The Hindu : Complacency in North Block

Online edition of India's National Newspaper
Tuesday, Mar 11, 2003

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Business

Complacency in North Block

By Prem Shankar Jha

The budget for 2003-04 contained no surprises. There were direct tax reliefs for the middle classes, senior citizens and corporations; a reduction of customs and excise duties and a further simplification of their structure; a promise to reduce the fiscal deficit by exercising the easy option of lowering interest rates on public debt, and a tepid effort to stimulate growth by increasing public investment in roads and ports. All this amounts to an exercise in fine tuning the economy, and the fine tuning presupposes that there is nothing structurally wrong with the Indian economy. Where does this complacency spring from?

The answer is to be found in the Economic Survey of 2002-03. "The drivers of change and rapid growth acceleration,'' it says portentously, "have to be technology and competition together with the benchmarking of the best international practices. India is now taking advantage of all three factors.'' The Survey goes on to describe in considerable detail how Indian industry upgraded its technology and cut its cost in response to the increase in competition ushered in by Foreign Direct Investment, the removal of import barriers and the lowering of customs duties. This has enabled it to expand its steel and cement industries rapidly to a large extent in response to international demand and increasingly mesh its rapidly growing software and automobile industries into the global production plans of the major multinationals.

The Survey attributes a `significant' improvement in industrial growth between April and November 2002 to 5.3 per cent against 2.7 per cent in the same period of 2001, directly to the success described above, and endorses the Central Statistical Organisation's prediction of a 6.1 per cent growth of industry in 2002-03. This is where the tenuous chain of reasoning that it tries to build breaks down. For, with industry having grown only by 5 per cent in December, it is unlikely that it will attain the 7.7 per cent rate of growth between January and March that is needed to make this prediction come true.

On the contrary the reduction of rural demand caused by the poor kharif and indifferent rabi harvests makes it unlikely that industrial growth will rise much above the present level of 5.3 per cent. That is about the same growth rate that industry recorded during the 20 years of economic stagnation between 1956 and 1975. It is also more than three percent lower than the growth rate recorded in the 1980s. Thus, while there is a good reason to welcome the transformation that is taking place in industry, what it is not leading to, and will not automatically lead to, is more rapid industrial and GDP growth.

The Survey fails to make its case because the three factors it describes are necessary but not sufficient conditions for sustainable, rapid industrial growth. For that a fourth factor is needed — sustained rapid growth of investment in the economy and especially in industry. That is what has been missing for the past six years. The 12 per cent industrial growth experienced between 1994 and 1996 was the product of a four-fold increase in private corporate investment during 1992-96. This more than made up for a decline in public sector investment in the same period. But from 1996 private corporate investment went into a catastrophic decline from which it has still not recovered, while public investment, especially fixed investment in new capital assets, continued to fall. As a result, the little stimulus industry has received has come almost entirely from consumer demand. As has been pointed out before in these columns, this has not only been seasonal, tending to peter out in October-November, but has been heavily dependent on the state of the rabi (spring) harvest.

The Survey candidly admits that technology, competition and international best practice benchmarking can stimulate growth only in an `enabling environment.' The chief element of this is more balanced Central and State budgets, and consequently a decline in the fiscal deficit. But what the Survey does not stress, and what Jaswant Singh seemed oblivious of, was that competition and technology can work their magic only after the fiscal deficit has been eliminated. Till that is done, they will only allow the more efficient producers to drive the less efficient out of business within an overall framework of stagnation or slow growth.

This awareness, of the need to sequence economic reforms so that stabilisation measures come first, and are followed by structural reforms and the construction of new market institutions to ensure the smooth functioning of the market in stages two and three, had formed part and parcel of the Government's thinking during Manmohan Singh's stewardship of the Finance Ministry. But it has all but disappeared from the Government's thinking during the years of the BJP rule.

One cannot but hold the writers of the Survey responsible for this crucial omission. Not only do they never mention the fact that the sequencing of India's reforms has gone wrong, and remained wrong, for the last seven years, but they actually manage to foresee both a continuing industrial recovery and a further rise in the fiscal deficit in the near future, at the same time. This kind of complacency misleads the people of India into believing that they can have growth and employment without sacrifice. It is something the country can do without.

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