The Hindu Business Line : Fiscal position could be better

Going by the second quarterly (and half-yearly) review of the Indian economy, the fiscal condition leaves much to be desired, so much so that, under the FRBM Act, is has become incumbent on the Government to take steps to remedy the situation.

THE SECOND quarterly (and half-yearly) review of the Indian economy, which the Finance Ministry has just released under the provisions of the Fiscal Responsibility and Budget Management Act, 2003, has to be read carefully in order to separate the good news from the bad, the overall impression being that while some of the nuts-and-bolts aspects have been encouraging, there are other, broader, spheres where performance has been less than satisfactory. First, of course, the good news which cannot but strengthen the `feel-good' factor that is currently in vogue both at the domestic and international levels. Take the Gross Domestic Product, to start with. At 1993-94 prices, the figure for April-September 2005 was 8.1 per cent compared to 7.1 in the same period of 2004. The Wholesale Price Index increased by 4.3 per cent this year against 7.2 per cent in April-September 2004. The Consumer Price Index rose by 4.2 per cent in 2005 April-September compared to 4.6 per cent last year. The Index of Industrial Production was higher by 8.8 per cent this year against 8.3 per cent in April-September 2004.

FDI/FII flows

As regards the net foreign investment position, $1916 million came in in April-September 2005 against $798 million in the same period last year. Of this foreign direct investment accounted for $1052 million this year against $717 million last year; the corresponding 2005 and 2004 figures for foreign institutional investments being $435 million and an outflow of $88 million. The overall capital account picture for the two periods are an inflow of $4180 million in 2004 which increased to $7448 million in the April-September period this year. This increase was enough to look after a current account deficit of $6201 million during April-September 2005 (which was in surplus by $3390 million in the corresponding period of 2004).

Another area of progress has been the control of inflation. As the review says, in the current year there has been a steady deceleration in point-to-point inflation from the initial 5.7 per cent on April 2, 2005, to a low of 3.3 per cent on August 27, 2005. From early September, however, there was a `fundamental reversal', of this trend mainly because of the revision of petro-product prices owing to the sharp increase in world crude prices. Even so, the 52-week average WPI inflation rates on October 1 and November 19, were 5.3 per cent and 5.0 per cent, respectively against 6.2 per cent and 6.4 per cent a year ago.

As for the inflation rates for primary articles and manufactured products, these were (for November 19, 2005) only 1.7 per cent and 4.2 per cent respectively, against 4.2 per cent and 6.6 per cent on the corresponding date in 2004. The 52-week average inflation rate for the fuel and power group was, however, higher at 10.5 per cent against 8.5 per cent last year. According to the review, the repertoire of the Government's anti-inflation measures included "strict fiscal and monetary discipline; rationalisation of excise and import duties of certain essential commodities; effective supply-demand management of sensitive items through liberal tariff and trade policies; and strengthening the public distribution system."

Mixed picture

While all this is, in a way, good news for the national economy, it is clear that unless there is a satisfactory increase in domestic production, preferably in the core sectors, one cannot confidently say that the economy is on a longish-term, secular growth path. The figures published by the review for the broad industry sectors give at best a mixed picture and at the worst the idea that the `feel-good' factor is based solely on a steep expenditure-increase on lightweight items which can evaporate at the drop of a hat so to speak. Thus, the relevant table in the review shows that mining activity (measured by output) grew by just 1.3 per cent in April-September 2005 against a 5.1 per cent increase in the same period in 2004; electricity by 4.8 per cent against 7.8 per cent; and manufacturing by 9.9 per cent against 8.8 per cent in the previous year. The review tries to explain the sharp deceleration in electricity by suggesting that the drop could have been partly the result of "low demand for energising irrigation pump-sets in a year of good monsoon and partly because of the shortage of coal and gas".

While this could be true, the overall picture hardly succeeds in infusing optimism among the economy's well-wishers. Drawing attention to the six critical industrial sub-sectors of steel, coal, crude oil, refinery throughput, electricity generation and cement, "which have important implications for all other sectors of the economy," the review pointed out that of these only cement "performed satisfactorily and registered a growth of 11.0 per cent." Going by use-based classification, while the value of basic goods increased by 6.3 per cent in April-September 2005 against 5.5 per cent in the same period in 2004, capital goods (which is closely linked to manufacturing) was static at 13.9 per cent against 13.8 per cent last year. Intermediate goods showed a decline to a 3.3 per cent increase in 2005 compared to 7.8 per cent in 2004. The value of consumer goods showed a 14.9 per cent increase against 10.2 per cent in 2004. The interesting thing about this figure is that while durables grew by 12.8 per cent in 2005 against a higher 16.3 per cent last year, non-durables shot up to 15.7 per cent this year against 8.1 per cent in 2004.

Keeping the bubble

One wonders whether there is a conceptual link between this factual position on durables and the sharp increase in bank credit for commercial purposes (trading, etc) which, if established broadly, could only mean that the authorities will have to be extra-vigilant in keeping the `bubble' going as it were. The review, of course, says the current year "is witnessing a rapid increase in bank credit to the commercial sector (which) together with a healthy increase in the supply of non-bank finance to the commercial sector, reflects the ongoing dynamism across sectors of the economy."

It says that this greater exposure to the commercial sector has affected the portfolio mix of commercial banks, one result of which has been the decline in the investment-deposit ratio to 39.5 per cent on September 30 from 43.9 per cent on the corresponding date of 2004. Further, net bank credit to the Government, year-on-year, declined by 0.6 per cent on September 30, 2005 compared to an increase of 4.1 per cent on the same day last year implying that the banks funded the high growth in commercial credit demand mainly by restricting their incremental investments in Government securities. The interest rates were not unduly disturbed also because there was adequate liquidity in the system.

The farm sector is expected to pick up during the year which is widely slated to give the economy a quantum push towards the 8 per cent GDP growth mark.

It also stands to reason that a good performance in agriculture will lead to an increase in production in the infrastructure and core sectors, which could redress the developing imbalance between the production base of the economy and the superstructure as it were. This will certainly be a development to look forward to, but the fact still remains that the current fiscal condition of the economy leaves much to be desired, so much so that, under the FRBM Act, is has become incumbent on the Government to take steps to remedy the situation.

The review itself says that under Rule 7 of the FRBM Rules 2004, the Government "is required to take appropriate corrective measures in case the outcome of the second quarterly review shows that: (i) total non-debt receipts are less than 40 per cent of BE (Budget estimates); or (ii) the fiscal deficit is higher than 45 per cent of the BE; or (iii) the revenue deficit is higher than 45 per cent of the BE. The situation is, in fact, so unsatisfactory that the actual outcomes under all the three criteria did not measure up to the above benchmarks. Table 8 of the review shows that the figure for (i) was 35 per cent, for (ii) 55.5 per cent, and for (iii) 68.3 per cent.

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