Indian
economy: Present perfect, future tense
By Kunal Kumar Kundu
KOLKATA - The provisional figures for India's gross domestic product (GDP) for
the period 2003-04 released by the Central Statistical Office last month show
that real GDP grew by 8.2%, making it the world's second-fastest-growing
economy after China.
Only on three occasions earlier has India's GDP growth surpassed the 8% mark -
8.1% in 1967-68, 9% in 1975-76 and 10.5% in 1988-89. In fact, in terms of US
dollars, the growth rate of India's real GDP was 13.98% as the Indian currency
appreciated by as much as 5.3% between 2002-03 and 2003-04. With the Chinese
currency directly pegged to the dollar, this makes the Indian economy the
fastest-growing in the world in dollar terms.
The data for the last quarter of 2003-04 showed the economy decelerating to
8.2% growth during the January-March 2004 quarter from the 10.4% recorded in
the preceding October-December 2003 quarter, but still extending a trend of
strong expansion that emerged almost a year ago.
The growth can be attributed largely to a sharp turnaround in agriculture. Farm
output increased by as much as 9.1% in 2003-04 (again the highest during the
post-reform period) after contracting 5.2% in the previous year because of
severe drought.
The output of the agricultural sector was 10.5% higher in the January-March
2004 quarter as compared with the corresponding period in the previous fiscal.
It was, however, lower than the 16.5% growth recorded in the preceding
October-December 2003 quarter.
However, not all of the 8.2% growth is attributable to the recovery from the
drought factor. The numbers show that the industry and service sectors have
also performed creditably, registering growth rates of 6.7% and 8.7%
respectively during 2003-04 vis-a-vis the levels of 6.4% and 7.1% respectively
that were recorded during the corresponding period in the previous financial
year.
The farm sector accounts for about 22.12% of India's GDP and sustains nearly
700 million of the country's billion-plus population, making it a key driver of
demand. Industry accounts for 26.86% of GDP, while the service sector accounts
for the maximum - 51.02% - of GDP.
On the macroeconomic front, India has quite a rosy picture to present, a rarity
perhaps in today's vacillating now-cheery, now-troubled international
environment. With strong economic fundamentals, sustained robust GDP expansion,
robust balance of payments, healthy foreign-exchange reserves, etc, and a
domestic market of colossal expanse and depth, India today is strappingly
positioned in the international economic landscape, though behind the global
economic powerhouse and regional Goliath China.
The moot point, however, is can India do a China and continue to grow at a
scorching pace, or has it just been a blip in the radar, as has been the case
in occasions mentioned earlier? Indications available so far do point to the
latter possibility. The reasons for the same are not far to seek.
Despite the service sector becoming India's engine of growth (accounting for
more than 50% of GDP), there's no gainsaying the fact the India is still an
agrarian economy, with close to 70% of the population depending on this sector.
The agricultural sector, which continues to be highly monsoon-dependent, has
been one of the most erratic sectors.
Indications are that during the current year the monsoons are likely to be less
than normal. Moreover, while some areas face severe flooding, others are still
in the grip of acute shortage. In such a scenario, India would struggle to
record even 2% growth in this sector, after having recorded a massive increase
last year. Even if one assumes that both industry and the service sector record
growth rates of, say, about 8% and 9% respectively (higher than last year), the
likely GDP growth for the current year would be between 6.5% and 6.75%.
This is the immediate short-term impact; the long-term scenario is less than
rosy, as hardly much is being done to reduce the monsoon dependency of the
agricultural sector and improve efficiency in the system. The agricultural
sector in India is in crying need for improved infrastructure, both at the
pre-harvest and the post-harvest levels. However, increasing budgetary
allocations for this sector over the years have failed to have the desired
impact as inefficiencies in the system (euphemism for leakages) and
administrative hurdles have resulted in a number of projects being inexorably
delayed or shelved altogether.
Consider these. Up to March 2002, a whopping Rs100 billion (US$2.1 billion) in
the District Rural Development Authority went unaccounted for. Similarly, under
the scheme "Rajiv Gandhi Drinking Water Mission", Rs890 million was released as
on July 2002 for the year, while only Rs294.7 million was utilized in that
period. It is not surprising, therefore, that the real gross fixed capital
formation (GFCF) in the agricultural sector rose by a compound annual growth
rate of a mere 2.82% between 1995-96 and 2001-02. Also, the recent economic
survey points out the fact that public expenditure in the agricultural sector
has been declining. Clearly, intention and rhetoric are not matching real
action on the ground, thereby depriving the sector of the necessary thrust to
achieve its potential.
Another likely roadblock will be the fiscal deficit. While the new government
is projecting a lower fiscal deficit figure (a reduction from 4.8% to 4.4% of
GDP), the numbers seem to be too optimistic to be true. For example, the gross
tax revenue for the current financial year is expected to increase by about
25%, while the average growth rate of gross tax revenue in the post-reform
period has only been 11.92%. A perfect example of highly misplaced optimism on
tax buoyancy.
On the other hand, while total expenditure is planned to be maintained
virtually at the same level (an increase of a mere 0.75%), the average increase
in expenditure experienced since 1991 is 12.82%. There seems to be a clear case
of overestimation of revenues and underestimation of expenditure. In all
likelihood, the fiscal deficit for the current year will cross 5%. Even a study
of the expenditure components reveal that the proposed capital expenditure of
the government has been scaled downward from Rs1.11368 trillion to Rs923.36
billion, a reduction of 17%. On the other hand, in a clear indication of the
government's inability to curtail its own expenditure, often wasteful, revenue
expenditure is estimated to increase by 6.23%. Nowhere in the recent budget was
there a strong statement about the government mending its ways as far as
managing its expenses is concerned.
There are two major ramifications of this. First, capital formation in the
economy (especially of the infrastructure type) will be compromised, as public
expenditure is the major growth driver for infrastructural development.
Available data show that real GFCF for the economy has increased by a mere 3%
since 1991, and has actually started declining since 1995-96. With inadequate
infrastructure acting as a constraint for India's growth potential, the future
prospect is indeed worrisome. The second impact is on inflation and interest
rates. A high fiscal deficit will crowd out private investment, raise inflation
and interest rates, and generally spook the growth path.
An important recipe for last year's high growth performance was low inflation
and, concomitantly, low interest. However, the lagged effect of a spike in
global oil prices and hardening of global interest rates can rock the boat.
Also, India's inflation rate has recently crossed 6% and promises to be higher,
given the provisions of the recent budget. A hike in service tax rates from 8%
to 10% and an imposition of a 2% education cess [similar to a surchare] on
all central taxes in India, including service tax, excise, customs etc, will
drive up prices, especially since India does not have a value-added-tax regime
and the impact of the cess on final products and services can be substantially
high. Add to this the likely impact of a higher fiscal deficit and one is
looking at potentially high inflation and interest rates.
Even public-sector disinvestment is out of the window. The budget of the new
government still talks of providing support to loss-making public-sector units
to nurse them back to life. If experience is anything to go by, there is a
clear sense of deja vu. The government is still intent on throwing good
money after bad, thereby further locking up vital resources.
This budget was supposed to be all about boosting public investment, without
compromising on fiscal prudence. Clearly, neither is happening.
We all know India has the potential to grow at a consistent rate of 8% or more.
Unless policymakers bite the bullet and go for the politically sensitive
second-generation reforms, such as bureaucratic and labor reforms,
disinvestments etc, India will continue to envy China, not emulate it.
(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact
content@atimes.com for information on our
sales and syndication policies.)
