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Travails of a surplus economy

S. S. Bhandare

IT IS amazing how, over the last decade, the economy has transformed into `a surplus economy'. Does this reflect its vibrancy? How desirable is it for a country with one of the lowest per capita incomes and one of the highest poverty levels `to boast' of becoming a surplus economy? These are, no doubt, vital issues, but we seem to be clueless on how to resolve the acute dilemmas of the present economic situation.

To begin with, let us evaluate the proposition (or measures) of a surplus economy: First, the unprecedented accumulation of foodstocks -- now placed at 62 million tonnes and valued at over Rs 50,000 crore. Even in the worst-case situation of 1995, the ma ximum PDS offtake was 26.8 million tonnes. Assuming a similar PDS level, the present stocks can last for almost two-and-a-half years. It is another story, however, that the age profile of the foodstocks is extremely worrisome, as a substantial part of it is more than three to five years old and, hence, unsuitable for human consumption.

Second, the build-up of total forex reserves -- now amounting to $43.6 billion. Even allowing for the acceleration of imports at a monthly rate of $5 billion, it affords cover for imports of more than eight months. Admittedly, there is a hefty portion of `flighty' capital -- FIIs' investment, NRI deposits, IMDs, short-term ECBs, and so on. Yet the economy has the resilience to withstand large speculative outflows and boast an import cover of at least five months.

Third, banks have been endowed with excess liquidity based on their holdings of disproportionate statutory liquidity ratio (SLR) at about 39 per cent compared to the requirement of 25 per cent. Even if there is a withdrawal of five percentage points from the SLR, banks will be able to fund incremental credit of over Rs 50,000 crore. The fact of the matter is that there is sluggish growth in demand for non-food credit, and banks are perforce required to park their investments either in government securit ies or commercial paper, bonds and debentures, etc., of the private corporate sector and PSUs.

Fourth, financial institutions also proclaim growing gaps between their sanctions and actual disbursements of financial assistance. The size of their `unutilised' resources is believed to be quite substantial.

Last, a host of industries has substantial `under-utilised' capacity of 20-40 per cent. The value of the potential production loss as a consequence can conservatively be placed at about Rs 175,000 crore.

The only area that is constrained for want of capacity is infrastructure. But even here, given the deceleration in demand for industrial power, the supply-demand gaps have been narrowing. Indeed, a few States can claim surplus power capacity. The absence of efficient mechanisms to put the potential excess generation on to the power grid, is creating problems of effective power management.

In short, there is a remarkable (and questionable!) transition of the economy which, for more than four decades, operated within a paradigm of shortages. Now there are bewildering problems of surplus spread across all key supply segments. No doubt, such surpluses do often embellish mature economies (for example, the US now uses only about 65 per cent of industrial capacity). It can afford to, given the high standard of living.

But, for a country like India, economic surpluses are relics of opportunities lost in the acceleration of growth momentum. There is an urgency to step up real GDP growth and tackle the chronic problems of unemployment and poverty. Hence, surpluses of key resources are tantamount to criminal waste. Managing the surplus economy is becoming even more challenging than handling the previous regime of shortages.

Stakeholders: Winners and losers

In this milieu, what is the impact on the various stakeholders in the economy? Consumers seem to be emerging as singular gainers; they have wider choices, falling prices in `real' terms of most products, better quality and greater attention of both manuf acturers and marketers. No long queues are seen, either for products such as baby-food and butter, or for scooters and cars. Contrast this with every other stakeholder who is on the losing spree.

First, the market mechanism has failed to deliver the goods in managing the food economy. The rigidities of procurement operations, inefficiencies of PDS and lack of purchasing power with the rural and urban poor have deprived the mass of consumers of th e benefits of surplus food-stocks.

Second, the manufacturers' profit margins are being squeezed, and they are struggling to sustain sales volume growth. They are under pressure to continuously reach out to consumers with innovative products and services.

However, there are numerous non-controllable factors (e.g. high incidence of indirect taxes, high `real' interest rates, inadequacies of the credit-delivery mechanism, high transaction costs, etc.) for which they have been looking for support from the Go vernment, banks, financial institutions and suppliers of public utilities. The capital market cannot come to their rescue either, what with the spectre of declining profits and earnings for the shareholders.

Third, the Government has been a victim of flat tax revenues given the lop-sided tax system under which industry alone generates, directly or indirectly, almost 80 per cent of tax revenues. The situation could not have been otherwise. Surely, for the Gov ernment, budgetary management assumes primacy of consideration. There is a major challenge in the absence of a resurgent manufacturing sector. In addition, the surplus economy imposes a burden of explicit and implicit subsidies (food subsidy, cross-subsi dies in power, railway freight, and so on).

Fourth, shareholders have increasing exposure to non-viable and non-performing companies; this is the outcome of surplus production capacities in the wake of intense competition. Diminishing prospects of making a fortune on the stock market have created widespread despondency. Making a choice between winning and losing companies is becoming arduous for investors. Therefore, only a microscopic minority of responsive and nimble-footed shareholders have emerged as fortune-makers, while a predominant majori ty have lost and suffered wealth erosion.

Fifth, the savers (or investors) have become increasingly wary following their travails in both risk investments and fixed interest bearing assets. While the stock market can no longer induce them to park their funds, the obvious choice is banks and smal l savings institutions, such as post-offices. The scenario of falling interest rates has become painful, and given the surplus liquidity and moderate inflation, there is no immediate compulsion for banks to offer higher interest rates.

Last, banks and financial institutions have an uphill task ahead of them. There are enough suppliers of funds, especially depositors and bond-holders, but no takers for credit. The combination of structural rigidities in their functioning and the pressur e of falling interest rates on lendable resources is squeezing their profits. Simultaneously, the growing non-performing assets are making them more vulnerable.

The road ahead

When India was confronted with the `shortage economy' before the reforms, many experts used to lecture on the need to `plan for a surplus economy'. Now, consciously or unconsciously, India is acquiring the dubious distinction of becoming a surplus econom y. Of course, the quality of surpluses may be questionable. Thus, all the food-stocks may not be edible; and all the excess liquidity may not be deplorable, especially after taking into account the NPAs; all the forex reserves may not be without encumbra nce; and all the unused industrial capacities may not be operationally exploitable.

Yet, the surplus economy is now posing numerous challenges. There are apparently no easy solutions to deal with the complex phenomenon. Numerous essays have been written on the causative and combative framework of the economic slowdown and the resultant surpluses. Surely, we cannot afford to sit tight and wait for market forces or the cyclical turnaround or structural adjustments to bail the economy out of the present predicament.

While micro-level efforts (at individual, corporate or firm level) are progressing, Government support is essential to deal with non-controllable events. Once again, recovery of the agriculture sector may provide some respite but there is no guarantee of sustainability. Industry, in particular, will have to reconcile itself to a two to three year waiting period for real resurgence to happen. In the meantime, can we not expect a desirable format for effective government intervention in the immediate futu re?

Lest we forget, the nation can also boast of nurturing a surplus of swindlers and scamsters. The common man, the middle-class depositors and investors have been mute spectators to the continuous systemic failures and their backlashes in the form of erodi ng income, wealth and faith. Inadequacies of the regulatory institutions and the judicial process are becoming endemic. Not surprising that India ranks high in the league of most corrupt nations.