There are no soft options

By C. V. Gopalakrishnan

A CAVING in by the Government to the strident demand for the rollback of petroleum prices would have reflected a lack of will to stick to hard decisions dictated by the overall interests of the economy. While the price increases will certainly inflict a very heavy burden on the people, a rollback would not have saved the country from the hardship that would have overtaken it very quickly from other quarters.

The sharp increase in the international prices of crude oil within one year from $15 per barrel in January 1999 to $30.83 in February 2000 and the anticipated increase in oil imports from 67 million tonnes in 1999-2000 to 72 million tonnes in 2000-01, which will push up the import bill from Rs. 57,000 crores to Rs. 72,000 crores (to be paid in foreign exchange), should leave no one in doubt about what the Government would have been in for had it chosen the soft option of not raising prices. The drop in export earnings, from $35,680 millions in 1997-98 to $34,298 millions in 1998-99, and the increase in the import bill, from $ 48,948 millions to $ 51,187 during the same period, should give an idea of the heavy burden oil imports throw on the Government.

While the oil import bill actually fell from $51,187 millions in 1997-98 to $47,544 millions in 1998-99, the scene is bound to change dramatically from now on because of the increase in oil prices internationally. This could be seen from the increase in the oil import bill by $2,910 millions during the six-month period of April-September 1999 and an anticipated increase of $4,460 millions between September 1999 and April 2000. With the higher cost of oil imports having to be paid in foreign exchange and with the outlook for exports not being very bright, the prospects of foreign exchange earnings giving much support to such heavy external financing are bleak. The decision to recover the cost through a hike in the domestic prices can only give the Government higher rupee earnings. A decision not to increase the petroleum prices would have given only an illusory sense of relief to the people, that too just for a short while.

The hopes about the country's ability to support a rising oil import bill without increasing domestic prices can materialise only with a substantial increase in foreign exchange earnings from exports. This will call for a quantum leap in the quality and quantity of exports. This can become possible only with the infusion of inputs of a far higher quality into the exported items than has been seen so far, and a sizeable part of the inputs will have to be imported. While this will lead to a big outflow of foreign exchange, the substantial upgrading of the skills at every level, from the shop-floor to the highly professionalised management, will lead to a big increase in the wage and salary levels. Even if one can hope for the higher inflows from export earnings, shielding the economy from the inflationary impact of the higher investments financed by borrowings and of the higher wages will be possible only if domestic production in every sector is raised to unprecedented levels. This alone can ensure that the higher sales fetching higher returns make it possible for the producers to retain selling prices at the same level or even reduce them while sustaining or even enhancing the profitability of operations.

Everyone familiar with the performance of the Indian economy knows that this is a wild dream inspired by pious hopes about substantial increases in export earnings financed by higher investments, wages and salaries and supported by imports of quality inputs. What has actually happened has always been very grim. When input costs go up - as in the case of crude oil imports - and are not recovered through higher prices from the consuming sector, the producing sector (which in this case would be the petroleum refineries) still has to foot the bill. The scenario is the same for the other producing sectors which cannot raise their prices for meeting rising costs. If the economy is healthy and its production units can expand sales to meet higher demand, it could result in greater cash inflows and and make it unnecessary to raise prices. But while production in India has gone up in many segments, it has never at any time matched the growing demand. The selling prices have always been going up faster and eating into the earnings of the wage earner and the salariat to leave them in hardship. While the incomes - both existing and those generated by the recruitment of new wage earners - have no doubt been going up, the prices they have to pay for most of the essential items have always been rising faster. Even with the monthly wages and salaries now hardly below four digits and, for quite a large number of middle income professionals, five digits, the push of such a deceptive liquidity on price levels, when production of most of the essential items still remains short of demand, cannot but be inflationary.

The non-stop increases in the expenditure of both the Government and the private sector to sustain their increases in spending because of anticipated annual wage increases - apart from meeting trade union demands for upward wage revisions - is giving a perpetual upward push to the demands for commercial bank credit. In the absence of an ideal scenario of the borrowed bank money being repaid as a matter of routine from the higher earnings realised by the borrowers, the monetary reality is that of a fiscal deficit as a result of expenditure outrunning receipts. The fiscal deficit during April-December 1999 was Rs. 67,082 crores showing an increase of as much as 20.7 per cent over the same period in the previous year, while the revised fiscal deficit for 1999-2000 was Rs. 1,08,898 crores. We do not have to plunge much into the fiscal depths of the economy to realise how efforts to accelerate economic development with monetary injection for the generation of more employment through expansion of the public sector and Government departments - much of which in retrospect looks unmistakably reckless in view of the return from such job creation being nowhere near the money inflows - has made the country an inflationary wasteland. It is doubtful whether the private sector would have given a better record had it not been - as it has always bemoaned - kept cribbed, cabined and confined. The outstanding dues of the major private sector borrowers to the banking sector, which had financed their operations and for the recovery of which suits have been filed, rose to the astronomical figure of Rs. 20,580.51 crores at the end of March 1999 according to the following break-up:

Send this article to Friends by E-Mail

Section  : Opinion
Previous : The Sahayog affair
Next     : Jumbo Cabinets