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The vicious chain - Views on News from Equitymaster
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  • Mar 15, 2002

    The vicious chain

    The World Bank expects output for the developing countries to grow by 3.0% in 2002. The growth in developed countries is anticipated to be lower at 0.8%. However, the real good news is that the expectation for global GDP growth in 2003 is 3.6%.

    The forecasted growth rate is higher than the figures for 2001 and 2002. However, the cause for concern is that net long-term private capital flows to developing countries fell for the fifth year consecutively. The figure in 2001 was US$ 234 bn (Rs 11,232 bn). Foreign direct investments (FDI) at US$ 168 bn (Rs 8,064 bn) had a 72% share of the net long-term capital flows and have remained more or less stable compared to the capital market flows.

    FDI flow to South Asia grew by 35% in 2001 to touch US$ 4.2 bn (Rs 206 bn) with 75% of the total investments coming into India. The FDI in the country grew by US$ 1.0 bn to and total inflow for 2001 was US$ 3.3 bn (Rs 158 bn). This means that India's share of the total FDI was 2%.

    According to the World Bank, the major concern with the Indian economy continues to be the state of the government's finances. For the fiscal year 2003 the budgeted estimate for the fiscal deficit is 5.3%. This based on a 22% increase in net tax revenues. The government plans to mop up Rs 305 bn (US$ 6 bn) in more in taxes this year. The government expects to earn Rs 120 bn for divestment in FY03. Both the tasks seem quite tough.

    India Inc operating margin in FY03: -49%
    Expenditure as a % of revenues FY98 FY99 FY00 FY01 FY02RE FY03BE
    Interest 46% 47% 47% 48% 46% 43%
    Defence 18% 18% 18% 18% 17% 16%
    Subsidies 14% 14% 13% 13% 13% 14%
    Administration 24% 27% 27% 31% 28% 25%
    Plan expenditure 25% 24% 24% 25% 27% 26%
    Revenue expenditure 126% 130% 129% 134% 131% 124%
    Defence 6% 5% 5% 6% 7% 8%
    Plan expenditure 17% 16% 15% 15% 16% 16%
    Others 13% 17% 5% 2% 3% 2%
    Capital expenditure 36% 38% 25% 23% 26% 25%
    Total 162% 168% 154% 157% 157% 149%

    However, the positive is that the largest cost head, the interest burden, will show a decline in growth (in the long term) as the government has cut all administered interest rates and therefore, lowered its cost of borrowing. To understand how large the problems of interest burden is, one need to look at the primary deficit (that is fiscal deficit without factoring in the interest expenditure), which is just 1.1% in FY02 as compared to the fiscal deficit of 5.7%. Thus, the status quo in the fiscal deficit situation is likely to be maintained.

    What could be even more detrimental to the investment inflows into India are incidents like the recent riots in Gujarat. The events at Ayodhya today have the potential to trigger a chain reaction. Many have talked about how bad they felt and how ashamed they have been of being Indians when commenting about the recent spate of gruesome and mindless violence. But few have commented on the fact that intensity of violence is a direct function of the economic disparity, which certain groups have exploited to their advantage.

    For a strong economic growth, the Indian industry desperately needs to work in synch with the global economy. For this it will need for FDIs, which will bring in toe latest technology and best business processes. However, for investment to take place the climate has to be conducive. We are caught in a vicious chain.



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