External sector forebodings?

By S. Swaminathan

Not a shattering revelation, is it? The downgrading of India's sovereign rating by Standard and Poor's on Tuesday followed by a revision of the foreign currency rating outlook for corporate ``dadies'' such as Reliance Industries, Indian Oil Corporation, NTPC and Larsen & Toubro, reminds one of the familiar ``doctor and patient'' encounter. The patient knows he is unwell and yet would like the doctor to examine him and prescribe some treatment. The doctor takes the temperature of the patient on the digital thermometer, of course, and then pronounces the anticipated verdict: ``Your temperature is about two degrees above normal. Take these medicines I am writing out. I shall see you again if necessary.''

What is new in the S&P's rating? And in Moody's? Continued fiscal slippages at the Centre and in the States - this is not news nor the plunge in tax revenue collections in the first quarter this year. Who does not know that the Vajpayee Government is too deeply caught in day-to-day fire-fighting to spare much time for further reforms in the economy? Nor is Moody's perturbation with the emergence of scams in the financial sector so much of a profoundly unknown dimension of the Indian economy.

The reported reactions of the Finance Minister, Mr. Yashwant Sinha, and the Governor of the Reserve Bank of India, Dr. Bimal Jalan, and the not-so-coincidental ``dismissive'' mode of the stock and forex markets, are not mere manifestations of some bravado or sheer unwillingness to listen to the voices of the credit-rating agencies. There is no flaw in the perception that the fundamentals in the economy continue to be strong relative to the actualities of many other developing countries including the erstwhile ``tiger economies''.

Forex reserves of $43.6 billion are a ``big deal'' for a country that faced the ignominy of an external debt default, only about ten years ago! A GDP growth rate that may cross 6 per cent this year and an inflation rate of just around 3 per cent in terms of the Consumer Price Index, are not precisely the pointers to a meltdown!

With the data system in the economy becoming much more transparent than in the pre-1991 period, credit-rating itself, perhaps, is becoming a ``sunset profession.'' The policymakers may not be far wrong in treating S&P's, Moody's and company and their qualitative assessments of the economy as being premature or even tendentious.

Yet, it would be foolhardy for the policy establishment not to see in these ``downgrading messages'' a growing apprehension among international investment analysts that India is rapidly forfeiting its credentials as an emerging ``favourite'' among investment destinations in the developing world.

The Enron tangle is enough to proclaim India as a classic example of ``collapse of a reform agenda,'' regardless of who, between Enron and the Maharashtra Electricity Board, is ``more wrong''. If the truth is that the FDI scenario for India is quite bleak, we do not need S&P's, to ``break it'' for us!

Leave alone the FDI component in the external sector. The tidings from the export front are not too comforting.

An early warning

When the U.S. economy catches a cold, the world is set on a bout of sneezing - thus goes the new wisdom on globalisation. India's exports to the U.S. account for hardly 2 per cent of the total imports of the U.S. Yet, to the extent that for India, these amount to 20 per cent of its global exports, any shrinkage presages a disproportionate order of dislocation to its own economy.

The slowdown in the U.S. economy and its reverberations across the developed world obviously are bound to impact adversely on the Asian economies as well. The first quarter data covering April-June 2001 for the Southeast Asian region leave no doubt that the U.S. downturn has begun to bite such countries as South Korea, Thailand, Singapore, Malaysia and the Philippines. Japan constitutes a mega-crisis by itself with the Government largely benumbed by the economic slowdown, not knowing where to draw the line between a cheap money policy and an expansionist fiscal stance.

Doleful export news

The first two months of the current fiscal year, April and May, showed India's exports growing at a deflated rate of around 5 per cent per annum, in marked contrast to 30 per cent in the corresponding period in 2000-01. The provisional data for June, now available show that there was an actual decline by 4.6 per cent so much so the exports during the first quarter have seen a dismal slide by around 1.8 per cent.

The Centre for Monitoring Indian Economy (CMIE) has now projected total exports for 2001-02 at $47.5 billion - a growth by 7 per cent as against the target of 18 per cent set by the Union Ministry of Commerce. While the sceptics have a point in forecasting a meltdown in exports in view of a perceived recession in the U.S. and in Europe, it is not implausible that the lacklustre export performance of India during April-June has had more to do with domestic economic uncertainties than with the U.S. economy hiccups.

Although preliminary indications are that the slowdown in Indian exports has covered the whole gamut of exports - agricultural commodities, engineering goods, textiles, handicrafts and gems and jewellery - a closer examination of the phenomenon by the export promotion councils and the commodity boards could perhaps yield meaningful clues as to how the reversal of a year of buoyant growth at 21 per cent has occurred and that too so abruptly. In a dynamic global trade situation, aberrations rather than deep-seated disequilibria can easily confuse the exporting community and the policymakers.

Given the fact that there has been a lot of vacuous politicking during the last three months and little of pragmatic implementation of the proposals set out in Mr. Sinha's budget for 2001-02, the economy itself would appear to be in a deep freeze, with industrial production continuing to chug at a ``3 per cent minus'' rate and consumer demand remaining subdued. It is an altogether depressing scenario with manufacturing enterprises lying low and the investment outlook continuing to dampen the entrepreneurs. That the export horizons have been clouded owing to the overall inertia in the economy and the dominant mood of ``wait and see'' needs to be underscored.

The perennial question of export competitiveness involving transaction costs, the exchange rate of the rupee and the range of issues relating to the infrastructure, particularly the turnaround performance of ports, continues to call for coordinated action. Nothing much has occurred in the matter of special export processing zones (SEZs) which the Union Minister for Commerce, Mr. Muraroli Maran, rightly advocates as the thrust area of export policy for the New Decade. The fact is that not many State governments are alive to export growth as a powerful stimulus to the regional economy. With all its political ``fire- fighting'' missions, the Vajpayee Government is perilously close to achieving the dubious distinction of a non-performing government!

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