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Economic slowdown -- Action on wider canvas needed

R. Parthasarathy.

THE ECONOMY has slowed down in the last quarter this year. In its Annual Report released in September, the Reserve Bank of India lowered its growth forecast for the year to 6-6.5 per cent from its earlier estimate of 6.5-7 per cent of GDP. The Centre for Monitoring the Indian Economy (CMIE) revised its projection steeply from 7 per cent to 5.8 per cent, and the National Council of Applied Economic Research (NCAER) from 7 per cent to 6.1 per cent. From all accounts, it appears we should not expect the gr owth rate to exceed 5.5-6 per cent of GDP. The Finance Minister, Mr Yashwant Sinha, has admitted there is an economic slowdown but feels it is exaggerated. He has spoken of a strategy to ``turn around the economy'' without waiting for the Budget, but no details have been spelt out.

According to the Finance Minister, these measures will see the growth curve climb to 7 per cent, which means growth has to be at 11 per cent plus in the remaining four months -- an unrealistic assumption! The slump in the industrial performance cuts acro ss most sectors of the Old Economy, such as passenger cars, capital goods, cement and paper. According to one estimate, corporate investment over the last three years has fallen by 40 per cent. No doubt some external factors may be responsible for this p oor performance. Monetary aggregates are merely symptoms, the real factors lie elsewhere.

Factors behind the slowdown

The factors behind the slowdown have been the steep rise in the international price of oil -- ruling at $36 a barrel till some time ago with little chance of respite in the near future; reduced growth of industry at six per cent against the expected 7.5 per cent; agriculture's moderate performance at 2.1 per cent over last year's negative growth, largely as a result of drought conditions in some parts of the country; inflation at 7 per cent plus in recent weeks; the listlessness of the capital market; a nd the steep fall in the rupee's exchange value. Weak infrastructure, mainly in the power sector, could also be added to the list. The growth rates in six infrastructure areas -- electricity, coal, steel, crude, petroleum refining and cement slumped to t hree per cent in August. Some were due to external causes, while the others were internal.

A modest improvement of five per cent in the plant load factor of thermal power plants might give us nearly 2,500-3,000 MW of power, which could have a multiplier effect on production. New projects are taking too long to fructify, for reasons well-docume nted. Therefore, it is necessary to improve the performance of existing facilities through retro-fitting and other rationalisation schemes, something we should have learnt from past experience. The Government's announcement last week of a Rs 34,000-crore plan to revamp the SEBs is a long-overdue step in this direction.

Domestic crude production has been declining in the past four years and is around 30 million tonnes. Eighty per cent comes from ONGC fields, largely from Bombay High oilfields, and from Gujarat. India is not in the league of major oil resource-rich count ries, though there are prospects deeper off-shore. There has been no announcement of bids in the recent past, and the Government is only now thinking of offering some locations for oil prospecting. This sort of knee-jerk response to a crisis is not healt hy. This sector needs urgent action since continuing slippages will depress growth. A modest achievement here would add at least 0.5 per cent to GDP growth.

Actual FDI inflows in recent months have declined, according to one report, by over 20 per cent. Arguably, the economic slowdown this time is not confined to India alone, it is a global phenomenon. In an increasingly open economic environment, the threat s from externally-induced factors, such as the capital market being influenced by the Nasdaq, and the rupee's depreciation due to the sudden spurt in demand for dollars by foreign institutional investors who may withdraw their funds from the market, are real.

In contrast, our exports are doing fairly well with 22 per cent growth in September. This is so largely due to the exports of software and the depreciation of the rupee vis-a-vis the dollar by 15 per cent in the past three-four months. Credit must also, however, go to the exporters who, despite considerable odds in the international market and anti-dumping threats to our traditional products, such as textile goods and steel, have done fairly well so far.

