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R. Parthasarathy

THE recently released UN report on World Economic Situation and Prospects for 2002 notes that the already weak world economy has grown weaker, with more than a dozen economies in recession. Gross World Product (GWP) in 2002 is expected to be at a low of 1.5 per cent. Even this modest performance is hostage to a number of uncertainties, notably the high dependence on the US recovery.

Global recession

The continuing recession in the Japanese economy for the third year in a row and the Argentinean crisis are additional frailties. Weak international prices for primary commodities and difficulty in accessing markets in a shrinking trade environment were among the major difficulties faced by developing countries. Foreign direct investment declined in 2001 except in Mexico, China and South Africa. A UN study forecasts that this might dip further in 2002, since the basic factors determining these flows have not changed despite the potential for FDI in many developing countries.

After the initial setback, post-September 11, consumer confidence is slowly picking up in the US. Stronger recovery there might counter the slowdown and check global recession, but when is the question.

Indian scene

Against the global picture, India's performance in 2001-02 cannot be considered dismal, although the slowdown has hit the country badly, particularly in exports. Exports that recorded over 20 per cent growth in dollar terms are expected to show at best a low single-digit growth in 2001-02. On the domestic front, major industries such as steel, cement and capital goods are suffering from demand slack. Housing and construction sector has also been showing signs of slow pick up.

There are two phenomena here: First, recession and, second, the GDP growth badly affected by lack of domestic and foreign investments. According to a recent FICCI study, of more concern is the sharp decline in investments. Investment rates fell from a peak level of 26.5 per cent of GDP at market prices in 1995-96 to 22.7 per cent in 1999-2000. Other indicators show that there has been no significant improvement since then.

In the banking sector, the credit offtake has been badly hit. Further, the figures for the sanctions and disbursement of credit by the financial institutions for April-September 2001-02 have slowed down. Interest rates have plunged and inflation is at an all-time low of 1.32 per cent (week ended January 19). Yet, investment has slackened primarily because of market and political uncertainties. Recovery of the capital market in a real sense has not taken place, although there has been some turnaround post-September. Sensex still is hovering in the 3,300 region.

Growth estimates

According to the Finance Minister's latest statement, GDP growth may be 4.5-5.5 per cent. The National Council of Applied Economic Research (NCAER), in its November forecast, placed it at 4.8 per cent in real terms with business confidence slipping 11 per cent. The RBI has also significantly lowered its earlier forecast in September at 6.5 per cent and the Centre for Monitoring the Indian Economy (CMIE), has set its sights lower, at a hopeful 5.3 per cent.

It seems best to speculate that the economy might end up with 5 per cent GDP growth, which is better than the less-than-2 per cent forecast by IMF for OECD countries.

However, any fall in GDP growth will have a direct impact on poverty reduction. This will be so despite comfortable foodgrain stocks of 60 million tonnes! Fiscal deficit may exceed the budget target of 4.7 per cent of GDP, and end up at about 6 per cent. However, falling oil prices, post-September 11, have been a boon. This has had a salutary effect on the oil pool deficit, which may be Rs 6,000 crore as against the Rs 14,000 crore for the rest of this year.

Budget prospects

The excise levy on the oil companies to mop up an additional Rs 1,600 crore is unlikely to cover the shortfall in revenue collections, which for the whole year, taking direct and indirect taxes, might show a deficit in excess of 25 per cent. By end-Dcember 2001, against the full year budgetary target for excise duty of Rs 81,720 crore, actual collections were about 60 per cent, Customs duty collections even less at 52 per cent of the Budget target. Direct tax collections both of individual income tax and corporate tax are a little over 52 per cent. All these figures indicate the extent of damage done by the slowdown in major sectors.

On the disinvestment programmes, the Budget-2002 had taken credit for Rs 12,000 crore, but actual receipts may not exceed Rs 2,000 crore, if at all. Introduction of full-fledged VAT on excise and sales tax has may have to wait one more year beyond April 2002 since the Committee of Chief Ministers has asked for more time to study its implications.

What is, perhaps, needed is the long-pending improvement in tax administration to improve collections. The Government has already gone for additional market borrowing of Rs 5,000 crore breaching the overall limit of Rs 77,353 crore set in the current Budget.

Budget-making against this grim backdrop, leaves little manoeuvrability in the Finance Minister's hands. In his usual pre-Budget consultations, the Finance Minister, Mr Yashwant Sinha, has met farmers, captains of industry, professionals, trade union leaders, and so on. Mr Sinha has rejected all demands for lowering Customs duty. Indications are that the peak Customs duty may be brought down from 35 per cent to progressively match it with the Asean rates of 20 per cent. Although ten years of liberalisation may not be sufficient for the industry to face global competition, it is time to get ready for an open economy.

Rural sector

This year's Budget, for a change, must focus on agriculture and rural sectors, social and physical infrastructure. The economy has not benefited fully from the vast rural market and one of the limiting factors is the lack of physical infrastructure for investors realising the full potential of their investments. The current recession to some extent can be tackled by opening up the rural market for consumer goods, but this requires creation of incomes and retail structures to tap them. Happily, the agricultural sector seems to have done better this year at an expected 3 per cent after two successive years of negative growth. Public investment in the rural sector has to be substantially increased in real terms.

Infrastructure

The power sector, despite being opened to private and foreign investments, has not really taken off. The Dabhol debacle and the subsequent Enron collapse must be eye-openers. Unless the projects are thoroughly vetted, mega schemes may fail on economic viability leading to disastrous results in legal costs and slippages. The physical assets created in Dabhol-Phase I should be properly utilised and the economic costs of revival strictly scrutinised to make the project viable.

Eleven States have not set up electricity regulatory authorities, which speaks poorly about the pace of reform in this sector.

The infrastructure sector is beyond one budget exercise to tackle, but no harm in setting off the process. The foreign investment is at a sticky $2-3 billion level. Is it possible to package projects in the power sector, including sale of SEB plants for NRI investment and management, with guaranteed performance and returns?

The entire programme has to be presented in terms of individual projects on a viable basis. The same cannot be said of the roads project that requires investment of over Rs 100,000 crore over five years. Special infrastructure bonds both on rupees and foreign exchange can be issued to attract money in this sector with implementation entrusted to corporatised institutions.

In social infrastructure, the Government must come forward with innovative schemes for health, education and shelter. Again, knowing the poor delivery system that only lets 15 per cent of the money reach the targeted poor, new schemes must be designed with decentralised functioning and role given to credible NGOs and Panchayat institutions.

Expenditure on defence and the law and order will almost certainly go up in the prevailing circumstances. Defence expenditure of Rs 62,000 crore may have to be increased particularly for modernisation and upgradation of the three services.

A substantial part will be on capital account where to some extent bilateral Government credits may help.

Overall, both the Central and State Budgets may come under strain unless non-essential administrative expenditure is reigned in, and strict scrutiny maintained on all sanctioned items.

The annual Budget has lost its relevance to some extent except in a purely accounting angle. In the context of globalisation and reform of tax policies and internal management systems, government budget can only be indicative.

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