Camouflaging realities

Print edition : May 23, 1998

There are two specific areas of urgent concern: the continuing industrial recession and the fragile external sector.

IT is a common ploy of governments that face internal pressure to use some external threat or conjure up some diversionary aggressive stance to distract public attention from real issues.

The nuclear explosions that have been proudly announced by the Bharatiya Janata Party-led Government may have come as a surprise, but only because the Government felt the need to play this card so soon. It is rare indeed that a Government feels so desperate within a few months of taking office as to go in for what must be the only "trump card" that it feels it holds. And in such a case, it is necessary to ensure that one does not lose sight of what the Government is so frantically trying to hide in the smoke haze that surrounds this celebration of weapons of mass destruction.

Of the many unhappy aspects of the current Indian reality, the state of the economy must count as one of the most significant. This does not simply refer to the continuing poverty, lack of development and inadequate access to minimum basic needs and adequately productive employment that continue to afflict the majority of India's population. It refers to more immediate and pressing problems even within that depressing background and to the fact that the meagre benefits to be gleaned from the economic strategy of the 1990s appear to be wearing off. The economic situation is such that it calls for immediate and serious consideration if another major crisis is to be avoided, and diversionary tactics will only make the problems much worse.

THERE are two specific areas of urgent concern: the continuing industrial recession, which threatens to cause even more unemployment as smaller firms feel the pinch; and the fragile external sector, which faces a more difficult world environment than before. These problems became acute in the past year, and these are the issues that merit attention on a war footing, rather than the imagined threats from China and other Asian neighbours.

However, the roots of these problems are not to be found only in the policies of the past year or two D they go back to the liberalising economic strategy that began in 1991 and to the fact that successive governments have stuck to the same broad formula despite their clear rejection by the electorate.

Consider the industrial recession. Industrial growth D and particularly manufacturing growth D picked up in 1993 after two years of decline and stagnation brought on by fiscal compression. Thereafter, there was a consumption-led manufacturing boom until 1996, fed by large increases in unproductive government expenditure which put more purchasing power in the hands of the middle classes, and import liberalisation which allowed the entry of import-intensive branded consumer durables to satisfy this pent-up demand. But by the middle of 1996, it was evident that this particular liberalisation-led expansion (which was lubricated by financial reforms that encouraged more consumer credit) had run out of steam. This was not only because of the nature of the commodities involved in the boom; more fundamentally, it was because the manufacturing boom itself did not lead to increases in employment and therefore to a genuine expansion of the market for such goods.

As a consequence, the past year witnessed a definite stagnation in manufacturing industry, which is reflected in the dramatic fall in the growth rates of the index of industrial production. In the fiscal year 1997-98, overall industrial production is expected to have grown by only 4.7 per cent, and manufacturing production by only 4.5 per cent, which is less than half the rate of growth of even the previous year. Inventory build-up continues, as the level of sales orders in hand has declined across all industrial sectors. Expectations for the coming year among industrialists are low, and this is especially so among small-scale entrepreneurs. The small-scale sector is the mainstay of the manufacturing economy, accounting for both the bulk of manufacturing employment and most of its exports, but it is also the segment that has been hit the hardest by the combination of fiscal, trade and financial policies that have squeezed credit access and helped shift domestic demand to branded products. The new Government has added to its woes through the declaration of an Exim policy that further widens the gap between small and large enterprises.

A recent survey of businessmen by the National Council for Applied Economic Research (NCAER) found that most of them felt that the investment climate had deteriorated substantially and they did not anticipate any major revival in demand in the near future.

The so-called "dream Budget" presented last year by the then Finance Minister P. Chidambaram was purported to be a quick-fix solution to this problem of lack of demand by offering huge tax cuts to the elite, middle classes and corporations. Like most instant remedies, it did not work in terms of reviving industrial activity, and has, instead, led to fiscal imbalances of serious proportions.

