The Hindu Business Line : Mid-Term Review of the Economy

If the Mid-Term Review of the Economy holds any lesson, it is that the Government should shun the business-as-usual approach and instead go the whole hog by fine-tuning policies to keep the economy on an even keel, and cashing in on the cosy fundamentals to make development meaningful to a larger section of the populace, says G. Srinivasan.

The Finance Minister, Mr Jaswant Singh, and the RBI Governor, Mr Y. V. Reddy... Optimistic about the growth prospects of the economy. — Kamal Narang

THE publication of the Mid-Year Review of the Economy, one-and-a-half months past that point in time, is an unvarnished bid to trumpet accomplishments and touch but in the passing on areas of concern. It is also in keeping with the promise to Parliament by the Finance Minister, Mr Jaswant Singh, that he will apprise members of developments in the economy, though this could not be done this time round with the winter session set for a delayed start in December.

The mandarins in the Finance Ministry and the team led by the Chief Economic Advisor, Dr Ashok Lahiri, who authored the Review, could not but give in to the temptation of pitching growth prospects a tad higher for the current fiscal.

"Assuming growth rates of more than 8 per cent and 6 per cent in agriculture and allied sectors and industry respectively, and a reasonably good performance by the services sector, the overall growth rate in real GDP can be expected to exceed 7 per cent in 2003-04," the Review gushed.

The latest bout of optimism on the growth front follows the Mid-Term Review of Monetary and Credit Policy unveiled by the Reserve Bank of India Governor, Dr Y. V. Reddy early this month when he placed GDP growth in 2003-04 at 6.5-7 per cent "with an upward bias, compared to 6 per cent projected in April" by the apex bank itself.

"A sharp turnaround in GDP growth, after a dismal performance in drought-affected 2002-03", when GDP growth was 4.3 per cent in the inaugural year of the Tenth Plan, to 7 per cent plus is a welcome tiding.

But even this is nowhere near the average 8 per cent GDP growth projected for the quinquennium, unless the economy can marshal all its strengths to score spectacular productivity gains in the remaining three years in all segments.

The high growth rate per se for the economy is a desideratum not for catapulting India into the league of developed countries, as devoutly desired by the authorities, but to address the twin scourges of poverty and unemployment which continue to plague the country.

It is time that the Finance Minister reminded himself of the "Panch Priorities" he set forth in his maiden Budget: Poverty eradication, infrastructure development, fiscal consolidation, development of agriculture including irrigation and enhancing manufacturing sector efficiency so as to engender some tangible benefits to the economy, in general, and to the people, in particular.

Even as the Review crows about the "strong macro economic fundamentals" and underlines the need to preserve this strength through fiscal consolidation and to leverage it for accelerating growth, the scorecard on the expenditure front makes depressing reading, dashing hopes of traversing the fiscal path at a strong pace.

The total expenditure of Rs 2,17,101 crore in the first-half of 2003-04 constituted nearly half the Budget estimate of Rs 4,38,795 crore. A particularly disconcerting feature is that Plan expenditure for the first half of the current fiscal, at Rs 46,890 crore, was equivalent to 38.8 per cent of the Budget for the whole year.

Such expenditure during the corresponding period of the previous drought year was only slightly worse at Rs 42,285 crore, equivalent to 37.2 per cent of that budgeted.

If Plan expenditure could not be stepped up in the first half, non-Plan expenditure up to the second quarter of 2003-04 at Rs 1,70,211 crore was equivalent to 54 per cent of Budget estimate and surpassed the total of such expenditure in the first half of 2002-03 in absolute terms by a whopping Rs 50, 046 crore and as a proportion of Budget estimate by a hefty 13.1 percentage points.

Though part of the rise of Rs 50,046 crore this year is on account of Rs 32,602 crore made over to National Small Savings Fund (NSSF) and matched by equivalent receipts, the lingering Rs 17,444 crore still signifies a net increase over last year.

