The Hindu Business Line : CSO'S data estimates in the economy

While there has been improvement in investments into India, the country still suffers from continued dependence on foreign capital flows, as reflected in the current account deficit.

In a paper issued at the end of January, the Central Statistical Organisation (CSO) came out with estimates of national income, consumption expenditure and savings on capital formation for 2005-06. The updated data were the subject of enlightened comments in this newspaper, authored by Prof C. P. Chandrasekhar.

I am referring in this brief piece to certain aspects of the CSO's paper highlighted by Prof Pulapre Balakrishnan and Mr Suresh Babu in an article in the Economic and Political Weekly of May 5. Prof Balakrishnan, the lead author, is a perceptive observer of the economic scene and has enriched our understanding by his periodic contributions. The latest article "Trends and Savings, Investment and Consumption" is in the same tradition.

Referring to the aggregate picture, Prof Balakrishnan points out that there has been an improvement in the proportion of savings to GDP in recent years. This trend of increase has enabled India to break out from its earlier low levels of savings, which stood at 23 per cent of GDP.

The recent data issued by the CSO indicate that the figure of savings as a percentage of GDP rose to 32 in 2005-06. This is closer to the East Asian level and represents an improvement in the macroeconomic environment. Improvement in savings appears to have generally been widespread, but household savings remained more or less around 22 per cent.

Private corporate savings, however, increased from 4.47 per cent in 1999-2000 to 8.09 per cent in 2005-06. What is more significant is that the public sector savings also showed a robust increase from 0.79 per cent in 1999-2000 to 2.0 per cent in 2005-06. This trend of increase in public sector savings is an indication of better control on public sector expenditure and improvement in efficiency.

Prof Balakrishnan compares this experience with that of South Korea, where public savings have been consistently high and form close to one-third of total savings in the economy.

The hallmark of long-term development in South Korea is that overall savings have generally exceeded investments, implying that its economy has not depended on foreign capital. In India, however, this is not the case.

Investments have been in excess of savings. We have been drawing on foreign capital, primarily in portfolio and debt. While there has been improvement in investments into India, the country still suffers from continued dependence on foreign capital flows, as reflected in the current account deficit.

Improved Savings

Improvement in public savings in India, says the lead author, follows directly from reduction in revenue deficit as a result of the enactment of the Fiscal Responsibility and Budgetary Management Act. The author is in favour of improved public savings. He reminds the reader, however, that the present data represent a considerable deterioration compared to the 1960s, when public savings contributed 25 per cent of the aggregate savings in the economy.

In the author's view, there is much scope for trimming the range of public intervention by orienting it to important segments of the economy. The role of the Government in contributing to the capital formation remains significant, though, in a liberalising economy, the private sector tends to get prominence.

The professor asserts that the continuing improvement in public sector savings is desirable, though the choice of a precise mechanism to bring this about may have to be debated.

Prof Balakrishnan, analysing the data on capital formation, points out that household investments peaked in 2002-03, but declined as a percentage of GDP. On the other hand, public sector investments have shown a steady increase over the past three years. In 2005-06, it regained the level of 1999-2000.

Analysing the details of capital formation segment by segment of the economy, Pulapre Balakrishnan points out that manufacturing sector has been the principal recipient of investment. This is also confirmed by the fact that the capital goods sector has expanded in recent years.

Further, capital goods imports have been showing signs of increase. The recent boom in the economy is thus essentially an investment boom in the manufacturing sector.

Neglected Agriculture

Turning to agriculture, Prof Balakrishnan notes that deficiency of investment in agriculture has been one more characteristic of the economy in recent years.

In absolute terms, capital formation in agriculture, forestry and fishing was Rs 55,000 crore in 2001-02, and it was only a marginal increase to Rs 64,000 crore in 2005-06.

Essentially, this slow growth indicates a neglect of agriculture in relative terms. This is critical not only to the balanced growth of the economy but also the inclusiveness of the reform process.

Above all, it has critical implications for food security. It is a pity that the policy formulation in recent years has, in spite of lip service, neglected the importance of adequate public investment in agriculture.

The recent Budget represents a turning point, in that it has focussed on improved investment in irrigation and related agricultural rural infrastructure more than in previous years.

Turning to consumption trends, Prof Balakrishnan points out that while it is true that investment in economic growth is important, equally the quality of life should be determined by improved consumption.

He refers to the data in the CSO estimates, which indicate that the share of food in the consumption basket has been declining.

While it is true that such a decline may be inevitable, following the operation of laws of economics, which indicate a movement of consumption expenditure from food to non-food items, the trend of decreasing food consumption is disturbing. The fact is that the general levels of nutrition status in the rural economy are not satisfactory.

The CSO's statistics, therefore, emphasise the fact that there is need for governmental action and policy focus on this aspect.

Obsession with Gold

Prof Balakrishnan focusses on an important aspect of the data, which shows that nearly 1 per cent of the investment is on what is called "valuable".

This includes, primarily, investment in gold. He refers to the insatiable appetite of India's public for gold. It is significant that the percentage so spent on gold and other valuables is almost equivalent to the size of our current account.

There have been a number of attempts at luring the Indian public away from obsession with gold. The latest instrument of exchange-traded securities in place of gold is an interesting experiment, but the effects thereof have not been significant so far.

It is necessary to distract the Indian public from investment in gold. A public education campaign on this subject may be well worth undertaking, at least to offset the contrary efforts of the World Gold Council, which attempts to increase India's appetite for the yellow metal.

Prof Balakrishnan includes in his comments a reflection on the continuing persistence of a large element of errors and omissions in Indian economic statistics.

They are sufficiently large to question the credibility of conclusions drawn from various data. The RBI, the Government and the CSO have been engaged in the effort of reducing the extent of errors and omissions.

Perhaps, there is need for one more concerted attempt at reducing the discrepancies unless we decide that we cannot achieve comprehensiveness and timeliness of data collection as well as their correctness.

All in all, Prof Balakrishnan and Suresh Babu have performed a useful task by highlighting important aspects of the latest presentation of the CSO.

I hope this will whet the Organisation's appetite to turn to the authors' original offering.