The Telegraph
Since 1st March, 1999
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- Going beyond the euphoria created by the saffron sultans of spin

An 8 per cent rate of real gross domestic product growth during July-September 2003 has sent the government and its cheerleaders in the media and non-resident Indian community into paroxysms of self-congratulation. In an unprecedented exhibition of partisanship and sycophancy, even the Planning Commission has taken out full-page advertisements with pictures of the prime minister heralding this “achievement”. No matter that it is only for one quarter. No matter that this is, by no means, unprecedented with 1967-68, 1975-76 and 1988-89 all having recorded 8 per cent plus growth rates and that too for the full year.

The recent achievement is certainly to be welcomed even though it comes on a low base of GDP growth during July-September 2002. It may well be sustained in the third and fourth quarters of 2003-04 because of the excellent monsoon during 2003. The complete year 2003-04 could well see 7.5-8 per cent growth. But even after this has been accomplished, the annual average compound growth rate of real GDP in the past five years would still be around 5.6-5.7 per cent. This is no different from the figure of the Eighties and considerably lower than the 6.7 per cent recorded during 1992-93 to 1996-97, which also saw, for the very first time, three consecutive years of 7 per cent plus growth driven largely by private investment. The fact that these are compound growth rates magnifies a seemingly small numerical difference over a period of time.

Undoubtedly, the macro-fundamentals of the economy look very good reflected, most visibly, in the over $ 100 billion of foreign exchange reserves. Even here, however, some sobriety is called for. India is not alone in seeing burgeoning forex reserves in the past two years. Most Asian countries have experienced this phenomenon. Interest rate arbitrage (higher interest rates in India than in the United States of America, for instance) has been one of the important reasons for the surge in dollar inflow. Hedge funds have also contributed considerably. But the most important reason for the continuing rise in reserves is simply that the demand for dollars is depressed. And that is so because, in spite of the so-called “feel good” factor, the investment momentum has slackened in the past five years.

Individual companies are, no doubt, carrying out major restructuring and expansion but the macro numbers tell a different tale. Manufacturing investment is at its lowest level over the past decade. The rate of investment in the economy as measured by the gross domestic capital formation has fallen from something like 27 per cent of GDP in 1995-96 to just about 23 per cent of GDP this year. The fact that banks are flush with liquidity and are placing more cash than the statutory minimum in government securities (called “lazy banking” by a deputy governor of the Reserve Bank of India) is another reflection of the sluggish investment sentiment in the private sector. As far as public investment is concerned, it is simply being elbowed out by persisting and unsustainably high levels of the revenue deficit both at the Centre and in states. With these investment rates and even with all the efficiency that can be mobilized, growth rates of 8 per cent plus just cannot be sustained. In vital areas like steel, cement, textiles and power, we are way behind China in consumption. Demand cannot be the bottleneck. While some corporates have embarked on capital expenditure, the big investment picture is still very uncertain.

Interest rates, even though still high by international standards, have fallen substantially in India over the past few years. This has certainly benefited large sections of our population as, for instance, by making housing loans cheaper. Cheaper finance has also helped in the expansion of a number of consumer goods industries. That the drop in interest rates is a direct consequence of an open economy triggered by the reforms of 1991 and 1992 is a different matter and is a political debating point. Far more serious is the issue of inter-generational impacts of lower interest rates. The younger consumer classes benefit. But the relatively older, saving classes are hurt. And this is precisely what has happened. Lower interest rates have not resulted in an investment boom although they have helped Indian companies to improve their profitability. What lower interest rates have surely done is to reduce the attractiveness of bank deposits — still the main form of savings for a predominant majority of Indians — in real terms.

There has been a remarkable continuity in economic policy over the past decade. And that has to be applauded. Unlike his more ebullient and partisan-minded colleagues, the prime minister has gone on record recently to acknowledge that the reforms his government is implementing were initiated by the Congress and continued by the United Front. This is true not just of the external sector alone where the Bharatiya Janata Party vehemently opposed import liberalization, rupee float and opening to the foreign institutional investors when economic reforms first began during the Narasimha Rao-Manmohan Singh regime. It is also true of the domestic economy. For instance, new legislation for modern national highways was enacted in the late Eighties and the National Highway Authority of India — perhaps the showcase of the Vajpayee regime — became operational in February 1995 and much of the detailed homework that made its subsequent success possible was done during the United Front regime. All the ground work for the hugely successful liberalization of the insurance industry that has taken place over the past three years was done during the term of the United Front government. The foundations of the Telecom Regulatory Authority of India were laid during 1996-97 when the tough decision to dismantle the administered pricing mechanism in hydrocarbons was taken. Of course, in information technology, this government is the beneficiary of the investments made by previous governments in science and technology and in professional education. Controversy on it apart, it is in the area of privatization that Atal Bihari Vajpayee’s government has been able to change the agenda significantly and make a “distinctive” contribution, although even here it needs to be said that the Disinvestment Commission that provided the initial impetus to privatization was established in April 1996 by the United Front government. That privatization is essential is incontrovertible. But there can be two views on whether Indian Oil Corporation and other oil companies should be sold off. Privatization of Indian Petrochemicals Corporation Limited has diminished competition, not increased it. Foreign companies are still very wary of our privatization although it could well be argued that by selling to the Indian private sector, the political backlash has been minimized.

After three years of very low growth, you have to “feel good” in 2003-04. But more seriously, there is much to feel confident about on the real economy. But many serious challenges remain. These are, by no means, new but they appear to have receded into the background with all the hype that has been generated. Without a significant step up in the tax:GDP ratio, investment cannot expand. Without the early introduction of value added tax, manufacturing competitiveness cannot be sustained. Without major new public investments in research and infrastructure, agricultural growth cannot be made robust. Without some labour legislation changes, employment growth cannot accelerate. Without changes in fiscal transfers, backward states cannot be forced to move ahead. Sobriety, not sensationalism, is the need of the hour.

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