The Hindu Business Line : Value beyond the numbers

The Prime Minister’s Economic Advisory Council (EAC), headed by Dr C. Rangarajan and comprising some of the best economics talent in the country, submitted in January the Review of the Economy 2007-08. Table 1 summarises the main facets of the growth picture of the economy. Agriculture growth is looking up compared to the previous year, while industry and services growth rates are down. Overall growth is projected to be 8.9 per cent, much like the NCAER forecast of a little over 9 per cent.

The best news yet for the current fiscal is on the external front (see Table 2). The current account of balance of payments is only moderately in deficit, while the capital account is projected to yield a surplus in excess of $100 billion. Overall, the BoP surplus is projected to add close to $90 billion to foreign exchange reserves.

As a matter of fact, according to the February 1 issue of the Reserve Bank Weekly Supplement, total reserves stood at $288 billion by January 25, 2008, up by $89 billion compared to the level at the end of March 2007. With February and March yet to go, the number could go up further and, the actual reserves at the end of this fiscal could easily surpass $300 billion.

Beyond the Numbers

The Review of the Economy presented by the EAC is excellent, though brief, and highly useful in that it raises important questions and provides some sound advice too. My doctoral supervisor told me over three decades ago that a good Table needs no description, reminding one of the famous statement by Nobel Laureate Sir John Hicks: “Facts arranged speak for themselves. Unarranged, they are as dead as mutton”.

It is thus fair to expect from government advisory agencies much more than a mere compilation and description of Tables. Instead, the reader hopes to find interesting interpretations apart from, and in addition to, exemplary extrapolations.

Consider, for instance, the investment rates and growth rates taken together from Table 1. The investment rate has been rising steadily: from 28 per cent in 2003-04 to 36.3 per cent in 2007-08. Yet, the growth rate has not risen consistently, indicating some long gestation investments not yet yielding full results.

The investment rates and growth rates together imply incremental capital to output ratios (ICORs) of 3.29 in 2003-04, 4.2 in 2004-05, 3.75 in 2005-06, 3.73 in 2006-07 and 4.08 in 2007-08. Why is the ICOR fluctuating? Why are we not getting the full mileage out of investments? Is there a bunching of investments in one or two years?

What is the annual share of long gestation projects in total investment? These and similar questions should be raised and discussed by those charged with providing advice on of the economy.

So many choices

When it comes to the BoP story, it is undergraduate economics to say that the overall BoP surplus is reflected in reserves accretion. The issue is whether we need to go for such accretion, whether we have choices, whether we have exercised such choices, whether any policy correction is warranted, and so on.

Take the data in Table 3, for instance. In 2007-08, the total of the inflows of portfolio capital, private equity and loans was $87 billion, just about as much as the anticipated accretion to reserves. Do we need such inflows? What is so special about inviting others to play in our stock market?

Does it matter if stock prices are pumped up by these inflows, only to lose ground when such investors retreat? Is it too much to ask the Government to set conditions and restraints on private capital inflows into the stocks of listed companies? The EAC does acknowledge the problems to some exporters stemming from the rising rupee, which has appreciated at a rate of 1.9 per cent in 2006 and 10.7 per cent in 2007.

Here comes sound advice from the EAC: “Since the pressure on the rupee to appreciate is likely to continue in the immediate future, given that the capital account surplus is several multiples of the current account deficit, clear signals should be given to the Indian industry to make adjustments through productivity increases and to tap the booming domestic market. However, some transitional packages targeted specifically at labour-intensive industries may be called for.” (Para 83 of the EAC Review)

In sum, it is only fair to expect an advisory body to provide much-needed advice to the Prime Minister, notwithstanding the possibility that political compulsions may weigh more heavily on him than economic ones.

(The author, formerly with the National University of Singapore and the World Bank, is Visiting Faculty, Sri Sathya Sai University, Prasanthi Nilayam. He can be reached at bhanoji@gmail.com)

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