commercial vehicles (-54 per cent), textile weaving machinery (-46 per cent) and commercial vehicles (-45 per cent).

The deepening recession is also indirectly established by recent evidence on excise duty collections. According to provisional figures, excise collections for April-June 1998 were Rs.9,782 crores, which is just 5.2 per cent higher than the figure for the first quarter of 1997-98. This compares with a rate of growth of 8 per cent during April-May 1998 and a target of 20 per cent for 1998-99. Since this deceleration in excise collections cannot be explained by changes in rates, they make sense only if we allow for a decline in sales and purchases of manufactured goods.

Since preliminary projections suggest that agricultural growth, which was a negative 2.5 per cent in 1997-98, would recover only to around a positive 1 per cent this financial year, the slowdown in industrial growth would tell on GDP (gross domestic product) growth as well. According to the revised estimates released by the Central Statistical Organisation, GDP is estimated to have grown by 5.1 per cent in 1997-98 as compared with 7.5 per cent the previous year. But even this rate of growth was achieved because of relatively high growth in the services sectors. With the potential for such growth virtually saturated and the real commodity producing sectors displaying negative or low growth, a further deceleration in GDP growth this financial year is quite likely. Thus, not only has the reform not taken India on to a new growth path characterised by a 7 per cent plus rate of growth (as promised by the votaries of liberalisation), but it appears that the Government would find it difficult to deliver even a 5 per cent rate of growth during the 1990s as a whole.

MORE serious than the deceleration in output growth is the virtual collapse of India's exports. According to provisional figures released by the Directorate-General of Commercial Intelligence and Statistics (DGCI&S), India's exports which registered a decline of around 1 per cent in the first quarter of 1997-98 relative to the corresponding period of 1996-97, collapsed by almost 8 per cent during April-June 1998 as compared with the first quarter of 1997-98. (India's export growth, which averaged 19.7 per cent a year during 1993-94, fell sharply to 5.2 per cent in 1996-97 and 1.6 per cent in 1997-98.) In all probability, in a dramatic aggravation of this downward drift, growth this year is likely to be negative to the extent of 5 to 10 per cent.

The collapse in exports has not been accompanied by similar changes in imports. Although oil imports during April-June 1998 fell by 35.86 per cent because of a fall in international oil prices, the overall import bill during the first quarter of 1998-99 rose by 3.75 per cent. This "stickiness" of non-oil imports in the course of the recession, resulting from import liberalisation, has meant that slow growth notwithstanding, the trade deficit has widened from $1,397.45 million in the first quarter of 1997-98 to $2,400.73 million during the first quarter of this financial year. If this trend persists, the trade deficit during the year as a whole would be close to a whopping $10 billion.

The heavy commercial vehicles industry is among the sectors severely affected by recessionary trends in the economy.-SAGGERE RAMASWAMY

A collapse in foreign exchange reserves is a likely consequence of this widening trade deficit. The first-quarter decline in India's foreign currency reserves by almost $2 billion - from $25.98 billion at the end of 1997-98 to $23.93 billion at the end of June 1998 - is suggestive of that possibility. It could no doubt be contended that capital inflows such as that from the Resurgent India bonds could help shore up India's reserves. But the impact on investor confidence of poor industrial growth, collapsing exports and a widening trade deficit could soon turn the tide and generate a speculative run on the rupee, especially if sanctions in the wake of the nuclear tests begin to affect official capital flows into the country.

Finally, despite the slump-induced increase in unutilised capacity in the industrial sector and the comfortable foreign reserves position, the country has returned to the era of double-digit inflation. The consumer price index, or CPI, which is a far better indicator of price trends than the wholesale price index, or WPI, has recorded a 10.5 per cent increase in May 1998 relative to May 1997. The principal commodities accounting for the rising inflation rate are a range of food articles, especially agricultural commodities. Food price inflation, in turn, while driven in part by the shortfall in production, is principally owing to the Government's decision to offer higher prices to farmers while not ensuring adequate offtake from the public distribution system through lower issue prices. This pre-empts a part of production in the form of stocks that accumulate in the godowns of the government, encouraging a speculation-driven rise in open market prices.

As a result of this combination of tendencies the economy is in a state of stagflation. Unable to divert public attention any further, the Government has promised action to reverse these trends and has begun by announcing a package to "boost" exports. It is now widely accepted, even by industry circles who were clamouring till recently for a withdrawal of the state, that the slowdown in growth is a result of a squeeze on the autonomous demand that was created by the government in the past, through its capital and current expenditures.

On the surface, this attribution of the crisis to a cutback in expenditures may appear surprising given the fact that the fiscal deficit of the Central Government has far exceeded its target of 4.5 per cent of GDP in 1987-88, having touched a figure above 6 per cent of GDP. However, the rise in the fiscal deficit according to this measure is attributable to two factors. The first factor is a decline in tax collections as a result of the concessions provided in P. Chidambaram's 'dream budget', rather than an increase in expenditures. The second factor is a slower growth in GDP on account of the recession, which exaggerates the increase in the fiscal deficit.

The only way in which the loss of the stimulus provided by state expenditure could have been neutralised would have been a substantial liberalisation-induced rise in exports. But as we have seen, exports have collapsed because liberalisation has done little to increase them while the depreciation of currencies in South-East Asia in the course of the financial crises in the recent past has eroded India's competitiveness in many markets.

FACED with these trends, the Government had two options. The first was to reverse the disastrous consequences of Chidambaram's Budget for the Indian fisc, by opting for higher rates of direct taxation, as well as by dropping the recent International Monetary Fund-inspired obsession with low fiscal deficits, so as to pump prime the economy. That effort could have in particular been directed at using a part of accumulated foodgrain stocks to launch a food-for-work programme that builds rural infrastructure as well as widens the mass market for manufactures.

The second option was to use a combination of currency depreciation and fiscal incentives to reverse the decline in exports. The difficulty here is that as a result of liberalisation, the influence of the government on the exchange rate is exercised through the sales and purchases of foreign exchange by the Reserve Bank of India (RBI). But it is not only the central bank that is motivated to play the market; an increasing number of operators in the currency market are doing so in the wake of liberalisation. As a result, if in a situation where India's trade performance is weak, the RBI sends out a signal that it is willing to let the rupee depreciate so that India can regain its export competitiveness, a speculative attack on the rupee is a strong likelihood, leading to a denouement of the South-East Asian kind. Thus some increase in control over the operation of the foreign exchange market may be a prerequisite.

The BJP Government made it clear in its Budget that it was unwilling to pursue the first of these options. Having made an abortive attempt to raise indirect taxes and reduce duties, it is left with little room to manoeuvre on the fiscal front. As a result, though the Government keeps promising measures to fight the recession, it has in practice been able to achieve little. As far as the second of the options is concerned, the nuclear tests and the sanctions that followed appear to have constrained the Government. India's policy-makers are now desperate to appease financial investors, by furthering financial liberalisation and going beyond India's commitments to the World Trade Organisation with regard to trade policy. This forecloses any restoration of capital controls and makes it impossible for the Government to use currency depreciation to improve export competitiveness.

If the RBI is seen to be pushing the rupee down through the acquisition of dollars or its refusal to sell them, a collapse of the rupee is a strong likelihood. As a result, the package announced to boost exports focusses on a set of non-measures such as lower interest rates on export credit, an improvement in export procedures and special concessions to units in export-processing zones.

In sum, the policy-straitjacket created by its ideological inclinations and the constraints generated by its own hawkishness have virtually incapacitated the economic-policy arm of the BJP Government. In the event, the current recession may just be the prelude to a long period of economic decline for the country.

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