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Big drop in public investment could mar growth aspirations

S.D. Naik

TWO recent reports aptly bring out the contrast between India's aspirations to move on to a higher growth path and the dismal ground realities hampering the growth process. In his address to the joint meeting of the US Congress, the Prime Minister, Mr At al Bihari Vajpayee, said that his Government would push the economic growth rate to nine per cent per annum in a bid to double Indian per capita income in 10 years.

``In the last 10 years, we have grown at 6.5 per cent per year. That puts India among the 10 fastest growing economies of the world,'' he added.

The second report says, the draft mid-term review projects a whopping shortfall of 25 per cent in public investment in the Ninth Plan period. The investment scenario would have been worse had private investment not exceeded its projected target by 1.4 pe r cent. According to the mid-term review, against the projected public investment of Rs 40,000 crore, actual investment is expected to be roughly Rs 30,000 crore.

What is particularly worrisome is that the shortfall has occurred in crucial sectors including agriculture, infrastructure, social sectors and mining.

The major reasons cited for the shortfall in public investment was unprecedented increase in the revenue expenditure in the first two years of the Plan. A major contributory factor for the unprecedented growth in revenue expenditure was the huge rise in the wage bill of both the Centre and the States because of the Fifth Pay Commission Recommendations.

The problem was further aggravated with the increasing interest liabilities accounting for 60 per cent of the revenue earnings. The steep rise in liabilities forced the Finance Ministry to downsize the Plan investments by over 10 per cent during 1997-98 and 1998-99.

Public investment squeeze was so severe that it resulted in a severe demand recession during the period. It was only towards the latter half of 1999-2000 that the economy showed some signs of a pick up.

Once again, there are signs of a slowdown during the current fiscal with the cumulative growth in industrial production during the first four months (April-July) decelerating to 5.4 per cent against 5.9 per cent in the previous corresponding period.

Even the Reserve Bank of India (RBI) has toned down its earlier economic optimism and predicted a GDP growth of around 6.5 per cent for 2000-01 in its Annual Reort for 1999-2000. The Reort states that the economy has still to catch up to achieve the pote ntial growth of 7-8 per cent per annum. It says, the high growth rate is possible only if the requisite real investment growth occurs along with technology improvements and efficiency gains.

True, the Indian economy has displayed considerable resilience in the face of the recent East Asian currency crisis and the consequent economic slowdown in the entire Asian region. Even so, the hope expressed by the Prime Minister of stepping up the annu al GDP growth rate to nine per cent would remain a dream unless the country is able to step up substantially its savings and investment rate.

The average GDP growth over the last three years (1997-98 to 1999-200) has already come down to six per cent from 7.7 per cent in the preceding three years ending 1996-97 largely because of the deceleration in the rates of savings and capital formation.

The gross domestic savings rate declined sharply to 22.3 per cent of GDP in 1998-99 from 24.7 per cent in 1997-98 and a high of 25.5 per cent in 1995-96. Similarly, the investment rate or gross capital formation has declined from 26.3 per cent of GDP in 1997-98 to 23.4 per cent in 1998-99.

Assuming an incremental capital output ratio of 4:1, the rate of investment needed to achieve a growth rate of nine per cent envisaged by the Prime Minister would be 36 per cent of the GDP.

As of now, the role played by foreign investment in the total gross capital formation is less than two per cent of GDP. Even if the country is able to raise this to say, 4 per cent or so because of the various policy measures announced recently, the requ ired gross savings rate would be of the order of 30 per cent per annum in order to step up the GDP growth rate to nine per cent.

That appears a tall order indeed! Hence in the medium term, even to achieve a growth rate of 7-8 per cent, heroic efforts would be needed to concentrate efforts on downsizing the Government and drastically reducing wasteful expenditure and subsidies, bot h at the Central and the State levels, so as to reverse the declining trend in public expenditure.