Fiscal deficit

There are two other vital areas in any consideration of economic performance. First, the size of the fiscal deficit, and second, the revenue pick-up. The Government is unable and, to some degree, unwilling to contain the fiscal deficit. A significant par t of the oil price increase has already been passed on to the consumer through the hike in petroleum products. This was inevitable given that the oil prices almost doubled in a short time. The Finance Minister has ruled out any further reduction of Custo ms duty given the slippages in revenue collection and the lowered rates as per WTO commitments. The oil pool deficit might widen by the year end, even on the assumption that crude prices will stay at current levels and demand will be reined in. In last y ear's Budget, the Finance Minister had indicated that the fiscal deficit would be about 5.1 per cent of GDP, which in all likelihood would reach 5.8 per cent or more unless drastic measures were taken. There are very few options before the Finance Minist er in the next four months. In its assessment of the economy, the RBI observed that the combined fiscal deficit of the Centre and the States in 1999-2000 had crossed the projections by 2.5 percentage points of the GDP at 9.9 per cent.

Given the urgent need for fiscal consolidation, any major tax relief also seems out of question in the coming Budget. Simultaneously, the Government has to seriously consider the Expenditure Commission's suggestion to reduce the Central Government's admi nistrative expenditure by 10 per cent by 2004-05. Pruning project expenditure and downsizing the bureaucracy can be attempted immediately. The Government's expenditure on wages and salaries increased at an average annual rate of 14.8 per cent in 1991-199 2 to 1999-2000, compared to a 12.8 per cent increase in total expenditure.

This is unsustainable and is a result of the wage hikes recommended by the Wage Commission. It can be said that project costs tend to be bloated by at least 25-30 per cent, not to speak of cost escalation due to delayed completion. These are issues withi n the Government's control. The Finance Minister will find himself under compulsion to increase investment in the social sectors. Even in this area there is considerable scope to improve the productive use of funds by setting time-bound targets, monitori ng them effectively and preventing leakages.

Tax-GDP Ratio and disinvestment schemes

The tax-GDP ratio has also receded from 11 per cent in 1989 to eight per cent, which the Finance Minister says resulted in a Rs 75,000-crore loss in revenue. There are institutional limitations to the tax ratio going up. The RBI report stressed, ``The st ructural shift in the composition of GDP seems to have constrained growth in tax receipts.'' The agricultural sector still remains outside the tax net and the expanding service sector still has to make a sizeable contribution to revenues.

Equally important is the scaling down PSU losses and recovering the huge arrears of the State Electricity Boards. They warrant urgent action in a planned and time-bound manner. Disinvestment in Central PSUs, where actual performance has been nowhere near target -- this year's target being Rs 10,000 crore -- is another area for serious consideration.

The proposal to enlarge the capital base by reducing the Government's holdings in public sector banks to 33 per cent has led to trade union opposition. But the Government needs to be congratulated in going ahead with the proposal. Simultaneously, the Gov ernment must initiate steps to recover a large part of the non-performing assets of public sector banks. Despite being vested with special powers, the Debt Recovery Tribunals are unable to recover significant amounts.

The disinvestment of other PSUs must also be vigorously pursued. According to Mr Arun Shourie, the Union Minister for Disinvestment, the Government has identified 38 cases in the Central sector for disinvestment, while another 15 cases are in the process ing stage. The Rs 10,000-crore target from the disinvestment programme is unlikely to be within the Finance Minister's reach. The Air-India case, where there are four bidders, will test how transparently the Government proceeds on this front. The Finance Minister should also reduce subsidies progressively, moving towards user charges wherever feasible. But the subsidy question can only be tackled in stages.

So long as the deficit question remains unattended, the Government will soak up funds raised through premium schemes, such as the recent India Millennium Deposits, which should normally have been earmarked for the social and infrastructural sectors. As p er news reports, nearly 40 per cent of these high-cost funds, raised through the Millennium Bonds, might finance the Central Budget deficit, a prospect no Finance Minister in deep trouble will let go of!

Overall, the economy is under stress, and short-term external and monetary corrections apart, serious attention must be paid to fulfil physical targets in key sectors such as power, so that some recovery can come through in the short term. Expenditure co ntrol, disinvestment schemes and measures to arrive at handsome productivity gains are part of the recovery package. The long-term trend indicates that the economy is on a growth trajectory, however, and that the effects of short-term disturbances can be mitigated by better planning and implementation.