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Friday, Feb 13, 2004

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Economy on song... But there are jarring notes too

Manoranjan Sharma

The dynamic and multi-faceted Indian economy has struck a purple patch. But despite the reasonably sanguine mood, daunting challenges remain and these must be addressed if the expectations of the future are to be met, says Manoranjan Sharma

THE deregulation of the Indian economy, which started in the 1980s, received an impetus in 1991. While the balance of payments crisis may have provided the immediate trigger, there were structural and deeper long-term reasons underlying a paradigm shift of the economy in 1991. The post-Independent economic history can easily be broken into three periods — 1951-79, 1980-91 and 1992-2003. Against the background of stagnation in 1900-50, India's GDP grew a modest 3.5 per cent in 1951-79 — a growth rate derisively dismissed by Professor Raj Krishna as the `Hindu rate of growth'. During 1980-91, the country achieved a GDP growth little in excess of 5 per cent, whereas post-reforms (1992-2003), it was about 6 per cent.

Significantly, the data released by the IMF recently show that India recorded a whopping 46 per cent-plus growth in per capita income during 1992-2002, whereas the growth was negative in most countries — the US (-4.3 per cent), China (-6.6), Malaysia (-12.7), Singapore (-24.2), Indonesia (-36), Korea (-50.3), Taiwan (-50.6), Hong Kong (-51.4) and Thailand (-61.8).

Explanatory factors for the increase in per capita income stress "convergence" of appropriate policies — free flow of capital to the poorer countries, imitation of technological changes of the richer countries by the poorer ones, and positive cascading effects of information and communication technology (ICT) — which slash transaction costs and increase output for firms across sectors.

Thus this period, which marks a decisive break with the past, saw India exploring new avenues that led to the global information superhighway. But even by the high standards of the post-reforms phase, there is little doubt that the dynamic and multi-faceted Indian economy has struck a purple patch, irrespective of the criterion adopted. The economy usually expands at a more rapid pace during the second half of the year. Hence, the soaring of GDP by a record 8.4 per cent in July-September 2003 and, more important, the likelihood of all three segments of the economy — agriculture, industry and services — growing by 7 per cent in FY 2004 makes the realisability of 7 per cent GDP growth in 2003-04 a certainty.

The acceleration in macroeconomic growth is clearly manifest in the current account bouncing back from a deficit of $317 million to a surplus $524 million, the Sensex rising to a new 46-month high, and the country becoming Asia's second-best performer for the year — the ONGC IPO at $2 billion, tipped to be the largest ever pure equity mop-up by an Indian company in both the domestic and international markets, may well be the biggest by any company in 2004.

Industrial growth spurted by 7.4 per cent in November 2003, aided by a near-double-digit manufacturing growth rate. While India has to traverse some way before it can become a global manufacturing hub, low interest rates, increasing demand and enhanced productivity propelled corporate profitability and growth.

The ascendancy of the professional middle-class and the emergence of the new entrepreneurial class are no longer issues of debate. The many arrows that point upwards include the recent $10 billion exports of information technology software, sale of components by Indian firms to 15 of the world's major automobile manufacturers; emergence of the pharmaceutical industry as the fourth-largest in the world in terms of volume of production with a growth rate of 10 per cent a year; one of the three countries, apart from the US and Japan, to build supercomputers; and one of the six countries to launch communication satellites.

Clearly, then, the `feel-good' factor is driven by forces that transcend cyclical factors, such as agricultural rebound and stock market boom. Structural factors such as steady southward movement of interest rates, industrial resurgence across key segments, infrastructural improvement and demographic change have lent a steadying impact to something intangible, which is distinctly palpable in the air.

Improvement across the development spectrum is also vindicated by a business confidence survey by ET-NCAER in October 2003 covering 580 companies. According to the survey, the second half of the 1990s and the new millennium were characterised by sweeping changes in scale of operation, adoption of technology, restructuring of marketing chains, introduction of IT and labour restructuring. Across sectors, over 91 per cent of the companies above Rs 500 crore in size effected changes relating to reduction of labour force and restructuring of the workforce to ramp up productivity.

Against this backdrop, interest in India perked up with the FIIs pumping in $7.4 billion ($6.5 billion in equity and $1.9 billion in debt). High GDP growth together with modernising infrastructure and the outsourcing revolution suggest that such inflows would not remain a flash in the pan and can reasonably be sustained over the medium-term. No wonder, then, that international rating agency Standard & Poor's raised the outlook on India's long-term foreign currency rating from `negative' to `stable' on the back of improving external finances. It, however, retained the local currency outlook constant at `negative', citing a bloated deficit and poor reforms.