In the coming year, industrial recession is likely to be exacerbated by the poor performance of agriculture in 1997-98, when agricultural production actually fell by 1.7 per cent. That even such a fall did not lead to higher inflation gives some indication of the low level of overall demand and the serious underemployment situation. The fact that agricultural product prices did not rise significantly even as output stagnated, has, in turn, depressed farm incomes and reduced the potential demand from that section, further contributing to the low-level equilibrium.

THE other major area of concern relates to external trade. There was a period of three years between 1993 and 1996 when Indian exports grew very rapidly, at an average of nearly 20 per cent in dollar terms. However, since 1996, exports have been decelerating, and the past year's performance was especially poor. In the first 10 months of the last fiscal year, exports grew by less than 2 per cent in dollar terms, and they actually dropped by 7.5 per cent in January 1998 when compared to January 1997. It is notable that this decline has been spread across a range of exporting sectors, from agricultural exports to machinery and electronic goods.

The worry is that export performance may continue to deteriorate unless other measures are taken. The continuing crisis in South-East Asia has involved a very substantial drop in exchange rates across that region, and as a result, prices of their export items, which are in direct competition with Indian exports, are now substantially lower. In addition, the slowdown in demand from the region will have a depressing effect on Indian exports to South-East Asia, which were just beginning to grow. It is clear that positive and systematic efforts to revive exports are called for; the Exim policy of Commerce Minister Ramakrishna Hegde failed miserably in that respect, so the urgency remains.

This is also because of the growing trade deficit, which is expected to exceed $6.5 billion in 1997-98. Despite the domestic recession, which has helped keep import demand down to some extent, the import liberalisation and tariff reduction measures have meant that imports grew by around 5.5 per cent in the past fiscal year. This overall import bill reflects the lower international oil price, which meant that India could benefit from cheaper access to the most important import item.

Non-oil imports actually increased by 13.5 per cent. The behaviour of the external trade balance and the current account is important because it must now be recognised that international investor confidence is highly volatile and can react very sharply to all sorts of perceived "bad news". Therefore it is foolhardy to expect large current account imbalances to be financed through such capital inflows. Since speculative portfolio investors remain significant for our balance of payments, it is worth noting that net Foreign Institutional Investor (FII) inflows were negative in January and February 1998. While Indian capital controls make a Thailand-style meltdown unlikely, the possibility of speculative capital flight cannot be eliminated.

These fears are compounded by the poor state of the public exchequer. The strategy of the previous Budget, of reducing tax rates to boost demand and consequently raise tax revenues through higher incomes and better compliance, has failed quite dramatically. The tax cuts have turned out to mean just that D cuts in tax revenues. Since the strategy also failed in the objective of bringing the economy out of recession, there have been big increases in the various deficits of the Government.

The Interim Budget presented earlier suggested that the overall fiscal deficit would increase to 6.15 per cent of gross national product (GDP) - compared to the targeted 4.6 per cent - and that this would be dominated by a huge increase in the revenue deficit, to 3.1 per cent of GDP. In fact, recent media reports have suggested that the deficits may be even larger, as revenue receipts have been even lower than realised before. And this fiscal package has involved the collapse of public productive expenditure, which in turn has been instrumental in prolonging the industrial recession.

It is clear that the economic situation cries out for strong and responsible measures, to tackle not only the many structural problems but the immediate problems of demand recession and internal and external imbalances. In fact, it also calls for genuine nationalism, in terms of putting the interest of the nation first and not succumbing to external pressures. It is ironic that the Government that appears to be so ready to declare its nationalist sentiment and its willingness to take on the developed countries is ready to do so only in the matter of exhibiting nuclear prowess and adopting bullying postures towards smaller neighbours. In external matters that really count for the Indian people, such as the attitude towards the World Trade Organisation and foreign investment, the BJP-led Government has so far indicated that it can be as slavish as anyone. The whipping up of jingoist sentiment without going in for policies that will genuinely benefit the citizens of India is a sham nationalism and must be exposed speedily.

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