Economy unlikely to get back on 7% growth path

Major initiatives required to stimulate investment and remove speed-breakers

Following is an extract from a paper “India: Economic Outlook, 2001-03”, presented to the Spring Meeting of the World Project LINK, April 9-11, 2001, United Nations, New York, by the Centre for Development Economics, Delhi School of Economics, University of Delhi:

AS mentioned earlier it was widely held that the weather conditions most of the year 2000 were close to normal. If this meant that agriculture records a moderate recovery even if it did not fully return to its trend growth path, value added in this sector should have grown by about 2.6 per cent. But this did not happen. The current estimate is that the actual growth will fall short of even 1 per cent. For industry, our last (October 2000) forecast was nearly 7.3 per cent for this fiscal. The actual growth rate is, however, now officially estimated to be 6.9 per cent i.e. less than 50 base points below our earlier forecast. This is in line with our earlier perception that while there is a slowdown of industry, it is not as sharp as was made out to be over the first few months of the year.

Going by the latest estimates there does not seem to be any deceleration in industry. The RBI (Reserve Bank of India) puts industrial growth at 6.1 per cent for 1999-00 as well as 2000-01. A marked slowdown has in fact been in services. Whereas this sector grew at 9.4 per cent over 1999-00 the growth rate for 2000-01 is estimated to be only 8.4 per cent. For overall real GDP (gross domestic product) our last forecast was about 6.6 per cent which is now scaled down to 6.1 per cent compared to 6.0 per cent estimated by both CSO (Central Statistical Organisation) as well as RBI. We still believe that the final estimates of growth rate will not be lower than our current forecast.

As far as the next two years are concerned, we expect that with normal weather conditions agriculture should grow by about 2 per cent in 2001-02 and by about 2.5 per cent in 2002-03 . Similarly, industrial growth should move to about 7.7 and 8.1 per cent in 2001-02 and 2002-03, respectively. With regard to services, while we forecast a slow acceleration in the growth of economic services this would be accompanied by lower growth rates in public administration. Thus the overall growth rate in services will stay at 8.3 and 8.4 per cent for the two years. This implies that overall GDP growth will go up by about 50 base points in 2001-02 and by another 25 base points in 2002-03. Thus the economy is unlikely to get back to a 7 per cent growth path even over the next two years unless major initiatives are taken to not only stimulate investment but also remove other speed breakers through a determined implementation of reform agenda which has een announced.

Inflation
Measured by movements in the wholesale price index, the year 2000-01 has seen a revival of inflation largely due to higher oil and energy prices. Annualised rate of increase on a point to point basis exceeded 8 per cent for a few weeks, but by the close of the year returned to a level below 5 per cent. The final figures based on a comparison of the 52 week averages for 1999-00 and 2000-01 put the rate of inflation at about 6 per cent; which is close to our last forecast of about 6.5 per cent. However our current estimate of 7.1 per cent is a bit on the higher side. Our forecasts for the next two years are not very optimistic either, as rate of inflation is unlikely to decelerate substantially. It looks like that the economy will have to live with an annual price hikes of about 5 to 6 per cent. The good news however is that rate of inflation measured by the consumer price index has been at a lower level of about 4 per cent for 2000-01 .

Trade and Balance of Payments
The first few months of the year had witnessed an unusual buoyancy in exports—rising by nearly 30 per cent over those for the corresponding period last year. However, our October forecast had clearly cautioned that, “Export growth beyond 20 per cent or so does not appear to be sustainable.....” While our prediction was a growth rate of 18.6 per cent which has now been raised to 19.4 per cent, preliminary figures indicate that actual exports, by DGCI&S (Directorate General of Commercial Intelligence and Statistics) calculations have been of the order of $ 44.1 billion which is 20 per cent higher than those last year.

This year our forecasts indicate a deceleration in export growth before it goes back to a little over 20 per cent rate of growth in 2002-03. Deceleration in 2001-02 is due to the slowdown in the exports of manufactures which account for over 70 per cent of total exports. Our current forecast for 2002-03 is considerably more optimistic compared to our last forecast. These variations are partly due to the predicted changes in the volume and prices of world trade over the calendar years 2001 and 2002.

With regard to growth of imports our forecast is on the high side. This is because while POL (petroleum, oil, lubricants) imports have grown by over 60 per cent, non-POL imports have marginally declined. Also, since imports of gold and some other items have declined, non-POL and non-gold imports have remained about the same. Since industrial growth as well as inflation are somewhat over-predicted in our forecasts, imports too are correspondingly on the higher side. Deceleration in domestic activity has presumably contributed to slower import growth. This notwithstanding, preliminary estimates available now are a bit hard to explain. While non-oil non-gold imports over the first few months increased fairly well the reasons for a sharp decline over the later months are not clear.

Given this development, for whatever reason, trade balance by DGCI&S calculations would be less than $6 billion. For reasons given above our forecast turns out to be rather high. What the right figure with eventually turn out to be only time will show. We also forecast slower growth of imports over the present year, 2001-02 due to lower oil prices. The next year 2002-03 should see a stronger growth at nearly 20 per cent.

In translating DGCI&S figures into RBI figures for balance of payments we apply mark up factors. The only new item in our calculation is the forecast for net invisible which prominently include remittances of NRIs and exports of computer software. Our forecast for this, which is about $14 billion, is not at variance with the official figures available so far. With this the current account deficit for 2001-01 is about $3.49 billion lower than our forecast in October. For the next two years the deficit is not likely to be significantly different.

(The forecasts are based on an economy-wide econometric model. Details of the model may be found in the paper “ Policies for Stability and Growth: Experiments With A Comprehensive Structural Model For India, Journal of Quantitative Economics, July-December 1999)