The message from Capitol Hill

By Prem Shankar Jha

The Vajpayee Government held its annual meeting last week with economic editors. Over three days, the Government's economic ministers told almost 200 assembled journalists what their ministries were doing - what the planned investment was, what had been achieved and where targets might not be met. The message, uniformly, was that while there had been a bit of an industrial slowdown, there was nothing fundamentally wrong with the Indian economy. The government had everything under control. The future of the country was safe.

The Finance Minister, Mr. Yashwant Sinha, was not quite as ebullient as he had sounded in July when he said that with a bumper harvest around the corner, consumer demand, and, therefore, industrial growth, was going to revive on its own in the second half of the year. But his message was still comforting: Although growth projections for 2001-02 had had to be scaled down from 6 per cent to 5 plus per cent, this was entirely because of the spillover of the global recession. He still maintained that a revival was around the corner. India was still among the fastest growing economies in the world. And as for the fiscal deficit, which the doomsayers blamed for the country's economic woes, the target 4.7 per cent was almost within grasp.

There was more than a dose of wishful thinking in all this. Mr. Sinha's prediction of a turnaround in the economy in the second half of this year is based on the slenderest of evidence. There has been some pick-up in demand for consumer durables in August, a substantial recovery in the rise of non-food credit, and a sharp increase in non-oil imports of late. But all these data pertain to a single month, and cannot be called a trend. Second, the data on imports and non-food credit are for september 10 to October 5. This is precisely when, after the terrorist attacks on the U.S., there was a widespread fear that the rupee would get devalued. Imports may have risen to beat the anticipated decline. By the same token, working capital needs too may have risen to finance some stockpiling of inventories against harder times.

What was significantly absent from the conference was any hint of an admission that the Indian economy is on its worst crisis since Independence; that employment in the organised sector has stopped growing altogether; that imports from China and a few other countries are steadily displacing consumer goods produced by 18 million Indian workers in the small scale sector; that domestic demand is contracting, in real terms; that inflation, measured by the cost of living index and not the deceptive wholesale price index, is not even 3.6 per cent but nearly zero; that consequently the real interest rate is not even the 6 to 8 per cent admitted by the Finance Minister, but an astounding 10 per cent; that investment in industry and construction has consequently almost ground to a halt; that real estate prices have slumped by 40 to 60 per cent across the country; that foreign direct investment has been falling steadily in the last four years and is now a paltry $2.4 billion against $44 billion in China; that consequently India's effort to mesh itself with the global economy has failed; that the peak power shortage in the country has now reached 30 per cent while the overall shortage exceeds 10 per cent; that what power is available is so expensive and so unreliable that industry has virtually cut itself off from the state grid, and is generating fully a third of the power it consumes, by itself; that the country's consolidated fiscal deficit is not 4.7 per cent but 10.5 per cent of GDP and that this is the root cause of the high real interest rates, and consequently of the failure of investment, the slowdown in industry and the disappearance of jobs.

Just how much this conference has degenerated, in the quarter century since it was instituted, from being a genuine exchange of views into a brazen PR exercise, was reflected by the statements of the Commerce Minister, Mr. Murasoli Maran. He was, if anything, even more ebullient than Mr. Sinha. Despite the 2.4 per cent decline in exports in the first five months of the current fiscal (April to August), he saw no reason to scale down the export growth target from 15 per cent that had been set at the beginning of the year. The slowdown, he said, had been caused by the global recession. But, as everyone knew that recession in the U.S. economy was soon going to end, export growth would soon pick up.

As for a U.S. recovery, even before September 11, the high priests of the New Economy on Wall Street had conceded that the recession in the U.S. economy was deepening and a turnaround would not occur before the second quarter of 2002. For India, that meant in fiscal 2002-03. After September 11 share prices across the globe have fallen by an average of 15 to 20 per cent. In the US this will have a negative 'wealth' effect on consumption of $40 billion. By the same ratios, the primary drop in consumption around the industrialised world will be of the order of $100 billion. Because of the multiplier, effect this will translate into a total decline in consumption over 18 to 24 months of $700 billion. Add to this the shrinkage of consumption this will trigger in the newly industrialised countries of Southeast Asia , and Latin America, and we are looking at an overall decline of the order of a trillion dollars. This is the global economy that Mr. Maran expects to pull India forward.

In the same vein queries about the closure of the Dabhol power plant in Maharashtra because its sole buyer, the Maharashtra State Electricity Board, refuses to lift any power from it were deflected by the ministers and officials concerned with the specious plea that the dispute fell within the ambit of a State and not the Central Government. No mention was made of the fact that if the MSEB lost the impending arbitration, paying out roughly $5 billion in damages for a non-functioning power plant, would become very much a national problem.

The conference highlighted the reasons , once again, why the Vajpayee government's hold on power is slipping and why he personally is facing a rising tide of criticism not just from the opposition but from within his own party. No one can blame the BJP or the NDA for the crisis in which the economy finds itself. This is the product of four decades of progressively more irresponsible and shortsighted policies by above all the Congress and more recently the United Front. But the BJP/NDA happens to be in power when the crisis has occurred. It, therefore, cannot evade the responsibility for taking remedial action.

Send this article to Friends by E-Mail

Section  : Business
Previous : ICICI responds to Tolani open offer