Amidst the increasing hype and hoopla about the revival of growth in the economy, the Union finance ministrys Mid-Year Review of fiscal 2003-04 offers a credible and realistic assessment of the economys performance and potential. Coming weeks after the Reserve Bank of Indias mid-term review of monetary and credit policy, the finance ministrys review of the real economy and of fiscal policy is along expected lines. The bottomline is that the economy is doing much better this year and economic growth will move up to 7 per cent for the first time in nearly five years. This rebound is partly on account of last years drought being followed by a good monsoon, but it is also in part on account of increased investment activity. The review states that in the first half of the current fiscal, sanctions by all-India financial institutions increased by 194.8 per cent, compared to a decline of 31.6 per cent in the previous year. Disbursements too increased by 32.8 per cent compared with a decline of 33.9 per cent last year. This pick up in investment activity is crucial for the economy because 6 per cent plus growth cannot be sustained in the medium-term without an acceleration in capital formation, output and employment growth in the industrial sector.
Compared to the more bearish view of the RBI on inflation, the finance ministrys review tries to give the impression of things being under control on the price front but there is an implicit warning in the discussion on energy prices. The rise in international crude prices could exert an upward pressure on domestic energy prices and on the subsidy burden of kerosene and LPG. This could worsen the deficit in government revenues already weakened by the decline in expected receipts through disinvestment and the expenditure overrun of Rs 32,602 crore incurred on account of the state debt swap scheme earlier this fiscal. The reviews more optimistic view of the external economy, that does take note of the weak performance in exports, is shared by most analysts, and so would its view that import tariffs must be brought down further. It would appear that the finance ministry would like to see import tariffs being reduced to improve export competitiveness rather than an engineered depreciation of the rupee. The reviews realism and professionalism should balance the excessive optimism in the stock market while reinforcing confidence in the medium-term performance of the economy.