Worrisome economic realities

Print edition : February 13, 1999

On current evidence, the Finance Ministry does not seem to have any new ideas about how to address the urgent problems of macro-economic imbalance, industrial recession and balance of payments fragility.

IT is hard to envy Yashwant Sinha his job. While it could never have been very easy being India's Finance Minister, to be holding that position at this time, in this Government and in the current economic context, must be uncomfortable in the extreme. Yet, the sympathy that his position generates has to be tempered with the knowledge that at least some of his current difficulties are due to his own (and his Government's) acts of omission and commission over the past nine months.

When the Bharatiya Janata Party-led coalition Government came to power in March 1998, the economy already had serious problems. The industrial recession had been evident since mid-1996; agricultural output actually fell in 1997-98; exports showed clear signs of deceleration and the balance of payments situation was fragile; employment in the formal sector had been falling for some years and non-formal employment generation outside of agriculture was not keeping pace with population growth; infrastructure was in a state of decline with severe shortages in most sectors; there were indications that the trend of declining poverty in rural India had been halted or reversed in the 1990s; fiscal indicators were problematic as the burgeoning public deficit reflected excesses on revenue account, rather than productive capital expenditure.

It was not to be expected that the BJP-led coalition Government would do very much to reverse or even contain these major problems. But it is remarkable that this Government has managed, even in the short time available to it, to make each of these significantly worse. Moreover, it has added some entirely new problems as well to this depressing list, reflecting the economic implications of its own peculiar combination of military/nuclear muscle-flexing and kow-towing to international capital.

Thus, the growth of aggregate national income in real terms has slowed down further in this financial year and is currently projected to be around 4.5 per cent compared to the more than 6 per cent anticipated by the Government. Agriculture was expected to recover significantly from the collapse of the previous year and buoy the overall demand. However, adverse weather conditions have meant that such recovery is likely to be weak: foodgrain production is currently estimated to grow by only 0.3 per cent and non-foodgrain output by around 3 per cent, and even these slated increases are considered optimistic by many. It is worth noting that the 1990s have been the first period since Independence that foodgrain output growth has lagged behind population growth, and this is likely to have serious implications for food security in the future.

The industrial recession has worsened, with the index of industrial production for the first seven months of 1998-99 showing an overall growth of only 3.6 per cent compared to 6.2 per cent in the corresponding period the previous year. Within this, the worst performance has been recorded by consumer goods (only a 0.8 per cent increase), with production of durable consumer goods increasing by a barely noticeable 0.4 per cent. There were absolute declines in sectors such as food, textiles, some capital goods and some chemicals, which have been hit by the slackening demand as well as by cheap imports. There are no signs of recovery since investment plans have clearly been affected. Fresh investment proposals in the industrial sector have not been enough to offset the investments that are being abandoned, so that the trend of investment is one of decline.

One corollary of this recession is the incipient debt crisis in the corporate sector, which has gone relatively unnoticed thus far in the media. Along with the trend of falling sales and declining profits, there are problems of repaying loans already taken on. According to the Centre for Monitoring Indian Economy, 96 per cent of the revenue inflows of the corporate sector were used to service loans during 1997-98; this ratio may be even higher in the current year.

Inflation, especially as reflected in the Consumer Price Index, has been the most obvious sore point in the Government's economic performance. It was the main issue in the State elections (in which the BJP was comprehensively rejected by the electorate), and still dominates public perceptions of the Government's failure. According to the Wholesale Price Index (WPI), inflation, which had accelerated from less than 5 per cent when this Government took office to almost 9 per cent within six months, has shown some deceleration in recent months, but is still projected at over 7 per cent for the full year. Among the commodities included in the WPI, the largest acceleration - from 2.8 per cent in February to over 22 per cent in November - occurred for food articles, which directly affects the incidence and severity of absolute poverty. Moreover, since food prices have a much larger weight in the Consumer Price Indices (for both industrial workers and agricultural workers) than in the WPI, inflation according to these have continued to increase and are estimated to be in excess of 13 per cent for the full financial year.

