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Despair sweeps the economy

P. R. Brahmananda

A NUMBER of economic events in the Indian economy are causing a downward shift in the spirits of industrialists, entrepreneurs and the custodians of finance and economic policy.

On June 29, the Central Statistical Organisation, Ministry of Statistics and Programme Implementation, released its revised estimates for the 2000-01 at constant and current prices. The growth rate for 2000-01 has been estimated at 5.2 per cent at consta nt prices against the projected estimate of 6 per cent released on January 30. The Finance Minister had stubbornly refused to accept the 6 per cent figure.

The Reserve Bank of India had reconciled itself to 6.5 per cent against the 7 per cent figure put out by the optimistic Finance Minister. The CSO's figures have made the Finance Minister revise his views on the state of the economy in 2000-01. What is wo rrisome is that for the last four years, the growth rate figures have been drifting downwards compared to the previous three years.

The average real GDP (at factor cost) growth for the three years ended 1996-97 was about 7.3 per cent. For the four years ended 2000-01, the average is 6.9 per cent. However, for the three years ended 2000-01, the average is 6.1 per cent. What is disturb ing is that the rate of growth of the manufacturing industry and that of electricity, gas and water supply both seemed to have decelerated quite heavily.

The GDP growth rate from manufacturing was 13.8 per cent in 1995-96, 6.7 per cent in 1996-97, 6.6 per cent in 1997-98, 4.3 per cent in 1998-99, 6.8 per cent in 1999-2000 and just 4.7 per cent in 2000-01. The GDP growth rate in the electricity sector was 8.1 per cent in 1995-96, 4 per cent in 1996-97, 6.6 per cent in 1997-98, 6.5 per cent in 1998-99, about 5.2 per cent in 1999-2000 and just 4.7 per cent in 2000-01. These two sectors have been given the most attention by the authorities. Industry and busi ness never had it so good in terms of patronage and consultation by the Government as they had in the last three years. The Government's message was that the top priority would be given to attracting foreign capital in industry and public utilities.

However, the growth rate of broad agriculture was 0.7 per cent in 1999-2000 and 0.2 per cent in 2000-01. But it was 7.6 per cent in 1998-99. Has the agricultural growth rate fallen? Are there reasons to warrant optimism about more than a 5 per cent growt h rate in agriculture in 2001-02? From the data released, the financing, insurance, real estate and business services sector, still seems to be on a high growth rate trajectory. In 1995-96, it had a growth rate of 7.6 per cent, in 1996-97 of 7.1 per cent , in 1997-98 of 11.8 per cent. However, in 1998-99, the growth rate of this sector came down to 6.1 per cent and it should be a matter of credit to the concerned ministries and other parties that the growth rate of this sector went up to 10.1 per cent in 1999-2000 and has remained at 9.1 per cent in 2000-01.

From all accounts, the trade transport, storage and communication sector growth rate seems to be decelerating. The CSO puts the 1999-2000 growth rate at 8 per cent and for 2000-01 at 6.9 per cent. These rates are lower than what was obtained in the years immediately before 1999-2000.

The community, social and personal services sector is dominated by transfers from the non-government to the government and grant-fed sectors with a growth rate of 6-8 per cent in the years before 1997-98. In 1997-98, due to the Pay Commission revisions, the growth rate went up to 12.2 per cent in that year and 10.9 per cent in 1998-99. The momentum was retained in 1999-2000, the growth rate being 11.8 per cent. Assuming that the impact of the revisions in wages and salaries had exhausted itself by 1999- 2000, clearly the growth rate should settle down to 6 to 7 per cent in 2000-01. This is actually what has happened and the growth rate being 7.8 per cent in 2000-01. In future, this should come down to 5-6 per cent per annum.

It follows that in future the sources of growth would depend on the commodity sectors and the productive component of the services sectors. That the growth rate in many of the components of these two groups decelerating means that it might be difficult t o move up to a growth rate per annum of even 6-6.5 per cent with the policy structures being what they are.

The downslide in the growth rates is primarily due to the direct and indirect adverse effects of declining and depressed savings ratios, too hasty a push towards making the economy more open without countervailing policy steps, too large an emphasis on p ushing of stock market indicators to the neglect of the attention needed to boost real sector indicators, too rigid an attitude towards the theme of reforms for their own sake without detailed attention to the immediate consequences thereof and so on.

There are too many mistakes at the policy end and the cumulative consequences are naturally reflected in declining growth rates. The mistakes occur because we have too many lay opinions and impressions governing policies. During the Narasimha Rao-Manmoha n period, and to some extent the Deve Gowda-Chidambaram period, policies were being formulated and carefully fine-tuned in consultations with experienced economic experts.

In fact, for the first time, experienced economists were work during those periods. Administrators, howsoever efficient they are, are not technical experts in complicated fields. The shift towards non-economists in policy matters in all layers of governm ent at the top and at the advisory levels has been the hallmark of the new regime. This matter has to be rectified by the Prime Minister if he wants the economy to recover and proceed as it did earlier. More than just prestige is at stake. The wellbeing of a large population and the future are at stake.

The distrust of technical experts in economics and the placement of political persons at the top is not healthy for any economy. We have to learn from the experience of developed countries in this respect. Economic problems are too technical and complica ted and cannot be seen in black and white terms.

It is not a question of intentions at the top political levels, but of the ability to handle complicated issues that possess several aspects. Understanding the problem is necessary and sheer administrative experience is of no help here.

Take the problems in the financial sector. If the overall real growth rates are falling, how are mutual funds expected to yield dividends of 10 per cent plus? Mutual funds and governmental financial institutions do not have unlimited financial resources. How long can the Finance Ministry subsidise operations of favoured funds? How are the holders of Unit Trust certificates superior to those who subscribe to small savings? Did we not break the trust with regard to provident funds? Why should savers in pa rticular categories benefit more than others?

Most people did not protest when small savers in postal scrips were forced to accept lower rates. But, there is a hue and cry regarding the scrips of the UTI. Is this justified? Clearly it seems those who knew better than small investors can get away by marketising their holdings. But, if the economy is now going downhill, how can any one be spared its consequences in terms of returns? What is the use of liquidity if there are no profitable outlets?

These and other fundamental issues will emerge if the economy does not sustain a 6 per cent growth rate in future. But, this requires a change in attitude from depending on consumption growth as a boost towards the time-honoured sources of growth of more savings and more real productivity improvements. It is this big shift that has to take place and this requires a fundamental change in the attitude the top brass holding key portfolios in the economy.

Even in the planning process, the decisions have become so wholly internal and even panels of economists have been done with. Is it not a matter of concern that we keep growth rates high and then suddenly bring them down? How do we expect normal expectat ions to be formed about the future in the minds of domestic and foreign investors? The Government seems hesitant to be aware of the technical opinions from different experts who may not always see eye to eye with its economic policies and programmes. A g reat country such as India cannot be run by lay opinions and impressions on technical matters. The media highlights such factors as shifts of personalities. But, really the economy's problems are deeper and such shifts will not remedy the serious malaise .