Tuesday, Feb 11, 2003
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News Analysis
By Prem Shankar Jha
The Central Statistical Organisation's downward revision of the estimated growth of GDP in 2002-03 to a paltry 4.4 per cent has not come as a surprise, for after the disastrous monsoon last year and the consequent 18 per cent drop in foodgrains output in the kharif (autumn) harvest, only the incurably naïve would have continued to set any store by the Ministry of Finance's initial estimate of 6 per cent and the Reserve Bank's estimate of 5 to 5.5 per cent. In fact even the CSO's current estimate could easily prove to be excessively optimistic. It is based on the assumption that the value added by agriculture (this is, what the GDP estimates measure) will decline by only 3.1 per cent over last year, and that services sector growth will continue virtually unhindered by the decline in agricultural output. The former estimate is in sharp contrast to the estimate of the Centre for Monitoring the Indian Economy. CMIE has estimated that the poor kharif harvest alone will lead to a 4.4 per cent decline in agricultural GDP. Furthermore, the CSO estimate almost certainly presupposes that the rabi (spring) harvest will be a normal one. The CMIE has challenged this assumption too, pointing out that there is likely to be a marginal decline in the rabi harvest, because of a decline in the area sown. Add to this the long, severe, cold spell in January throughout northern and central India, and the rabi could easily add another 2 per cent to the overall decline in agriculture. Overall, therefore, it would be wise not to expect GDP to grow by more than 4 per cent this year. A 4 per cent growth rate would knock India out of the league of the fastest growing economies of the world, but does that really matter? Isnt it at least as important to have an efficient, competitive economy as a fast growing one? The answer would almost certainly be yes, for that was the primary objective of the economic reforms of 1991. Judged by this yardstick, India does have something positive to show for the six years of slow GDP and even slower industrial growth that it has experienced since the end of 1996. During this entire period, investment has been falling continuously in public and private sectors, till it has almost disappeared. Consumer demand has therefore remained virtually stagnant especially after the spending spree caused by the Pay Commission awards had ended. In the resulting buyer's market industry has been forced to struggle hard simply in order to survive. Thousands of medium and small scale units have in fact not done so. But the industry that has survived the crisis is now leaner and more competitive than anyone could have imagined a few years ago. Its performance in the first three quarters of the current financial year gives ample proof of the change that has occurred. During this period while overall industrial growth has been a not-too-impressive 5.3 per cent, corporate profits, especially for the larger companies, have soared as perhaps never before. In a sample of 1,700 companies, 908 of them, accounting for 82 per cent of total production, have recorded a 66 per cent jump in their net profits over the same period of last year. What makes it especially so is the fact that these profits have come at a time when, thanks to the flat consumer demand, companies have competed fiercely with each other through price cutting and have passed on most of the benefits of their greater efficiency to consumers. A good recent example is the cement industry, which has matched a 10 per cent increase in sales with a nearly 10 per cent cut in prices. As a result, although its profits have only just inched up, consumers across the country have benefited from the price cuts. Much the same has been happening in the steel industry for the past three years. This is one reason why steel exports have boomed to more than a million tonnes this year. Steel and cement have not been in any sense exceptional. Nearly all industries have been trimming costs and lowering prices. Fully one third of the increase in the profits of the 908 companies has come from a sharp decline in the cost of borrowing following successive reductions in the Bank Rate over the past two years and the deregulation of bank lending to the private sector. But the remaining two-thirds are a direct result of successful efforts to cut costs , through voluntary retirement schemes for surplus workers and much better inventory management. This transformation has begun to get reflected in the overall performance of the economy. Inflation has remained below 3 per cent during the past two years. Exports have grown by more than 20 per cent. The balance of payments is in surplus. This is the reason why money is flooding into the foreign exchange market. There is a down side to this success story. For the past four years, employment in the organised sector of the economy has stopped growing altogether and has been shrinking. As the number of job seekers has remained the same this has meant that about seven lakh educated young men and women have failed to find jobs in the newer parts of the economy every year. This can only change when industrial growth resumes.
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