The theoretical underpinning of the all-pervading `feel-good' factor was provided by a recent report, `The Path to 2050' (October 2003), by Dominic Wilson and Roopa Purushothaman of Goldman Sachs. The report argues that by 2050, BRIC (Brazil, Russia, India and China) would have a combined economic weighting larger than the current six largest economies (the US, Japan, Germany, the UK, France and Italy). Among the BRIC economies, India has the potential to grow even faster than China over the next 30 years and by 2010 India's growth rate should exceed that of China. The basis for this projection about India is driven largely by what is called the `demographic dividend' India is likely to reap over the coming decades because of the sharp surge in its working population.

In a similar vein, Roger Bootle (Money for Nothing: Real Wealth, Financial Fantasies and the Economy of the Future, Nicholas Brealey Publishing) contended that the opening up of India and China, in conjunction with the potential for gains from developments such as biotechnology, would usher in "the greatest increase in prosperity in our history." Against this backdrop it is hardly surprising that the debate about India shining moved to central focus. This is good as far as it goes. But does it go far enough? Certainly not if the recent study on corporate investment intentions, published in the December 2003 monthly bulletin of the Reserve Bank of India is any indication. The study revealed successive declines of 23.6 per cent and 9.1 per cent in capital expenditure in corporate investment in 2001-02 and 2002-03, respectively. Continuation of this trend could further restrict corporate investment.

Year 2003

The year gone by was characterised by a turnaround in financial performance, diversified industrial growth, growth of business process outsourcing (BPO), return of manufacturing, spate of takeovers by Indian companies of small/medium-size foreign firms, foreign exchange reserves breaching the $100-billion mark, buoyant capital flows, a healthy stock market and rising business confidence.

Exports for November 2003, on top of a healthy 19 per cent growth for 2002-03 despite a weak global demand and a stronger rupee, grew at 13.74 per cent with cumulative exports during April-November 2003 placed at 9 per cent. India's exports of engineering goods surged by a record 35 per cent during April-July 2003. Robust growth of 26 per cent in non-oil imports, particularly capital goods and intermediates, strongly suggests fresh investments and capacity expansions powering the economy.

To be sure, these are clear indications of the resurgence and renaissance of India — an India that seems to have come of age.

But despite the reasonably sanguine mood, consider the following dissonance: A GDP growth of even 8 per cent in 2003-04 would imply a simple average of only 5.8 per cent between 1999-2000 and 2003-04 vis--vis 6.7 per cent in 1993-94 and 1997-98.

Apart from the reliability of data about the rapid growth in services, there are also the issues of banks continuing to park their funds in government securities, the sustainability of the rise in the Index of Industrial Production (IIP), moderate rise in core infrastructure industries, uncertain merchandise growth and the fear of rising inflation. Further, high fiscal deficit and low domestic investment continue to cause concern and consternation.

While the Tenth Plan estimated fiscal deficit of the Centre and the States at 8.8 per cent and the Eleventh Finance Commission had pegged it at 6.5 per cent by 2004-05, it was perilously close to 10 per cent in 2002-03. As the former RBI Governor and Chairman of the 12th Finance Commission, Dr C. Rangarajan, pointed out, "failure to step up expenditure on necessary items (such as physical and social infrastructure) or failure to achieve fiscal consolidation will dampen the growth momentum."

The road ahead

There are many daunting challenges hampering the ushering in of a "new deal". In the ultimate analysis, the crux of the issue lies in a revival of investment (particularly in manufacturing), a transformation of agriculture, check on deficits of the Central and State governments, privatisation, change in labour laws, availability of efficient and sufficient infrastructure at reasonable cost, rise in per capita income, reduced regional disparities and a sharper focus on employment, health, education and gender equality. So, where do we go from here? What policy options and instruments do we have at this defining moment of history? Decisive action on what Prof Amartya Sen (India: Economic Development and Social Opportunity) called "the central issue" of "expand(ing) the social opportunities open to the people" is needed to transform the socio-economic milieu. This is a tall order, particularly when, as demonstrated by the recent FAO (Food and Agriculture Organisation) report entitled `State of Food Insecurity in the World, 2003', over a fifth of India's population still suffers from chronic hunger.

What is even more galling is that the incidence of hunger over three reference periods — 1990-92, 1995-97 and 1999-2001 — registered an initial decline from 214.5 million to 194.7 million, before a near total reversal increased the number of the undernourished to 213.7 million. Without quibbling over the details of various surveys, it can safely be maintained that the grim employment scenario reveals a rapid erosion of opportunities, a decline in self-employment and the growing "casualisation" of labour.

All this necessitates discernible improvement of the thrust on compelling socio-economic issues, such as basic employment, education, health, women's empowerment and so on, to improve the quality of life of the teeming population. Midcourse corrections needed to reach a new renaissance require coordinated and concerted action with a sense of urgency to meet the challenges of the present and the expectations of the future.

(The author is chief economist, Canara Bank, Bangalore.)

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