The Hindu Business Line : Economy is fine, but time Govt profligacy ends

ALTHOUGH India has been known as one of world's fastest growing significant economies, never has it caught global attention in a positive way as it has now. In the same vein, never in the recent past has a new year dawned with such robust optimism about the economy and well being of the country.

After four years of modest GDP growth and after a disastrous year of drought-affected slowdown in 2002-03, suddenly the economy has started to look up even as the country finds itself invested with renewed confidence.

Currently, most macro-economic indicators are positive. The GDP growth rate in current fiscal (2003-04) is poised to touch 7 per cent (against 4.4 per cent last year). Foreign exchange reserves have crossed the magic milestone of $100 billion. Vis-à-vis the US dollar, the rupee continues to strengthen. The stock market is booming with the Sensex tantalisingly close to the 6000 mark with the rally quite broad-based this time. The market is up nearly 70 per cent and from the year low, the index is up 100 per cent.

Investor confidence is looking up. Several public issues are being planned. Inflation is under control. There is a rebound in agricultural output. Farm produce prices are booming and rural incomes are spurting.

What has caused the sudden turnaround? Doubtless, the proximate cause is the excellent south-west monsoon of 2003. Favourable spatial and temporal distribution of rains across the country has resulted in a 10 per cent plus growth in agriculture. As nearly 70 per cent of the population is dependent on farm and related activities for livelihood, such a growth rate translates to higher rural incomes and higher demand for goods and services, setting off a virtuous cycle of investment and employment.

Industry is doing well. Capacity utilisation is improving. Steel, cement, petroleum, vegetable oil and chemicals are some of the sectors showing positive growth signs. Fresh investment and expansion is being planned. Increasing integration of the country's economy with the global economy has meant local producers are learning to cope with competition. Creeping supply chain efficiencies are slowly beginning to make a difference in a positive way. Interest rates have been falling over the last two years, in line with global trends. The pain of shakeout and downsizing felt between 1998 and 2002 (first the Asian contagion and then the tech meltdown) is now beginning to turn into a positive attribute of cost efficiency in the Indian industry.

Huge BPO opportunities are opening up. Despite global economic slowdown, Indian exports have performed reasonably well. Information and technology and pharmaceuticals are two sectors, in particular, where Indian companies continue to make an impressive mark in the world arena.

Is the euphoria for real? Yes, indeed, if one looked at only the bright side of things. There surely are areas of concern. Indian economy is far from drought-proof. Efforts are necessary to ensure a steady 4 per cent growth in agriculture as envisaged in the National Agriculture Policy; but specific programmes and schemes to realise the growth target have to be put in place.

Falling public investment in agriculture needs to be reversed. Water is the most critical input for agriculture. Scientific water management is the key to future growth.

Infrastructure is another weak area. Huge investments are necessary in key areas such as power, telecom, roads, ports and so on. Policy support for attracting investment, including foreign direct investment, is imperative. Rural infrastructure needs to be attended to. Investment in education and health services has to be stepped up.

Worse, Government finances - Central and States - are in a shambles. Many State Governments are on the brink of bankruptcy. There should be an end to fiscal profligacy. The government should first be downsized, as there is too much of government and too little governance. Public governance is far from transparent. The government has no moral right to impose corporate governance rules without improving public governance.