The Hindu Business Line : Reflections on the Mid-Year Review

While the Finance Minister, Mr Jaswant Singh's Mid-Year Review of the trends in receipts and expenditure is optimistic on economic prospects, one hopes the next review is more inclusive of the effects of higher GDP growth on poverty and employment.

THE Fiscal Responsibility and Budget Management Act 2003 enjoins upon the Government to review every quarter the trends in receipts and expenditure in relation to the budget. The first quarterly review for April-June 2003 was presented to the Government on August 7, 2003.

The mid-year review, which is also the second quarterly review as prescribed, has come recently. It has surprisingly caught the attention of analysts more than its predecessors, especially because of its optimistic stance on the country's economic prospects. In a professionally competent manner, it lays out the macro-economic prospects for the year, predicting a GDP growth rate of more than 7 per cent in 2003-04.

This forecast has brought forth, unjustified, criticism that it is tailored to suit the ruling party's election propaganda. It is, however, fully borne out by the logic of the review, which stresses the various positive developments on the economic scene.

It is another matter that previously also, the years following drought have seen India register higher growth. But that cannot discount the reality of better current economic performance, especially given the fact that it is based on an expectation of an agricultural turnaround.

India, however, is not alone in recording a high rate of growth. In fact, the figures reported for countries, like China and Taiwan, offer a humbling contrast. The latest research report of J. P. Morgan-Chase shows that China had recorded an annualised rate of growth of 18 per cent in the first quarter of 2003-04 and is expected to reach an annual rate of more than 8 per cent. Taiwan and Singapore had clocked rates of growth of as high as 15 per cent in the first quarter of this year.

A rising global tide lifts all boats. The global economy as a whole is moving to a new period of higher growth. India gains — provided, of course, it does not rock its boat.

The mid-year review notes that the downward trend in inflation in the period 1999-2000 to 2001-02 was halted in 2002-03, due to drought and rise in crude prices. 2003-04 began with a legacy of an inflation rate of 6 per cent in March 2003.

In September 2003, the inflation rate stood at 4.6 per cent. With the arrival of the kharif harvest and given the conservative monetary stance, inflation is expected to moderate to 4 per cent for 2003-04 as a whole.

On the external front, there has been a reversal of the improvement in the current account, which had been positive for six consecutive quarters. The first quarter of 2003-04 saw it turn into a deficit. In spite of this "reverse", the forex reserves rose, thanks to strong capital inflows. So much so, the reserves scarcely showed a dip when Government of India organised the repayment of $5.18 billion of Resurgent India Bonds.

While the rise of the reserves has not been costless, it does offer a welcome shelter from the risks of speculative attack on the rupee. The fear now is rather that the rupee is getting too strong for the good of the economy. Exports have risen in the April-September period this year only by 10 per cent, compared to 18 per cent the previous year.

The review, however, disputes the attribution of this export slippage to appreciation of the rupee. "Simply trying to relate the export growth deceleration to the real effective appreciation of the rupee misses out on the important issues of productivity growth and the benefits of a market-determined floating exchange rate regime.

What is required in its view is a sector-specific analysis of the hurdles that hinder exports and measures to remove such hurdles would help exporters.

While exporters do face a hurdle race in India, an unrealistically appreciating rupee imposes a further handicap on the hurdle-racers. The removal of hurdles is important, but the handicap of the strong rupee does mean a big difference to our export competitiveness. The mid-year review rightly links the improvement in manufacturing performance to the public investment programmes in infrastructure, especially on highways and power. Government investment and growth in infrastructure-related industries such as steel and cement are, of course, linked.

But, until the road project initiatives of the Prime Minister, Mr Atal Bihari Vajpayee, this was a rather heterodox idea. While investment in the public sector may raise the hackles among the fiscally concerned fraternity, it is necessary to awaken the somnolent manufacturing and construction sectors. Too literal an interpretation of fiscal responsibility can be counter-productive.

If India is to compete with China, improved infrastructure, together with structural reforms, is an absolute must. The policy-makers of Delhi have caught on to one, but not the other pillar of progress.

If India is to realise the potential of its economic strength and be one of the growth engines of the global economy, it has to have world-class infrastructure, and a labour market infrastructure that will brook no recalcitrance. But these are problems that a mid-year review cannot address, given their complexity.

Somewhere, they deserve to be mentioned, more effectively than has been done in the present effort. I do hope that magic figures of above 7 per cent of GDP do not contribute to the growth of the deadening vice of complacency among our policy-makers.

Turning to the ostensible purpose of the mid-year review as part of the Fiscal Responsibility and Budget Management Act, it has rightly to be focussed on the fiscal dimension. The current review does an honest job of portraying the fiscal problems that face the Centre (and the States). The fiscal outcome in 2002-03 was worse than expected. Fiscal deficit to GDP ratio in 2002-03 was 5.9 per cent, higher than the budget estimate of 5.5 per cent.

In the first half of the current year, direct tax revenues have been buoyant. Gross tax revenue has shown a spurt in the second quarter, growing to Rs 60,000 crore from Rs 34,000 crore in the first quarter. Gross collection of direct taxes up to September 2003 went up by 22 per cent over the same period the previous year. Corporate tax collections have also gone up by an impressive 30 per cent, while income-tax collections have increased only 11 per cent. The review highlights the significant improvement in service tax collection by 50 per cent over the same period last year. Non-tax revenues are, however, low reflecting the lower contribution from RBI.

Expenditure continues to increase. But there is, however, no clear analysis of the trends under major heads, like subsidies in relation to the Budget. Given the figures in the review, the expenditure actuals may very well turn out to be higher than estimates. The mid-year review would have been more purposeful had it spelt out the directions of policy changes needed to rectify the fiscal slippage.

On the whole, the mid-year review depicts the economy in a glowing light, perhaps more so than it deserves. The current account deficit and the performance on fiscal indicators are disturbing, in spite of the estimate of a higher rate of growth. There is need to focus as much on the negatives as the positives if the review is to serve a useful purpose. The polls will come and go, but the economy goes on.

One misses a touch of realism in the report, in that it does touch on the growth of unemployment and the need for measures to cope with it. The simmering troubles from Assam to Maharashtra point to the existence of the powder-keg of the unemployed and the resulting social tensions among castes and regions, which threaten the national identity and unity.

A mid-year review of the economy has to extend beyond mere numbers of fiscal deficit and rates of growth. It has to concentrate on real issues of importance — whether the Government's policies are helping alleviate poverty and reduce unemployment. Ultimately, GDP growth makes no sense without such outcomes.

We need a broadening of the scope of the mid-year review. The Economic Division of the Ministry of Finance should take up this challenge in right earnest so that such a redesign is visible in the forthcoming Economic Survey, which the Finance Minister will lay on the floor of the House in February 2004. Will it be too much to expect such a recast, considering that the polls are too near?

Transparency requires that the truth be told, however unpleasant. The forthcoming Economic Survey, which will in effect be the next quarterly review of the economy, will hopefully set itself higher standards of inclusiveness and objectivity. No less is expected from the distinguished professionals in charge of the Economic Division of Ministry of Finance and the political leadership of Mr Jaswant Singh, who has made transparency his mantra of better financial management.

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