Woefully, the three principal components accounting for a major chunk of the spurt in non-Plan spending in the first half of the current fiscal continue to be major subsidies such as food, fertiliser and petroleum, which were up by Rs 9,744 crore, interest payments by Rs 2,854 crore and payment — euphemism to bail out their egregious commercial decisions which contributed to overall spurt in their non-performing assets — to financial institutions.

It is germane to note that in its 2002-03 Annual Report, the RBI convincingly argued that earlier efforts at fiscal correction have resulted in a persistent decline in capital expenditure. In general, it is capital outlays, which have provided the soft-option for deficit-based fiscal correction.

In the revised estimates for 2002-03, capital outlays fell short of the budgetary target by more than 25 per cent, implying the diversion of resources from productive investments to current expenditures.

It is rather ironical that the Ministry of Finance and the Planning Commission have been proactive in drawing up Medium Term Fiscal Programmes (MTFRP) as per the recommendation of the Eleventh Finance Commission for the States, while the fiscal correction efforts on the part of the Centre proceed at a halting pace and pattern.

An Incentive Fund has been set up by the Centre to encourage the States to "speed up reforms chalked out by them under MTFRP". The goals of the MTFRP encompass fiscal consolidation, power sector reforms, public sector restructuring and transparency in budgetary classification and processes.

The Review said that so far the Monitoring Committee under MTFRP has approved the fiscal reforms programmes of 23 States and incentive grants of the order of Rs 3,278.20 crore has been released up to end-September 2003. It further noted that the single monitorable indicator, based on which sanctions are made, is an annual reduction of 5 per cent in revenue deficit as proportion of revenue receipts.

While this pragmatic policy-based lending by the Centre to States, evolved in the economic liberalisation era, is in tune with the universal dictum that there is no free lunch, how is it that the Centre is unable to rein in its own fiscal deficit year after year?

Thus, fiscal deficit up to September 2003 at Rs 81,014 crore is 52.7 per cent of the current year's Budget Estimate. The corresponding figure for the first half of last year was 42.6 per cent.

Revenue deficit up to September at Rs 65,427 crore constituted 58.3 per cent of Budget Estimate compared to 49.9 per cent in the first half of 2002-03.

As cutting down revenue deficit is crucial because it goes only for consumption and not for creation of productive assets that yield a reasonable return, the Centre's continued profligacy on this count is but odd.

This asymmetrical approach in husbanding resources, particularly when the Centre is also ruled by the biggest coalition with several State-level parties holding their stakes and having their decisive say, is bound to generate heat unless the Finance Minister effects some root-and-branch reform on the expenditure front.

Mere repeating of the need for fiscal consolidation without actually putting in place or setting an example by its own action by the Centre will not help anyone, more so an economy of continental size such as India, with rising demand and unmet needs of millions.

Public investment has traditionally been the prime mover for unleashing private investment and entrepreneurial élan, as demonstrated in successive Five-Year Plans and the investment famine or steep cut-down in capital expenditure by the Government was partly the reason why industrial growth performance could not touch double-digits even after the advent of deregulation and liberalisation.

The RBI rightly diagnosed that the pace of private investment has lost momentum since the second half of the 1990s on account of "several factors including lack of adequate reforms and public investment in infrastructure as well as uncertainties in the domestic investment climate".

In the Indian context, as the RBI pertinently put it, there is considerable evidence that public investment has played "a preponderant role in entrenching the conditions for higher growth".

Hence, the authorities would be well-advised to take advantage of the brimming foreign exchange reserves running to $92 billion now, to make use of them for kick-starting public investment on a higher gear after making due provision for reasonable level of forex reserves.

Alongside, as aptly assessed by the Review, reducing import tariffs since 1991 has served India quite well "in terms of higher growth and greater export vibrancy.

Given the comfortable foreign exchange reserves, and the incipient upward pressure on the rupee, there is a need to go forward towards the already announced alignment of tariff structure with Asean countries".

If the Review holds any lesson for the government of the day, it is that it should shun the business-as-usual approach and instead go the whole hog by fine-tuning policies to keep the economy on an even keel, cashing in on the cosy fundamentals to make development meaningful and participatory to a larger section of the populace.

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