The Hindu : An economic review

Online edition of India's National Newspaper
Wednesday, Nov 19, 2003

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An economic review

THE FINANCE MINISTRY'S mid-term review of the Indian economy is a voice of moderation amidst the many extravagant predictions of double digit growth that have been made by independent think tanks at home and abroad. The official assessment of the performance of the Indian economy in 2003-04 does not however completely avoid making unrealistic forecasts. The Reserve Bank of India's perspective, issued a fortnight ago, remains the more sober and realistic view of the short-term outlook for the economy. Where the RBI sees GDP in the current fiscal year growing by between 6.5 and 7 per cent, the Finance Ministry sees growth exceeding 7 per cent. The acceleration in economic growth in 2003-04 is being driven and facilitated by the good south-west monsoon: normal levels of precipitation will lead to a substantial jump in agricultural production and higher farm incomes will boost demand for industrial products and services. The question is whether the overall recovery will be substantial or only modest. The trends in the first half of the year were of a modest acceleration in output. While the situation may change dramatically during the second half of 2003-04, the mid-term review errs in not paying more attention to how the economy performed between April and September 2003.

To be fair to the Finance Ministry, its review acknowledges that the recovery this year will be similar to the turnaround in the past when a good monsoon came immediately after a poor one. Yet even the Government's optimistic forecasts are of GDP growth that will be less than in 1967-68, 1975-76, 1980-81 and 1988-89, when the economy grew well above 7 per cent as agriculture benefited from the return of a normal monsoon. This, of course, is not a very accurate comparison, since the share of Indian agriculture in GDP is now far less than it was even a decade ago. However, the mid-term review is guilty of excessive optimism elsewhere. It sees foodgrain production this year registering a new peak of 212 million tonnes, although the first estimates of the kharif (monsoon) crop are of a harvest of 108 million tonnes, which is less than the record production of 111.5 million tonnes in 2000-01. This means that the rabi (winter) crop will have to be the highest ever and compensate for the somewhat modest recovery in kharif production. The flow of bank funds to the commercial sector has increased more slowly so far this year than in 2002-03, the core infrastructure sectors are showing a slower rate of growth, exports are rising at half the rate of last year, and the pick-up in industrial production has been modest. In spite of these trends — all noted in the mid-term review — the Finance Ministry expects a substantial acceleration in industrial activity. The months ahead may indeed witness a dramatic improvement, but as of now there is little concrete evidence of such a development.

The quarterly review of the Centre's finances, which the Government is obliged to present under the Fiscal Responsibility Management Act, indicates that after two quarters the fiscal situation is better than last year. A higher proportion of revenue receipts, including taxes, was collected by end-September 2003 than at the same point of time last year. This is true as well of expenditure, which is by and large adhering to the budgetary projections. But there are some discordant trends. While direct tax and customs duty collections have been increasing rapidly, excise duty revenue has been growing slowly. There is then the revenue deficit, always the weak spot in Central Government finances, which after six months was 37 per cent wider than in the corresponding period of last year and was already 58 per cent of what has been budgeted for during all of 2003-04.

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