The Hindu Business Line : Can economy be monsoon-proofed?

UNLIKE in its previous term in 1991, the Congress did not inherit an ailing economy when it came back to power last year with a coalition arrangement. Economic growth at nearly 8.5 per cent in 2003-04 was stronger than ever beforeAgriculture and allied activities grew 9.6 per cent in 2003-04, thanks to a better monsoon compared to -5.2 per cent in 2002-03. The industrial sector maintained growth of nearly 6.6 per cent against 6.2 per cent in 2002-03, whereas the services sector registered a rise by about 1.9 percentage points to 9.1 per cent in 2003-04. Judged by the average annual growth rate of 6.1 per cent between 1992-93 and 2001-02, the year 2003-04 was incredibly good.

On the external sector front, the economy witnessed a sharp rise in export performance resulting in a whopping accumulation of foreign exchange of over $110 billion by end-March, 2004. However, advance estimates, recently released by Central Statistical Organisation, show some disquieting trends for 2004-05 that point to loss of growth momentum. The growth rate is expected to falter, down by 1.6 percentage points to 6.9 per cent, which is far lower than the 8 per cent growth rate targeted under the Tenth Plan. Sector-wise growth is mixed. The industrial sector is poised for increased growth of nearly 7.7 per cent and services will remain at around 8.9 per cent in 2004-05, whereas agriculture is likely to register only one percent growth. The paltry performance of agriculture is the major drag on overall economic growth due to poor monsoons which adversely impacted farm production. Exports are likely to record a stellar performance.

The growth of merchandise exports is likely to meet this year's target of 16 per cent and thus hitting another breaker of $75 billion against the record $63 billion in 2003-04. Of course, the Reserve Bank of India has forex reserves of over $128 billion.

Standard economic theory tells us that in equilibrium, output (national income) should be equal to aggregate demand.

The identity of aggregate demand for an open economy, such as India's in recent years, consists of private consumption, private investment, government spending net of revenue but inclusive of transfers, and net exports. A glance through trends in respect of each of these constituents indicates possible drivers of growth.

In its Annual Report, the RBI regularly carries out an exercise on the sources of aggregate demand. In its report for 2003-04, it put out certain statistics covering the period up to 2002-03. Income growth moves closely in tandem with that of final consumption expenditure (Table). As the growth of private final consumption declines, income growth also declines; for instance, when it declined to 3.7 per cent in 2002-03 from 5.2 per cent in 2001-02, national income also went down from 5.8 per cent to 4.0 per cent.

This happened because private final consumption accounted for over 68 per cent of GDP the last few years. Similarly, private fixed investment also plays an important role in the growth process. In 2002-03, gross capital formation was 23.3 per cent of GDP with a sectoral share of the order of 12.3 per cent being accounted by the household sector, 5.7 per cent by the public sector, and 4.8 per cent by the private corporate sector. Whether it is in terms of consumption or investment, it is the household sector that holds the key to growth.

In 2002-03, private consumption was affected by monsoon failure. With lacklustre agricultural performance, private consumption is likely to drag economic growth this fiscal too. Thus, insulating the economy against the vagaries of the monsoon is important to sustaining growth momentum.

However, this is not to suggest construction of dams to store water; public expenditure in agriculture, particularly rural infrastructure, needs to be stepped up. This would not only provide an alternative to employment in agriculture but also prove to be a better medium of translating public spending into demand through the multiplier effect.

Rural infrastructure will not attract private investment at least in the foreseeable future because it does not generate revenue.

Over the years, there has been significant public spending on the development of urban infrastructure. Increasingly there is a willingness to pay for services amongst the urban residents, as evidenced by the success stories of Tata Power and Reliance Energy, and so the private sector may be expected to step in if public spending on urban infrastructure is withdrawn.

The services sector has been registering robust growth for many years now; however, it is difficult to determine its rural-urban break up.

Considering the major growth businesses within the services sector like hotels and restaurants, telecommunication, financial services, insurance, real estate and so on, it can be reasonably expected that the bulk of growth originates in urban centres.

Public spending on rural infrastructure could perforce be planned with an objective of improving connectivity between rural and urban areas so that rural masses can be effectively integrated with growth propelled, urban-centric businesses.

Perhaps, improving such connectivity, as time and again stressed by the President, Dr Abdul Kalam, is the means to insulate the economy from adverse effects of the vagaries of the monsoon.

Unfortunately, increased public spending is inherently deficit biased and may hence militate against the spirit of the Fiscal Responsibility and Budget Management Act 2003.

The bonus, however, is the reduced oscillation of the economy with the vagaries of the monsoon besides strengthening rural growth. Can Mr Chidambaram do it?

(The author is on the faculty of the ICFAI Business School. He can be reached at dennisraja@hotmail.com)

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