The year that is drawing to a close (2002-03) has registered a dismal GDP growth rate of 4.4 per cent. Nominal GDP growth was about 6.7 per cent and, after adjusting for the inflation rate, GDP growth is 4.4 per cent. It is from this low base that Jaswant has projected a growth rate of 6-7 per cent during 2003-04.
This is how we reach that conclusion: the government has assumed that nominal GDP growth will be 11.3 per cent and, allowing for an inflation rate of 4-5 per cent, it expects that GDP will increase by 6-7 per cent. On paper, this is unexceptionable, but the reality is very different. During 2002-03, for example, it was assumed that nominal GDP would increase by 10.7 per cent, but the actual increase was only about 6.7 per cent. There is, therefore, no reason to believe, at this point of time, that nominal GDP during 2003-04 will increase by 11.3 per cent. If that first assumption proves wrong, then all other expectations will be belied.
Why did the governments assumption go wrong during 2002-03 Because, contrary to its plans, the economy did not receive or absorb the level of investment that is required for a high rate of growth. Take the Central governments account alone. Total capital expenditure was projected to be Rs 64,827 crore (Plan Rs 43,187, Non-plan Rs 26,640 crore). Actually, only Rs 62,365 crore was invested as capital (Plan Rs 41,420 crore, Non-plan Rs 20,945 crore). The difference shortfall in capital expenditure was Rs 7,462 crore, which is a little over 10 per cent of the budgeted capital expenditure.
I have no doubt that the state budgets will also tell a similar story. There will be huge shortfalls in actual capital expenditure. The record of the private sector is not different. There is enough evidence to show that the level of new investment during 2002-03 in the organised private sector was poor. During April-January 2002, the industry was able to raise only a meagre amount of Rs 1,287 crore by way of equity in the primary market, and that is a good indicator of the capacity or willingness of the industry to make new investments. Further, in a drought year, farmers are unlikely to have made substantial new investments in their farms. Altogether, 2002-03 witnessed a low level of investment, and the inevitable consequence was low growth.
I have said this a hundred times before, and I shall say this again, growth is a function of investment. Hence, in my column last week, I praised Jaswant for the number of steps he had announced to augment and promote investment. These, if you recall, include the ambitious road projects and the modernisation of two airports, and two seaports. I still think these are good initiatives. The big question is where is the money Budget 2003-04 is the most unfunded Budget in recent years. The big ticket items and the smaller proposals add up to an impressive number, but a closer scrutiny of the expenditure budget reveals that the government hopes to implement them through love and fresh air. Here is a list of completely unfunded programmes (the paragraph numbers are from the finance ministers speech):
Development of sports infrastructure (para 23);
College of Rehabilitation Sciences, Gwalior (para 36);
Institute for Empowerment of Persons with Multiple Disabilities, Chennai (para 36);
LICs Special Pension Policy guaranteeing a monthly pension, differential cost to be reimbursed by government (paras 41, 42);
Buyback of banks holdings of the Central governments loans at a premium (para 67);
Compensation to the states for revenue loss following introduction of VAT (para 131);
Compensation to the states for revenue loss on account of reduction of CST (para 135).
Not one rupee has been provided for these programmes. Of these, LICs special pension policy is completely open-ended. It is a potential minefield and is fraught with the same consequences as UTIs fixed-income schemes. Likewise, the compensation to the states for revenue loss on account of VAT and reduction of CST, while motivated by good intentions, can result in a large, unquantifiable demand on the Centres finances.
Let us look at the big-ticket items: On the new 48 road projects, two airports, two seaports and convention centres, Jaswant hopes to make an investment of Rs 60,000 crore. According to the finance minister, Budget 2003-04 undertakes to provide a major thrust (para 48). And when we go through the following paragraphs, we find that all that has been provided is Rs 2,000 crore! The only other contribution is the new, creative phrase called viability funding gap and this viability funding gap is also capped at Rs 2,000 crore per year. Thus, by spending Rs 6,000 crore over a three-year period, the government hopes to ensure an investment of Rs 60,000 crore. Now you will realise why I described Jaswant as a magician!
There is nothing wrong in the government putting its faith in the capacity of the private sector to make new investments. Jaswant believes that private consumption expenditure and housing will drive economic growth. During the last three years, these drivers of growth have not been able to lift the growth rate beyond 5 per cent. Hence the need for enhanced public investments. The government is still the dominant player in several sectors of the economy, including power, telecommunications, steel, petroleum and mining. With the economy in low gear and the stock market moribund, it was imperative that the finance minister used government revenues to make major investments in one or more of these sectors. By downsizing the government and cutting back on Non-plan expenditure, the government could have easily saved about Rs 10,000 crore, and this Rs 10,000 crore should have been leveraged to make new public investments of about Rs 30,000 crore during the forthcoming financial year. If he had done that, Jaswant would have proved himself to be not only a clever tactician (from the BJPs point of view) but also a master strategist (from the nations point of view). Absent that, he remains a magician who has conjured an illusion of growth.
(The author is a former Union finance minister)