Financial Daily from THE HINDU group of publications
Thursday, Jul 08, 2004
Industry & Economy - Economic Survey
Survey hints at bold moves to sustain growth `Improvement in fiscal situation is critical element'
New Delhi , July 7
A DAY before the Union Budget 2004-05, the Finance Ministry has made a rather bullish prognosis of the economy even while hinting at hard fiscal measures and "bold actions" to consolidate the current "growth momentum."
"The economy appears to be in a resilient mode in terms of growth, inflation and balance of payments" and there are "signs of improvement in the investment climate in recent months," the Ministry's Economic Survey for 2003-04 has said, referring to the 8.2 per cent growth in real gross domestic product (GDP) registered in the previous year.
Moreover, notwithstanding the instability in Iraq and structural imbalances in the US economy, "the global economic environment and outlook continue to provide a benign backdrop for consolidating India's growth process." Similarly, there is "reason to believe" that the inflation rate this fiscal would remain around 5 per cent, as projected by the Reserve Bank of India, subject to there being no uncertainties in the movement of global oil prices, it said.
But at the same time, the Survey has pointed out that the real challenge lies in "sustaining the growth momentum" and achieving an annual average growth of 7-8 per cent in the next five years. In fact, the 5.7 per cent 23-year average annual growth recorded by India is way below what economies in East Asia have achieved over longer periods, despite much worse "initial conditions."
During 1961-1996, for instance, Hong Kong notched up an average GDP compounded growth rate of 7.97 per cent, with the corresponding figures being 6.39 per cent for Indonesia, 7.96 per cent for Korea, 7.22 per cent for Malaysia, 8.74 per cent for Singapore and 7.71 per cent for Thailand.
The critical component for sustained growth, benign inflation and low interest rates, according to the Survey, is improvement in the fiscal situation.
"Any misguided scepticism about the resolve behind the declared goals of fiscal consolidation should be scotched by bold actions," the document has said, while reiterating the new United Progressive Alliance (UPA) Government's commitment to eliminating the Centre's revenue deficit by March 31, 2008, as per the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
The Survey has even favoured "front-loading" the existing revenue deficit elimination schedule, given that "the economy is doing well now." What this could imply is that the Budget may target a largely revenue-deficit reduction from the Rs 98,308-crore provisional figure for 2003-04.
The Survey has also called upon States to also adopt similar fiscal responsibility legislations, as the current FRBM Act applies to only the Centre. As of now, only Karnataka, Kerala, Punjab, Tamil Nadu and Uttar Pradesh have enacted such legislations.
According to the Survey, the main reason why the deteriorating fiscal situation since 1997-98 has not resulted in a crisis so far has been the subdued demand for non-food credit in recent years. But with fiscal deficit remaining high and signs of a pick-up in the flow of credit to the commercial sector, "the possibility of interest rates moving northwards cannot be ruled out," it has warned.
Also, without fiscal consolidation, it is not possible to step up public investment, especially in areas such as agriculture, where gross capital formation has dropped from 1.9 per cent to 1.3 per cent of GDP since 1990-91.
The Survey has called for a "rethink" on the existing cost-plus minimum support price (MSP) system of unlimited foodgrain procurement, which is imposing a heavy burden on government finances. It has also advocated the need to build "popular consensus" on more flexible labour laws and "less friction in the creation and closure of firms in response to normal competitive market dynamics."
Simultaneously though, the Survey has acknowledged the fact that mobilising popular support for such radical measures is a "challenge" in the absence of an immediate crisis.
This is unlike the situation in the early 1990s, when the then Finance Minister and present Prime Minister, Dr Manmohan Singh, was able to convert the country's precarious forex reserves position as an opportunity to launch far-reaching economic reforms.
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