Finance Minister Yashwant Sinha meets leaders of industry as part of the Government's pre-Budget consultations with various sections.-S. SUBRAMANIUM

The slowdown in growth will inevitably have its effect on the revenue collections of the Government, and that is why there is expected to be a substantial shortfall in public revenues. Even as tax collections have fallen, expenditures (largely unproductive and not directed to infrastructure or to important areas such as the provision of food and employment schemes which would reduce poverty) have continued to rise. Thus, the overall deficit is expected to have ballooned, and may be in excess of 6.6 per cent of GDP unless the Finance Ministry is able to manage some creative accounting before the Budget presentation.

The balance of payments is now one of the most critical areas of concern. For many analysts, the key question is not whether India will face a balance of payments crisis, but when. The anticipation of future external vicissitudes reflects both the poor showing on the foreign trade front, with stagnant or falling exports and big increases in non-oil imports, as well as the uncertain behaviour of international investors.

The trade data released by the Directorate-General of Commercial Intelligence and Statistics (DGCI&S) suggest that the trade deficit may cross $10 billion this year. This may well be an underestimate of the actual deficit according to the Reserve Bank of India definition which includes defence-related and other imports on government account, and which has exceeded the customs-based deficit by around $10 billion in the past few years. Instances of industrial recession in post-Independence India have typically been characterised by lower import activity and improved export volumes, as sluggish domestic production translates into lower import demand and domestic manufacturers search for external markets. Currently we have exactly the opposite combination - higher imports and lower exports even as the industrial slump continues.

Even if remittance inflows stay steady at earlier levels - which cannot be taken for granted - this big trade gap means that the current account deficit must certainly increase. In fact, it is likely to be somewhere between 2.5 and 3 per cent of GDP, which is certainly a ratio associated with a payments crisis in the past. However, the capital account may be in surplus, even though foreign investment has been marginal and there has been a marked slowdown in foreign direct investment (FDI) and a net outflow of foreign institutional investors (FII) portfolio investment. There has also been a large outflow of non-resident Indian deposits.

To some extent, these net capital outflows may have been compensated for by the inflows on account of the Resurgent India Bonds through which $4.16 billion was collected amid much fanfare. The Government made a great deal of noise about this collection, but it must be noted that these bonds represent fairly expensive external borrowing (8 per cent assured interest in dollar terms) and will certainly involve a loss to the public exchequer unless the money is actually invested in projects with higher assured rates of return.

THIS is the context in which the recent pre-Budget moves of the Government have to be assessed. In a sequence of statements made by him, the Finance Minister has hinted that the Budget to come will be a "hard" one. This has been accompanied by large pre-Budget increases in the prices of food and fertilizer in an obvious attempt to signal fiscal determination. Simultaneously, there are reports that the Government is twisting the arms of reluctant public sector managers to make "buy-backs" a success, so that the Government is able to show a large disinvestment in its books through the expedience of forcing public sector undertakings to buy government-held equity using their cash reserves, and even borrowing. In a parallel move, the rates of interest on small savings have been lowered in order to divert savings from these instruments which State governments can draw upon to others such as bank deposits and the stock market. The attempt, as in the past, is clearly to make the Central Budget look better by clawing funds from the PSUs and the States.

It is of course highly questionable whether the price hikes in food sold through the public distribution system (PDS) will actually imply any decline in the overall expenditure on food subsidy, given that lower offtake may lead to increased carrying costs of the Food Corporation of India, as in the past. But even the other announced increases in administered prices will involve a relatively small cut in public expenditure and are not likely to make much of a dent on the fiscal deficit.

On current evidence, the Finance Ministry does not seem to have any new ideas about how to address the urgent problems of macro-economic imbalance, industrial recession and balance of payments fragility. No wonder this Government is falling back to fiscal tricks which the Congress(I) played before, and is playing up the pre-Budget dash of the Finance Minister to Davos to meet the World Economic Forum. But this time, the Indian Finance Minister was ignored by the international media despite the BJP-led coalition Government's attempts during the last few months to present itself as a more determined economic liberaliser, essentially because there is simply no credibility left.

HOW did these economic indicators and perceptions deteriorate so rapidly? One important reason is related precisely to the Government's ready embrace of the strategy of liberalisation and wooing of foreign capital that has marked Indian economic policy over the past decade. Indeed, it has shown itself to be even more ready than its predecessors to make concessions and propitiate foreign investors despite the swadeshi slogan that marked its electoral campaign. This inability to reorient economic strategy in ways designed to improve domestic market conditions has combined with the more general tendency to ineptitude displayed by this Government and led to the current economic mess.

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