The mid-year review has three sections running into 25 pages. The introduction is the longest 14 pages. (If it has taken 60 per cent of the report, why is it called an introduction) It tells a familiar story. There are lots of positives, but the few negatives cannot be wished away. They are too critical to be ignored. After enthusiastically broadcasting the song Happy times are here again, the finance ministry has wisely stopped short of joining the chorus.
If the economy is seemingly doing well, none gets more credit than the monsoon. The anticipated high growth rate of nearly 7 per cent is, partly, a statistical illusion. The GDP growth rate during 2002-03 was only 4.3 per cent. So, even if the growth curve returned to the normal trend line, the growth rate will appear to be impressively high. The review itself acknowledges that, in the agricultural sector, this is exactly what will happen this year as it happened following the drought years of 1966-67, 1974-75, 1979-80 and 1987-88.
Look at the figures of kharif production. The 2001-02 fiscal was a normal year and 2002-03 was a drought-affected year. Rice production during the 2001-02 kharif was 79.76 million tonne, it declined to 66.51mt during the following year. During 2003-04 (the good monsoon year), kharif rice output will increase to 75.05mt, but it will still be lower than the 2001-02 production level. Yet, for statistical purposes, there will be a growth of 13 per cent! Coarse cereals production was 26.92mt during 2001-02, 20.13mt during 2002-03 and is expected to be 27.96mt this year. That means coarse cereals production will return to normal this year; yet in terms of growth, the record will show a growth rate of 38 per cent!
Therefore, when the mid-year review talks about a double-digit growth in agriculture (propelling a 7-per cent GDP growth), it would be prudent to do a reality check.
The sectors that are showing remarkable results are industry and services. Against a growth rate of 6 per cent last fiscal, industry has recorded a first quarter growth of 5.8 per cent. The growth in the index of industrial production stands at 5.8 per cent for the April-September period, compared to 5.4 per cent during the year-ago period. Similarly, the services sector, after logging a growth rate of 7.1 per cent last fiscal, has maintained a growth of 6.9 per cent during the first quarter of this fiscal. Thanks to the good South-West monsoon, the second quarter demand would have got a boost. Hence both industry and services ought to have done better during the second quarter. If these two sectors maintain these growth rates, the economy will indeed grow by nearly 7 per cent this year.
There are, however, some worries. Firstly, inflation. The fiscal began with an annual point-to-point inflation rate of 6 per cent. After rising to 6.6 per cent in April, it has shown a downward trend, but the review estimates that it will remain through the year at 4 per cent. Some time back, the government, the Planning Commission and the Reserve Bank had agreed that inflation should be kept below 3 per cent. Has that goal been given up In Indian historical terms, an annual inflation rate of 4 per cent seems a remarkable achievement, but it is nevertheless a loosening of the resolve to fight the long-term enemy and push it to below 3 per cent.
The second worry is oil prices. The review notes that the recent Opec decision to cut crude production from November 1 may push crude prices beyond the current level of $31 per barrel and could exert an upward pressure on domestic energy prices. It also notes that the subsidy burden on kerosene and LPG may also rise. (Mr Ram Naik will ensure that!)
The third worry is the decline in FDI. The first quarter ended with a current account deficit of $1.2 billion, but that was more than made up by a capital account surplus of $6.1 billion. Of this, foreign investments accounted for $2.8 billion. Of the total foreign investment, FDI accounted for only $0.8 billion and the remainder ($2 billion) was through foreign institutional investment. The trend has continued into the second quarter as well. According to the review, it has been estimated that during the first half, FII inflow was $3.44 billion, whereas FDI inflow was a dismal $0.99 billion. This should be a matter great concern for the finance minister.
The fourth worry is the sluggish growth in bank credit. Up to October 17, non-food credit recorded a 5.7 per cent growth against 15.8 per cent last year. Food credit growth was negative. These are inexplicable trends. There is abundant liquidity. Interest rates are at a historical low. PLR of commercial banks has declined to 10.5-11.5 per cent. Businesses are reporting healthy toplines (sales) and healthier bottomlines (profits). So, why is there not a greater demand for credit and why is there not greater investment
The last and perennial worry is the deficit. Both revenue deficit and fiscal deficit as a percentage of the budget estimate are running higher than last year levels. Wasteful expenditure continues, notwithstanding the Fiscal Responsibility and Management Act.
If elections are held on schedule, Mr Singh has one more year at the wheel. It is not enough to feel good this year, it is necessary to revive the engine of growth so that the pace of growth, at 7 per cent or more, will be maintained through the next five or 10 years. In the recent past, we achieved a high growth rate once, but we could not maintain the momentum beyond three years (1994-95, 1995-96, 1996-97). The country cannot afford to scale the mountain once again and slide down once again.
The feel good should not turn out to be a false dawn. The key to high growth is to curb wasteful expenditure, tame inflation and boost investment. When that happens, we can all truly feel good.