An argument for further reform

Growth has slowed down and the fisc is unhealthy: this is the main message about the immediate economic situation that has been conveyed by Economic Survey 2000-2001.

THE Economic Survey, the annual pre-budget, state-of-the-economy report issued by the Finance Ministry, is meant to be an exercise in stock-taking and identification of immediate trends and problem areas that provide the background for initiatives to be launched in the Budget. But in the recent years, as successive governments have committed themselves to "reform" and to the control of the fiscal deficit, there has been shrinkage in the ability to manoeuvre the budget exercise to fit the actual state of the economy. Consequently, most recent budget speeches have aroused more interest for their off-budget policy pronouncements than for the budget proposals proper.

And, in parallel, recent Economic Surveys have shifted the focus from short-run developments to medium-run issues, and become a statement of the Finance Ministry's views regarding progress along the reform agenda. With the immediate picture not entirely rosy for the economy, and this also being the tenth anniversary of the reforms, this is especially true of Economic Survey 2000-01.

The main message that the latest Survey conveys about the immediate economic situation is that growth has slowed down and that the fisc is unhealthy. This provided the backdrop to the Budget in which the Finance Minister emphasised the need to accelerate growth and lectured his audience on the need for fiscal consolidation. On GDP growth, the Survey has noted steady deceleration from 6.6 per cent in 1998-99 to 6.4 per cent in 1999-2000 and to an estimated 6 per cent in 2000-01, with agriculture performi ng poorly in the last two years and with the recovery in industrial growth during 1999-2000 not sustained into 2000-01. On the fiscal front, the Survey notes some recovery in revenues from the depths reached in 1998-99 after P. Chidambaram's "dream budge t", but to a level which is still significantly below the average for the 1980s as proportion of GDP. The revenue deficit has therefore consistently exceeded 3.5 per cent of GDP during the past three years and is now higher than in even the most profliga te years of the 1980s. This is mainly because interest payments have continued to balloon.

With the Central government's debt (excluding liabilities to the Reserve Bank of India) having risen to over 50 per cent of GDP as a result, the main casualty has been public investment. The Centre's capital expenditure has fallen to around half of that achieved during the 1980s, and overall public investment, including that of the States and public sector undertakings, has as a proportion of GDP come down during the last three years to levels last seen during the 1960s. No wonder that the Survey identi fies fiscal improvement as the key area for action, noting that the lack of public investment has led to not only a slowdown in infrastructure but also to a decline in industrial demand.

This broad picture is conveyed without neglecting other immediate developments, both positive and negative, but these are given less emphasis in the overall diagnosis. For example, perhaps the most positive outcome during 2000-01 has been that exports gr ew by over 20 per cent, following a recovery in 1999-2000 from an actual drop in 1998-99. This is, however, attributed to similar movements in world trade following the East Asian crisis and the subsequent recovery without claiming much domestic credit. Similarly, not as much is made as could have been of the resilience of the economy in the face of the sharp increase in oil prices.

The chapter on prices does note that higher energy prices led to overall inflation rising from 3.9 per cent in 1999-2000 to 8.3 per cent in 2000-01, but without much effect on the prices of other goods. Also, the chapter on the external sector does claim a reduced trade deficit based on customs data, despite the surge in the value of oil imports owing to higher prices. But not much is made of this, either because there is some doubt, since balance of payments data show higher import growth, or because o f the implication that domestic demand must have fallen if indeed imports of non-oil products did fall and domestic non-oil prices remained depressed despite the oil price increase. In a similar vein, not much emphasis is put on, or credit claimed for, f oreign exchange reserves reaching a record level in January 2001, this being attributed to the issue of India Millennium Deposits.

ON the negative side, the most serious development during 2000-01 was that there was deficient or scanty rainfall in over a third of the country, with rainfall being deficient for two successive years in about half of these districts. This is noted, as i s the consequence that the Index of Agricultural Output declined in 1999-2000 and is expected to decline even more sharply in 2000-01. Quite correctly, however, the Survey views agricultural performance over a longer period. On this ground it is quietly optimistic, although it notes a deceleration in agricultural growth post-reform.

What is missing, however, is any assessment of the response to the distress caused by drought and no real analysis of why cereals stocks have accumulated massively over precisely these last two years without any significant attempt either to use these pr oductively or even to relieve distress. Tucked away in the chapter on Social Sectors is a table that in fact shows a huge setback in achievements under rural employment schemes in the last two years. The data on per capita foodgrains availability show th ese to have fallen during the last three years to amongst the lowest levels over the last decade, but in the chapter on Prices and Distribution there is the statement that "domestic production has reached a level much more than what the market or PDS can absorb".

There is of course acknowledgement of the fact that high procurement prices have led to high procurement and that high issue prices have discouraged offtake. But there is no recognition of the fact that low rural incomes may have depressed demand and no introspection about the decision announced in last year's Budget to raise APL (above poverty line) issue prices. The per unit APL subsidy then was less than the per unit carrying cost of stocks and so that move, while cutting consumer subsidy, increased the total subsidy outgo for the government. Instead, there is only the obvious comment that costs can be reduced by improving the efficiency of the Food Corporation of India.

In the event, the principal concern of the Economic Survey is not to identify the implications of these recent developments for budgetary policy but to build an argument for further reform based on the observations of slowing growth and mounting fiscal p roblems. In this context, much space is devoted to making a comparison of growth during the pre-reform (1980-81 to 1991-92) and post-reform (1992-93 to 2000-01) years.

