The Hindu Business Line : Economy in pink, but concerns persist

To make the most of the heightened business confidence, there is a compelling need for the economy to be made more competitive and open through appropriate macro economic policies and financial standards. The pursuit of higher growth needs to be tempered with greater investment in irrigation and rural infrastructure and the efforts to tackle poverty and unemployment.

INDIA'S $700-billion economy is likely to expand by 7 per cent in 2005-06 because of increased output in key industrial sectors and increase in broad-based exports.

The present period marks a break from the past with the growth rate accelerating from 3.5 per cent in 1979 to 6.3 per cent today. The per capita gross domestic product (GDP) has increased from 1.2 per cent in 1972-82 to 3.9 per cent in 1992-2002 .

Growth in excess of 7 per cent would make India the world's second-fastest growing economy, after China. Industry is expected to grow by 8.1 per cent and services by 8.3 per cent.

Dynamism in the industry and services and the emergence of a new investment cycle supported by strong credit growth resulted in the growth of 6.9 per cent in 2004-05.

The agriculture sector, which accounts for one-fourth of India's total economic output, might grow by 3 per cent in 2005-06 because of improvement in distribution of quality seeds, higher growth in commercial bank credit to agriculture and a favourable trend reversal in the gross capital formation in agriculture.

But the Centre for Mathematical Modelling & Computer Simulation's indication that rainfall may be 34 per cent below average in June and 12 per cent lower in July is a cause for concern. Spiralling crude oil prices and the rising US interest rates curb higher economic growth. Volatile global oil markets might moderate the growth outlook.

The inflation rate in 2005-06 might hover around 5 per cent subject to growing uncertainties on the oil front both in global prices and their domestic absorption.

The economic growth target has been scaled down from 8.1 per cent to 7-8 per cent annually in 2002-07 in the mid-term appraisal (MTA) of the Tenth Plan because of the lower-than-planned actual growth in the first three years. MTA also proposes far-reaching reforms in labour, infrastructure, social sectors and further liberalising FDI regime, especially in retail.

India rising: There is a convergence of opinion across the development spectrum about India's place in the world. Goldman Sachs estimates India's economic growth could outperform China by 2015 with the potential to deliver the fastest growth over the next 50 years with an average rate of more than 5 per cent a year for the entire period.

Deutsche Bank's study India Rising: A medium-term perspective argues that India could sustain a 6-8 per cent annual economic growth rate for the next 10-15 years.

"Favourable demographics, increasing investment in education and infrastructure and further integration with the world economy" would push India's growth rate beyond that of China. Such changes would influence more spending on health care, transport and communications and internal investment.

According to the National Council of Applied Economic Research (NCAER), Indian business confidence has risen to its highest level in two years as policy changes helped generate demand for manufactured goods, thereby making companies more efficient.

Global market research agency Synovate's opinion polls involving 130 CEOs indicated that capital goods production, capital good imports and investment activity would continue in the manufacturing industry.

Corporates continued to perform well with over 50 per cent growth in net profit this year. The net profit of 1,325 companies rose by 54.81per cent in 2004-05 (topping the 59.1 per cent growth in 2003-04).

Of the 112 sectors, 42 recorded a 25 per cent sales growth and net profit doubled in 24 sectors (including housing construction sector, picture tubes, office equipment, sponge and pig iron and sugar industries). The services sector is expected to gain momentum from the commodity producing sectors in the trade, transport and communication segments.

Diverse forms of legal, administrative and political systems hamper the smooth functioning of a global market economy. Hence, there is a compelling need to make the economy more competitive, open and efficient through appropriate macro economic policies and financial standards.

Lingering concerns: India still faces problems of a semi-closed economy with trade accounting for a lower proportion than that in China, low foreign direct investment, unsustainable fiscal deficit of 10 per cent and debt levels of 80 to 85 per cent.

India's federal fiscal deficit for the year 2004-05 stood at 4.11 per cent, the lowest budget deficit as a proportion of GDP in eight years.

Such lowering is unlikely to occur because of the $6 billion commitment in social spending plans. Selective reduction in Budget deficit restricts investments to 1.9 per cent of GDP this year.

The pursuit of higher growth needs to be tempered with greater investment in irrigation and rural infrastructure and the efforts to tackle poverty and unemployment.

A recent paper by Timothy Beasely and Robin Burgess, Professors at the London School of Economics (LSE), on Operationalising pro-poor growth: India case study suggests a five-point agenda for reducing poverty in India.

This includes improving access to financial services for the poor, relaxing labour laws, upgrading human capital and providing greater focus on rural economy.

Despite inflation, corruption and red tapism, we must foster creativity, incubation and innovation and provide an environment for patenting inventions on a larger scale.

Solutions to the problems of disguised unemployment, large and growing unemployment, extremely skewed distribution of income and wealth should not be delayed any more.

For, the success of the development strategy requires a holistic approach to deep-rooted macro-economic and structural challenges for removal of poverty and deprivation within a reasonable time-frame.

Rejigging development strategies: Past experience and financing problems make implementation of ``economic reforms with a human face'' the litmus test of policy pronouncements. There may not be immediate, easy solutions, since bringing about qualitative improvement is a dynamic process to be viewed in the broader context of quality of physical life index (QPLI) and economic opportunities.

Well-defined policy and procedures need to include political will and the determination to implement actions for new initiatives, cooperation and coordinated action by the government.

Given the need to create 110 million new jobs over the next 10 years, the growth of the service sector will have only a limited impact on the IT sector that will employ about 2 million people by 2008, less than 1 per cent of the labour force.

An accent on enhanced productivity in agriculture, labour-intensive manufacturing, rural non-farm sector, labour market reforms, rural infrastructure/financial institutions, education, health, infrastructure, gender development and other basic needs, is needed to achieve the goal of growth with equity.

(The author is Chief Economist, Canara Bank, Head Office, Bangalore, India. He may be reached at sharma_m@canbank.co.in)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
At loggerheads with Left

Protecting farmers from world markets

Economy in pink, but concerns persist

Poverty in the US: Fact and fiction

From failure to success

BIS Platinum Jubilee report: `Build on financial stability'

The effect of credit growth on NPAs

Petrol price hike

Water conservation

Screen smoking