Apart from this are the financial implications for other sections of the economy. The government of India borrows money at 9 and 10 per cent and gives it to the Railways at 5 per cent. This is affecting the general budget which is already groaning under a 5 per cent deficit. Most importantly, higher freight charges mean goods traffic moves away from railways to road transport. The impact is disastrous. There is more consumption of diesel, more pollution on the roads, more trucks passing through our cities and creating mayhem. It is amazing how one distortion can create so much havoc. Nitish Kumar should be congratulated for starting a process of reversing this distortion. Hopefully the politicians will allow the Railway Budget to be passed in its present form without the use of the populist scissor.
Turning to the Economic Survey, it has put everything on the table without any attempt to hide the problems that confront the economy. Last year was also the same and the chief economic advisor should be complimented for his high level of transparency. If fact I cannot think of any other document put out by the government which is so open and invigorating. Without trying to hide behind a 5.4 per cent estimated GDP growth for 2001-02, the survey points out some basic malaises in the economy which are causing this problem. After pointing out that the fiscal deficit is going to overshoot the 5 per cent mark much above the 4.7 per cent which was budgeted it says that real interest rates are disquietingly high in the economy. For example, the real prime lending rate, PLR corrected for inflation, has risen from just 2.4 per cent in 1994-95 to 7.3 per cent in the current fiscal.
The survey states that because of this the share of interest in costs of Indian industry is perhaps the highest in developing countries. A bigger problem is being faced by the manufacturing sector. Taking advantage of liberalisation of the economy in terms of removal of industrial licensing, removal of MRTP restrictions etc, huge investments were made by the manufacturing sector between 1994-97. Unfortunately, nominal interest rates were high at that time and now industries are saddled with a massive debt overhang.
The financial system is stricken with bad loans and the government pumps in money to shore up the capital; as vicious a circle as you can imagine! The Survey has made a very strong case for further reduction of administrative interest rates. It is practically on the wish list of every economist and stock market analyst that the government will follow this up with a cut in the small savings and public provident fund rates which now stand at 9.5 per cent. In comparison with this, even as I write this, the current yield on long term government paper is 7.2 per cent.
The Survey is also unhappy that gross domestic capital formation has stalled in 2000-01 and has fallen to 2 per cent from a high of 15 per cent in 1999-00. Consequently, the real consumption in the economy is also down significantly. No wonder the rate of growth of industrial production is estimated to be a mere 2.3 per cent against a smashing 13 per cent in 1995-96.
True, the whole world is passing through a recession and we are not immune to it. This has also been pointed out by the Survey. On the positive side, foreign direct investment has gone up by 61 per cent in the last eight months mainly into IT, services and engineering. I presume this is because of the large sums of money coming in from investors to the newly liberalised telecom and insurance sectors.
There is also a lot to be cheerful about in the public sector disinvestment scenario. So far the government has raked in slightly over Rs 5,500 crore including the special dividends. It is obvious that the PSU sale story is in overdrive. And there are still some big ones in the hit list like the Shipping Corporation of India, IPCL, Maruti Udyog, and Hindustan Zinc. It is possible that we may be close to Rs 10,000 crore by 31st March 2002, a fantastic achievement. And on top of that the government still has big holdings in many of the sold units so that it can hope for a further inflow when it divests the balance stake, possibly at a better price.
The Survey also highlights the need for structural reforms in key sectors if we are to move forward. Right now on the front burner are reforms in labour laws and power. How Parliament will handle all these inputs from economists is the key issue. In the next few weeks through the union budget 2002 and other key legislations our politicians will have to come up with the answers.
Labour laws need to be modernised if more jobs are to be created. In spite of an average growth in industrial production of around 7 to 8 per cent per annum in the last ten years, the number of jobs in industry has actually fallen. The truth is simple. If you cannot fire, you will not hire. The unhappy situation in the area of distribution of power, with large segments of community getting free power, and huge thefts masquerading as transmission losses are known to one and all.
The case for reduction of administered interest rates cannot be made any stronger than has been done by the Economic Survey. One hopes that our politicians will deal with the issues thinking of posterity and not of just tomorrow. If they drag their feet thinking of their own constituencies, that will be very sad indeed.
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