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Economy in a 'difficult stage' - Views on News from Equitymaster
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  • Feb 24, 2001

    Economy in a 'difficult stage'

    The Economic Survey has painted a mixed picture of the Indian economy. While on the one hand the 'remarkable resilience' has been highlighted, on the other the 'difficult stage' that we are presently in. Indeed, the economy is now forecast to grow by 6% this fiscal as opposed to an earlier projection of over 7%.

  • For a more detailed analysis of the Indian Economy click here

    Irregular rainfall for the second consecutive year and high international oil prices took their toll on the Indian economy in FY01. Despite this, the Indian economy is expected to grow by a respectable 6%. As this growth happens to be much below the desired levels of 8%, the disappointment is apparent ('difficult stage').

    The scaling down of the GDP growth has largely been the result of a slower growth in the services sector. This sector is anticipated to grow by 8.3% in FY01 as compared to 9.6% in the previous year. Agriculture, too, is poised to record a growth of 0.7% as compared to 0.9% a year earlier. The industrial sector is also likely to disappoint with a lower growth rate. This overall decline in growth is likely to limit overall GDP growth to 6% as compared to 6.4% recorded a year earlier.

  • GDP: Over the years

    One of the 'difficult' issues highlighted in the survey is that the leading indicators of investment and growth have shown considerable deceleration. The indicators refer to domestic production and the imports of capital goods. Worryingly the survey points out that there may not be a significant recovery in investment in FY01. In turn, sluggish investment activity would hurt economic growth. Among the remedies suggested to boost investment activity are "steep rise in FDI and FII, structural reduction in inflationary expectations and real interest rates, reduction in fiscal deficits and further liberalisation of the domestic debt and capital markets". Indeed, any up tick in growth will be unsustainable unless it is supported by a rise in investment activity.

    The Economic Survey has once again taken pains to highlight the "persistence of high fiscal deficits both at the central and state levels". Among the key points mentioned here are the administered interest rates on government pension and provident funds and the large demand for funds by the government. The first of these factors works to the detriment of the government in case of a low inflation environment, as real rates rise. The second factor primarily causes what is known as the 'crowding out' effect. Basically what this means is that as demand for funds is large, and the supply limited, interest rates tend upwards. These high rates deter investment activity leading to a reduction in private sector investment.

    To combat the problems facing the economy, the Economic Survey has listed out several solutions. We highlight some of them.

    • Privatisation: "Governments, with their elaborate bureaucratic structures, multiple layers of accountability and complex cross checks, are unsuited to the demands of commercial production in a competitive fast growing economy". The Economic Survey clearly makes its case for PSU disinvestment. Apart from this it states that disinvestment will enable a better allocation of resources. It would also raise resources of the government, which can then be used to repay debt.

    • Expenditure Control: The passage of the Fiscal Responsibility Bill is a step in the right direction.

    • Subsidies: The Survey points out that subsidies have given rise to problems pertaining to corruption. There is also large amount of leakage, due to which the subsidy does not benefit the people it is meant to. A classic example is the fertiliser sector, where 50% , 75% of the subsidy goes to the producers. Subsidies also limit the investment activity in the sector. The Survey also makes a case for a comprehensive decontrol of the farming sector in an attempt to improve the profitability of this segment of the economy.

    • Downsizing government: "The primary purpose of such down sizing is to eliminate bureaucratic controls and to change the anachronistic command mentality still prevailing in the system. Accordingly all employee positions of this nature must be identified and eliminated". Whether the government will heed this advice is uncertain, but the Survey is clear in its recommendations. It says that such a move will force the government to become a facilitator of economic growth and investment.

    • Tax reform: The Economic Survey terms developments pertaining to tax reform as 'by and large successful'. It highlights the need to bring more services under the tax net.

    • Interest costs: The Survey makes a strong case for the government to reduce interest rates on government debt in the form of provident and pension funds. It also argues for a more comprehensive decontrol of the debt markets to permit a wider participation in the government securities markets.

    The Economic Survey is objective in its assessment of the Indian Economy. It has clearly stated what the government needs to do to improve its fiscal health, and in turn, the overall vibrancy. What one must however make a note of is that the problems are more structural and have persisted in the economy for a number of years. So far the government has failed to tackle the important issues in an urgent manner. Whether this budget will mark a change in trend is uncertain. But let's anyway hope that it does.



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