The Hindu : One-off phenomenon

Online edition of India's National Newspaper
Thursday, Oct 03, 2002

Opinion

Opinion - Editorials

One-off phenomenon

THE ECONOMY GREW by 6 per cent in the first quarter (April-June) of 2002-03, there was a small surplus on the current account of the external balance of payments (BoP) during the same period and at the end of August the fiscal deficit of the Government of India was narrower, on a corresponding basis, than at the same time last year. The reasons are not far to seek for why, in spite of this clutch of positive news put out by Government agencies earlier this week, the dominant mood in the economy at present is one of sluggishness.

The most obvious explanation is, of course, that two of these three sets of economic data are for the months before the monsoon of 2002 showed its truant hand. The monsoon did revive after the middle of August, yet the first estimates of kharif production this year are that it will be 18 per cent less than last year. That will be a major economic loss, which will have its ripple effect on the rest of the economy and may not be neutralised by any recovery in rabi production. This is why the Reserve Bank of India last month cautiously noted that the Indian economy was highly unlikely to grow in 2002-03 at the 6 to 6.5 per cent that had been predicted earlier. The GDP growth registered in April-June 2002, compared to the performance in the corresponding period of 2001-02, must be seen then as a one-off phenomenon. In any case, the economy is usually at its lowest level of activity in the first quarter. Besides, the sectors that drove growth in those three months were almost entirely the services, though the early recovery in manufacturing was in evidence and agriculture recorded a strong performance because the rabi crop of 2001-02 was substantially larger than the previous year. The last two phenomena are not going to be present during the next three quarters. That leaves services, where in some areas (trade and finance) the quarterly growth rate was higher than 7 per cent. This certainly is an unusually high growth rate for even the service sector where it was believed that, barring construction, the annual rate of expansion had settled down to around 6 per cent. The question is if the service sector, which does today account for more than 50 per cent of GDP, can by itself make up for the expected deficiency of production in agriculture and manufacturing. This does seem unlikely since services in India are still dependent on the output of the "real" economy. If the GDP growth in April-June is not going to be representative of the economy's performance during the entire year, this is not so of the BoP, where foreign exchange reserves now stand at over $62 billion. The current account surplus for the period may be smaller than in the last quarter of 2001-02, but it is still a surplus which is a relative novelty for India. However, there are some peculiar developments. The merchandise trade deficit widened during April-June because exports actually contracted (they subsequently registered strong growth) and the surplus in services trade has shrunk a bit. And the surplus on the capital account has come down sharply because of lower capital inflows. It was in the end only because of substantially large provisions for "errors and omissions" in the BoP that April-June saw foreign exchange reserves rise by $1.7 billion.

Since all the expensive bailouts that the Centre has already provided or has plans for postpone expenditure to the future and do not involve an immediate outlay, it is not surprising that the Centre's finances are looking healthier today than they were at this point last year. Besides, drought relief expenditure would have been spent only after August, which is the latest month for which public finance statistics are available. While tax buoyancy (until July) has played a part in reining in the fiscal deficit, it should be pointed out that revenue and capital Plan expenditure declined significantly in August, suggesting that expenditure compression of this kind is making its own unhealthy contribution to giving a rose tint to Government finances.

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