THERE are three points to be made about this comparison. First, the figures suggest that though GDP growth improved from 5.4 per cent in the first phase to 6.4 per cent in the second phase, almost all of this is the result of a sharp increase in the rate of growth of services. The rate of growth of services GDP rose from 6.4 to 8.2 per cent between these two periods, whereas in the case of agricultural and industrial GDP, the comparable growth rates during the two periods were 3.9 and 3.3 per cent and 6 .3 and 6.5 per cent respectively. That is, there is no evidence of a revival of growth in the commodity producing sectors after reform. And, indeed, there is some reason to suspect a sharp slowdown in agriculture where the growth rate of the Index of Agr icultural Production falls from 3.4 to 2.2 per cent between the two periods, much sharper than the decline in agricultural GDP which is buoyed by dubious data relating to horticulture.

Second, the sharp rise in services GDP is by no means largely a reflection of new dynamism in sections of the services sector such as financial services and software and information technology-enabled services. Rather, it appears to be in significant par t owing to increases in public sector incomes ensured through the much-delayed implementation of the Pay Commission's recommendations. Not surprisingly, after the three years (1997-98 to 2000-01) during which these recommendations have been implemented i n staggered fashion at the Central and State levels, there are signs of the rate of growth of services GDP decelerating.

Finally, the choice of what the Survey considers pre- and post-reform years is controversial. The year 1991-92 is included in the pre-reform years, though the reforms were launched in July 1991 and the International Monetary Fund-stabilisation induced co mpression in growth occurred in 1991-92. GDP growth in that year stood at 0.9 per cent, industrial growth at 4.5 per cent and agricultural growth at 2 per cent. A case could have been made to drop 1991-92 altogether from the growth comparison. But to hav e chosen to make an extremely poor year the terminal year of the pre-reform growth calculation lays the Survey open to criticism since it is clear that even this does not lead to an unambiguous conclusion of much improved economic performance post-reform .

Nonetheless, this effort to establish higher post-reform growth was probably necessary to establish the basic argument of the Survey, which goes as follows. First, it is asserted that post-reform growth has been better than pre-reform growth. Second, it is shown that more recently growth has been slackening. Third, it is argued that since the fiscal situation is parlous, the effort to revive growth cannot be through the obvious budgetary route of reviving public investment. Rather, this calls for an acc eleration of reform in the form of speedier trade liberalisation including liberalisation of agricultural trade both domestic and international, a decisive commitment to massive privatisation, removal of protection to small-scale industry and immediate r evision of labour laws.

The Prime Minister's Economic Advisory Council (EAC), in its recently released report, had launched this campaign for an acceleration of neo-liberal reform. The Survey signals the Finance Ministry's official commitment to this agenda.

In the process, however, three vital aspects of policy formulation and its feasible implementation appear to have been given less attention. First, that the objective of any national economy policy should not be growth for growth's sake and, in particula r, that growth should be sustainable and should not bypass the poor. Secondly, that the policies have the required degree of consensus not to be derailed by widespread opposition. And, third, that there be no better alternative than the one on offer.

On the first of these, the EAC had taken at face value, and without critical appraisal, the results of the 55th Round of the National Sample Survey (NSS) showing poverty incidence at only 26 per cent in 1999-2000. It had concluded from this that there ha d been a decline to this figure from the 36 per cent recorded in 1993-94, and that therefore there was no reason to suspect that growth was bypassing the poor. Being an official document, the Economic Survey sets the record straight by noting that the 19 99-2000 poverty figures are not strictly comparable with earlier estimates, giving details of the methodological differences. Taken in conjunction with mutually comparable results from the NSS "thin sample" rounds conducted during 1994-95 to 1998, and co rrecting for the fact that the 55th round used only a 365 day recall for clothing and so on, it can now almost safely be concluded that poverty during 1999-2000 was at most about 2 percentage points lower than in 1993-94 - using the methodology then in v ogue. This means that there is no reason to alter the pre-55th round academic consensus that poverty reduction has slowed down significantly during the 1990s despite somewhat higher GDP growth.

If this is accepted, and there is supporting evidence from regional inequalities in the growth of agricultural incomes and wages, there is a question mark over whether the pattern of growth observed during the 1990s has benefited everyone. This is signif icant because this suggests that the neo-liberal policies identified are bound to draw significant opposition. This is especially so since so far the reforms have been sold on the promise that neither organised labour nor small producers will be hurt. Bu t with the prognosis now that it is necessary for growth that certain existing rights be withdrawn from organised workers, small industrialists and probably even farmers, it is almost inevitable that there will be confrontation. While consensus can be fo rged on the share to be received from incremental growth, it is an altogether different matter when it comes to changing the rules of the game on the argument that certain rights have to be shifted from others to private investors in order to create a su itable investment climate.

The really unfortunate fact is that this harsh prognosis has been drawn on the basis of an analysis that assumes that the fiscal situation is so bad that the government can do nothing for growth through the Budget and must necessarily disturb what are cu rrently seen to be socio-economic rights. This is where greater sensitivity to the actual economic conditions at present would have helped. With a high level of foreign exchange reserves and burgeoning food stocks and with the problem of demand identifie d by the Survey itself, a less confrontational path could have been charted and growth restored along traditional Keynesian lines without much adverse fiscal, inflationary or balance of payments fallout. The core of this would have been a massive food-fo r-work programme to build rural infrastructure and generate demand. But for this it was necessary to recognise that the Budget proper is more than about the fiscal deficit and that in a democracy there is no alternative to consensus.

Abhijit Sen is Professor of Economics, Jawaharlal Nehru University, New Delhi. Until recently he was chairman of the Commission on Agricultural Costs and Prices (CACP).