The Hindu Business Line : Economy poised for recovery

THE 2002 drought has once again demonstrated how critically dependent India's GDP growth is on agriculture, no matter the strides the country has made in industrial diversification and a vibrant services sector, which contributes more than 50 per cent to the overall output. In spite of a broad-based industrial recovery in the latter half of the year, and sustained expansion in the services sector, GDP growth slowed down to 4.3 per cent in 2002-03, as at present estimated by the Central Statistical Organisation (CSO).

The failure of South-West monsoon in 2002 resulted in a 3.2 per cent decline in agriculture against the 5.7 per cent rise in 2001-02 to bring down the overall growth rate from 5.6 per cent to 4.3 per cent.

The vital role of the primary sector for rural incomes, employment and poverty reduction, is too well recognised but over the years investments in agriculture and allied activities have declined even as focus shifted towards manufacturing and services as the route to prosperity.

The delayed onset of monsoon and its slow and uneven spread has not lifted anxiety altogether for the farmers in large water-stressed parts of the country. The prospects of a strong economic revival that have emerged in the first quarter (April-June) can be sustained only by favourable rains and the Met Office is optimistic about the monsoon.

Depressing as the CSO's estimate for 2002-03 is, it must be set against the backdrop of the first quarter, which has thrown up highly encouraging trends for the economy raising hopes of a growth outcome of not less than 6 per cent. This is again on the assumption that the monsoon proves more favourable though greater faith is placed in a strong revival of demand after three years and the industrial recovery sustaining itself.

The remarkable rally in the principal stock market in recent weeks, mirrored, besides the monsoon, the impressive turnover and profitability of large corporates, private and public, in 2002-03; the relatively firmer trends of the American and Asian markets; the staggering response to Maruti Udyog's public issue, fuelling new hopes of disinvestments gaining momentum; and, not the least, the spurt in portfolio investment by FIIs. The stocks recording highs were spread across both the Old and the New Economy, with public sector undertakings (oil and banks, in particular) sharing the limelight with established players in the pharma, automobile, cement and steel sectors.

Technology stocks regained their élan in line with the rebound in Nasdaq (hi-tech) index in New York. Overall, the business mood is more upbeat than at any time during 2002 and indications of the primary market (IPOs) getting reactivated in the aftermath of the Maruti success as well as the latest output and export data are strengthening the market sentiment. Even allowing for corrections, the uptrend is unlikely to be reversed in the near future. Early decisions on some big-ticket divestment would sustain the buoyancy and investor interest and at least partially meet the Budget target of capital receipts. On the assumption of a normal monsoon, the Agriculture Ministry is most likely to set a target of 210 million tonnes after the sharp drop to 183 million tonnes in the drought year.

Industry seemed to have moved out of stagnation in the latter half of 2003-03 and the year ended with a 5.8 per cent growth, moving up from the 2.7 per cent in the previous year and the new fiscal year opened with a 5-point rise in manufacturing and the capital goods sector posted a 9 per cent rise in April. Barring the electricity sector, the infrastructure growth was also higher with rising cement and steel output corresponding to the growth in construction and housing activities.

With the end of the Iraq war and lessening of geo-political uncertainties and stabilisation in oil prices, the volatility in international equity and financial markets is expected to be considerably reduced. At any rate, India looks comfortably placed with its huge reserves, current account surplus and continuing inflows, invisibles and investment. In the first two months, April-May, exports maintained double-digit growth (11.12 per cent) at $8.8 billion but the 26 per cent rise in non-oil imports totalling over $11 billion has to be seen more as meeting the needs of domestic economic activity than as a yawning trade gap ($2.3 billion as against $1.4 billion in the corresponding previous period).

Increased edible oil imports at higher prices is one of the factors accounting for the surge in imports.

But with the rising rupee, which has already appreciated already by three per cent so far in 2003, the export competitiveness of the exchange rate to the dollar may have to be looked into by the central bank. India's external position is considered so strong that the IMF selected India to participate in its Financial Transaction Plan, which helps it to finance BoP needs of other countries. India has contributed $291 million and become a creditor to the IMF. The reserves, which stood at $75 billion at the end of March 2003, have further risen to around $82 billion by the end of the first quarter (ending June). After a modest start in 2001-02, the current account surplus had risen to $3.7 billion in 2002-03. The $21 billion addition to reserves last year (from $54 billion end-March 2002) was contributed by the current account surplus, foreign investment of $4.6 billion (including re-invested earnings of MNCs), banking capital (net) $8.2 billion, and valuation changes $3.8 billion. The reserve accumulation was through non-debt flows, the RBI points out.

Notably, India is also lessening its decades-old dependence on external assistance, mainly bilateral assistance from smaller developed nations, to begin with.

Macro-economic conditions remain favourable for a GDP growth higher than recorded in the last three years, with the availability of adequate food stocks, though at a reduced level from the earlier unsustainable build-up and foreign exchange reserves, and low inflation. The wholesale price index rise has remained steady below six per cent for several weeks now.

Abundant liquidity and soft interest rates make for a conducive investment climate though, in relation to the sharp fall in interest rates which help Government to contract loans cheaper and prepay part of the costlier debt, the depositors are put at risk with are turn which would at best neutralize the current level of inflation. The corporate sector complains that interest rates are still too high for them at above 9 per cent, as banks have not lowered their prime lending rates to the extent they have gained from the cuts they have made by pruning deposit rates.

On the fiscal side, deficits have grown without any significant growth-stimulating public investment in years of economic slowdown, and efforts to contain them are limited to cutting budgeted expenditure and there is no knowing to what extent it adversely affects development. Revenue receipts in the new year so far are not according to budgeted targets.

The RBI has been voicing its concern over the larger debt financing of the Budget, the rise in GDP-debt ratio, and the stagnating tax-GDP ratio. Though Parliament has enacted a milder Fiscal Responsibility and Budget Management legislation, leaving it to the Government to set targets, it is unlikely to have any significant impact in the near future.

Meanwhile, as the RBI notes, reduction of indebtedness (63.3 per cent of GDP in 2002-03) by way of prepayment, buyback of high-cost loans from the banking system and debt swaps with States may strengthen the fiscal consolidation process.

The electoral preoccupations over the next two years preclude the possibility of any major budgetary reform such as drastic cuts in expenditure including any reduction in subsidies or any additional resource mobilisation through new imposts.

Overall, at the end of the first quarter, the outlook for the economy is more positive but higher growth expectations are contingent on sustained pace of industrial recovery on a broader front and an evenly spread rainfall rescuing agriculture from drought-driven depths.

(The author, a former Chief News Editor of PTI, is a freelance writer.)

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