One more upturn?

Print edition : October 23, 1999

If at all there has been a turnaround in the economy, it is not because of the successful implementation of the reform programme but because of the failure to implement fiscal stabilisation.

THE Indian economy, it is being argued, is on the mend. The most recent evidence quoted in support of this view is the Central Statistical Organisation's (CSO) estimate of GDP growth during the first quarter (April-June) of 1999-2000. According to the CS O, though agriculture grew at just 2.8 per cent during April-June as compared with the corresponding period of the previous year, robust growth rates in manufacturing (6.2 per cent), construction (6.7 per cent) and various services (7.8 per cent), have h elped raise the overall rate of GDP growth from 3.6 per cent during the first quarter of 1998-99 to 5.5 per cent during the first quarter of financial year 1999-2000. Encouraged by these figures, observers have declared that the Indian economy is witness ing a turnaround.

The CSO's practice of issuing quarterly figures of GDP is, of course, recent. It started with the release of figures for the fourth quarter (January-March) of 1998-99 in June. But at that time, for purposes of comparison, figures for all quarters of fina ncial years 1996-97 to 1998-99 were also issued. Any judgments relating to the first quarter of 1999-2000 must therefore be based on such a comparison. The accompanying chart presents the quarterly rates of GDP growth since the first quarter of 1997-98. As should be clear, after having registered creditable rates of quarterly growth of between 5.8 and 6.9 per cent between April and December 1997, growth slumped to 1.5 per cent in the first quarter (January to March) of calendar year 1998. This was not s o much a consequence of the South-East Asian crisis as it was of a collapse in the rate of agricultural growth. GDP generated in agriculture fell by 7.4 per cent during that quarter. However, as agriculture recovered in the subsequent months, the quarter ly rate of GDP growth rose continuously from a low of 1.5 per cent to 8.4 per cent during the fourth quarter of 1998-99.

Seen in the context of that performance, growth during the most recent quarter for which figures are available is indeed disappointing. The consistent recovery during 1998-99 was in fact reversed during the first quarter of 1999-2000, when growth stood a t 5.5 per cent. The tendency on the part of many commentators to ignore this and focus instead on the fact that growth during April-June 1999 was higher than during the corresponding months of the previous year is indeed surprising.

One reason could be that manufacturing seems particularly buoyant, having notched up a quarterly growth rate of 6.2 per cent. But even this is merely a return to a rate of growth which prevailed a year back after what, on the basis of the CSO's figures, appears to be a minor dip in production. In fact, an indication that all is not well in the manufacturing sector is the trend in non-oil imports, which registered a fall of 4.07 per cent during the first five months (April-August) of the current fiscal year.

Given this background, the tendency to make much of the recent GDP growth figures appears to be a peculiar instance where the oft-discussed "feel good" factor applies not to how economic agents behave but how economic analysts read reality. With the post -reform boom during the years 1993-94, 1994-95 and 1995-96 having petered out, especially in the manufacturing sector, advocates of reform are desperately in search of indicators which can be taken to suggest that liberalisation and reform have indeed de livered their promised results. The current mood, illustrated by periodic surveys of an ostensibly upbeat business leadership whose expectations rarely materialise, seems to be that if you cannot find those indicators you could invent them.

THE most recent effort based on the CSO's quarterly GDP estimates is, however, the last straw. Making much of those figures is particularly pathetic, given the trends in a range of other variables. For example, though it is eight years since India's econ omic reforms programme began, exports are virtually stagnant. Exports in dollar terms registered a growth of just 4.4 per cent during the first five months of fiscal 1999-2000. While this is an improvement on the negative growth rates reported a few mont hs back, it is still inadequate to provide the stimulus to growth that exports were expected to deliver in the wake of liberalisation. On the other hand, with the reversal in the collapse of international oil prices, India's oil imports rose by 56.5 per cent during these months. Hence, but for the sluggishness in non-oil imports, India's trade and current account deficits would have widened substantially.

It is not just that exports are doing badly. There are indications that foreign direct investment (FDI) inflows, which, rightly or wrongly, were seen as a major trigger for growth in the wake of liberalisation, are also drying up. According to the World Investment Report of the United Nations Conference on Trade and Development (UNCTAD), in 1998 FDI flows into India fell from $3.35 billion in 1997 to $2.26 billion. More recent figures released by the Reserve Bank of India indicate that during April-June 1999, inflows stood at $454 million. If inflows remain at this level over the rest of the fiscal year, the annual inflow would be around $1.8 billion. These figures compare with India's FDI inflow target of $10 billion a year and an actual inflow of $45 .46 billion into China in 1998, up from $44.23 billion in 1997. All of this has not told on India's reserves position partly because of large remittance inflows and partly because of a growing external debt.

India embarked on an accelerated programme of reform in 1991 in response to a balance of payments crisis. The principal benefit of reform was to be a process of balance of payments adjustment. Such adjustment was to be ensured through an improvement in exports facilitated in part by relocative foreign investment which was expected to use India as a production source for world markets. Eight years later, it is clear that liberalisation has not delivered on that front.

Nor has it for that matter ensured the fiscal adjustment which was the other area of emphasis in the reform programme. Failure on the fiscal front has been the result of tax reductions and concessions associated with reform. To quote the Annual Report of the Reserve Bank of India: "The large shortfall in tax collections during 1998-99 needs to be viewed against a decline of over 1 percentage point in the ratio of the Centre's gross tax revenue to GDP between 1991-92 and 1997-98 (from 10 per cent to 8.9 per cent). Excluding trade taxes, revenue from domestic taxes as a percentage of GDP fell by 0.4 percentage point during this period. This trend has been reinforced in 1998-99, with the overall tax GDP ratio declining further to 8.5 per cent and domestic tax-GDP ratio to 6.0 per cent."

This shrinking tax base has meant that even with modest increases in expenditure the fiscal deficit on the Centre's budget rose to 5.7 per cent of GDP in 1997-98 and 5.9 per cent in 1998-99. Expectations are that this would further rise substantially thi s financial year, partly because of the expenditures associated with the Kargil War. It is this persistence and increase in recent times of the fiscal deficit that accounts for the buoyancy in domestic demand and the growth, however moderate, in manufact uring. Thus, if at all there has been a turnaround in the Indian economy, it is not because of the successful implementation of the reform programme but because of the failure to implement what was considered its crucial plank, namely, fiscal stabilisati on.

But for advocates of reform desperately in search of indicators of success, these details do not matter. Any positive sign, however weak and transient, is swooped upon to defend what now seems the indefensible.

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