The Hindu Business Line : High growth must deliver jobs and equity

THE new fiscal, 2004-05 has had a bright start with economic prospects buoyed by an explosive 10.4 per cent growth in the third quarter (October-December), when bumper kharif crops, enabled by a plentiful monsoon, entered the markets.

The Finance Minister, Mr Jaswant Singh, who delivered a dismal 4 per cent growth in the first year of his stewardship of economy (2002-03), has every reason to feel gratified by the outcome in the second year (2003-04), for which the Central Statistical Organisation (CSO) has projected an 8.1 per cent rise in GDP. Depending on the fourth quarter data, which will not see any regression, the CSO might revise the growth estimate higher.

There are other encouraging developments that augur well and should provide a strong base for fiscal and other policies, once the country gets the most contentious election in its history out of the way, and a government, hopefully stable is formed by mid-May.

These include a $35-billion rise in external reserves in the year ending March 2004, with a current account in surplus of $3.2 billion in April-December 2003 and the rate of inflation slowing down to below 5 per cent by end-March.

Meanwhile, the third quarter GDP growth is exciting for growth-obsessed policy-makers, and the Finance Minister sees in this a validation of his oft-repeated contention that India is now on track for a sustained 8 per cent growth.

The drought was blamed for the low 4 per cent growth in 2002-03 but the major impact of the monsoon for this order of growth is not fully conceded by those who tend to see India "shining" all over. Agriculture moved up by 16.9 per cent from a negative 9.8 per cent compared to previous year's corresponding quarter, or a 26 per cent rise, according to CSO data.

Manufacturing is firmly on recovery path, but growth at 7 per cent is still below what it was in the mid-l990s.

In a series of interviews, the Finance Minister, talking about the third quarter, says that 10.4 growth is "the highest ever, much higher than in our eastern neighbour" (China). The fact of the matter is that India's growth trajectory will show disjointed years of high growth in the 7-9 per cent range in the 1970s and the 1980s, which ended with a 10.5 per cent growth in 1988-89 (after the drought of 1987). And three continuous years (1994-97) produced a 7.5 per cent average as liberalisation took hold of the economy.

An 8 per cent plus in 2003-04 would be the first showing at this level in six years of the Vajpayee regime from 1998-99, a period marked by growth slowdown and virtual stagnation in savings and investment — which has been glossed over in recent pre-election propaganda.

As for China, both the IMF and the World Bank data show an average growth of 10.3 per cent in 1980-90 and 10 per cent in 1990-2001, against India's 5.7 per cent and 5.9 per cent respectively. In the early l990s, its growth was startling, at 13.5,12.6 , 10.5 and 9.6 per cent for four years in succession which led to overheating of the economy and a resulting moderation to around 8 per cent after 1996. The question is not whether an 8 per cent growth is achievable or sustainable. It must be the objective; the country has also to insulate itself against adverse effects of monsoon failures. Industry must raise its share of GDP, which is one-quarter, against China's one-half, if India is to become a strong manufacturing and exporting hub.

More important, the obsession with growth numbers must give way to tackling the basic challenges which growth over the years has bypassed orimpactedmarginally if there is to be a real `feel good' that spreads beyond business or upper middle classes to the common people.

It is true that, as Mr Jaswant Singh says, the jobs available have not matched expectations, and one must reckon with the growing population and additions to the labour force. This is applicable to past governments as well but what has happened in recent years is the sharp decline in the rate of growth in employment from the latter half of the l990s as against the earlier period, when there was some relation between the growth of labour force and of employment generation.

Both the BJP and the Congress(I) had come up with promises of 10 million jobs a year before the l999 elections but the former has not given any account of how far this target has been met during its six years in office. The Prime Minister, Mr Atal Bihari Vajpayee, keeps claiming that his government has fulfilled the target of five crore jobs. Would the government go beyond this generalisation?

The informal sector has, no doubt, become a major source of employment, irrespective of wage levels and working conditions. IT is making a dent in the job market for skilled professionals. But the problem of millions of impoverished and unemployed cannot be wished away. The whole "India Shining" campaign has mocked at living conditions in both rural and urban areas involving some 800 million people, and policies have generally been biased towards taking benevolent care of the elite.

But, overall, it must be said to the credit of Mr Jaswant Singh that he has managed a smooth run for the economy without drastic tax measures, imparting stability, and has indeed extended huge concessions for infrastructure building as well as to make the cost of business cheaper and competitive.

Strong export growth at 14.75 per cent and a surge in capital inflows (related mainly to portfolio investments, banking and NRI deposits) have been the significant trends of 2003-04. The $15-billion trade deficit has been offset by the flow of inward remittances ($14.6 billion) and software services ($9 billion).

Foreign Institutional Investors injected $7.6 billion into the Indian capital market during the year, though FDI was again on low key. It has been a year of boom for many stocks with the BSE Sensex touching new highs and India probably outperforming many of the major global markets.

Expectations are that the primary market is in for a strong revival after the elections.

Even as foreign exchange inflows remain unabated, the rupee's continuous appreciation, which was Rs 43.65 to the dollar at the close of fiscal 2004, is raising questions afresh about reserve build-up and exchange rate management without impairing stability and export competitiveness.

Export growth thus far appears unaffected but there is concern over a continuing rupee rise.. A stronger rupee can keep imports cheaper, whether it goes to benefit consumers or not, and absorb part of the rise in crude oil prices. (India imported $18 billion worth of crude in April-February).

The RBI's prime concern has been to see that inflation remains in the targeted 4-4.5 per cent range in 2003-04, apart from its policy objective of preventing any "undue volatility" in the rupee-dollar exchange rate. Internationally, oil and other commodity prices are on the rise, especially with OPEC's decision to cut crude output from April 1, an action which the International Energy Agency sees as one that would undermine global economic recovery and hurt growth of heavily importing countries like India and China.

Strengthening global growth and prices is expected to lead to interest rate revisions in the US in the near future and Europe later. These significant trends would have to be taken into account by the RBI in its Monetary and Credit Policy for 2004-05 which has been deferred till after the elections to May 18.

Meanwhile, the RBI's sterilisation of inflows has to ensure that the money supply remains steady without expansionary effects. To overcome any inadequacy of government securities in mopping up excess liquidity, a new instrument, the Market Stabilisation Bond, has been announced.

Nevertheless, recent exchange rate developments call for the RBI re-visiting reserves and exchange rate management, however commendable its policies have thus far been. Productive use of reserves, which stood at $110 billion at the end of March to meet domestic investment needs of the economy is yet to get the attention it deserves.

(The author is, a former Chief Editor of PTI)