Sustaining Eight Per Cent Growth

Updated: Mar 25 2004, 05:30am hrs
In the hot summer months of 2003, there was much pessimism in Delhi. The disastrous monsoon of 2002 had led to a sharp fall in agricultural production. As a natural corollary, GDP growth plummeted to less than 5 per cent. In this gloom and doom scenario, the government went out and said that it was working towards an 8 per cent growth in 2003-04. Not only that, the government said it expected to maintain that type of growth right through the Tenth Five Year Plan.

Pundits sat in seminar halls in India International Centre and the Habitat Centre and shook their wise heads. This is political hogwash they moaned in a manner customary for economists when they talk of lesser mortals like politicians. The Opposition parties quickly seized the opportunity to pile on. Sonia Gandhi made her famous comment comparing the government estimates to the pipe dreams of a mythical Mungeri Lal. The jury was out.

Now the numbers are coming and it is clear who was right and who was wrong. The government was right and the GDP growth is now estimated to be over 8 per cent. Economists are ducking the question and the Opposition spin-doctors are trying to shift gears and claim the credit for it. The growth is evenly balanced with agriculture, manufacturing and services contributing in fair measure. The good monsoon, low interest rates and political stability have contributed to business confidence being the highest among all nations in Asia.

The next question is: Where do we go from here Has India crossed the hump and is now in a China-style growth trajectory That nation, which was wallowing in self-defeating socialistic policies, is now growing in excess of 8 per cent year after year. If China can do it, why cant we We can do it; but to sustain this type of growth, we need to really get our act together once the elections are over. It is vital for us to understand that we are not going to keep to this 8 per cent GDP growth trajectory with the existing set of rules and regulations. In other words, tinkering will take us nowhere. We need to get aggressive on what is known as second generation reforms.

One truth we have learnt from the last few years is that to sustain 8 per cent growth, agriculture has to keep performing well. Manufacturing and services can pull up the economy only upto a point. Even though agriculture accounts for slightly less than a quarter of the GDP, it has nearly 70 per cent of the country employed in it. In other words, there is a clear under utilisation of resources here. On top of that, when one considers that India is the worlds largest producer of dairy products, second largest producer of fruits and vegetables, one begins to appreciate the enormous untapped opportunities we have there. Just a few reforms have catapulted farm exports to 14 per cent of total exports.

In stock market parlance, agriculture is the most undervalued stock in the Indian market. We need a multi-pronged approach to stimulate agriculture and make it deliver an average 5 per cent growth consistently. We have to make heavy investments in what is known as rural infrastructure. Unfortunately, most of the money we have put into agriculture has gone into either support prices for grains or into meeting the storage costs of food stocks. Very little has gone into assets and in corporate parlance, these are basically P &L items. Things are changing. The rural roads programme will provide the necessary connectivity to the rural economy with the urban and overseas markets and the telecom revolution will ensure that modern technology can be used as a tool for flow of information. Irrigation and cold storage should see massive investments so that monsoons dont rule the roost and also to ensure that high levels of wastage do not take place.

We need to release the creative forces of the farm community and should cut through the maze of archaic laws that bind the sector. Some steps have already been taken for the creation of a national market for grains. Credit delivery should be improved and the risk levels should be minimised by aggressive insurance. All these step taken together should easily ensure a consistent 5 per cent growth even if the weather shows its feminine vagaries.

Another factor that can pull us back is the fiscal deficit. We are living in a fools paradise if we think that growth alone can solve the problem of fiscal deficit. Today we have an economy growing at 8 per cent cheek-by-jowl with a fiscal deficit that is around 10 per cent (if one considers the states and Centre together). This is a lethal cocktail and can turn into a major crisis. What happens in such a situation is that such a fast growing economy becomes a cash guzzler and the requirement of fresh funds keeps going up. After all, growth requires capital to sustain it. Cracks start developing in the low interest architecture and suddenly we find that interest rates are headed north. Government ends up paying more on its borrowings. Growth slows down and so do exports as competitiveness declines. The fiscal deficit increases and we are thrown into a vicious circle.

So, the second most important thing for us to do is to keep the fiscal deficit under check. This year a remarkable job has been done by keeping it at just 4.8 per cent. The deficit has the expenditure and income aspect to it and my sense is that reducing government expenditure dramatically is not going to be easy. That leaves us with the only option of increasing revenues. The tax to GDP ratio should be increased. It is one of the lowest in the world and is unacceptable by any yardstick. VAT should be brought in with safeguards against inspector raj as soon as possible. We are giving too much away in terms of tax incentives. These should be drastically pruned.

Action on just these two fronts will make the economy stronger and the growth sustainable. One is happy to note that even the Congress, which has been sniping away at the jobless growth, has stated in its manifesto that sustaining growth is the best away to create employment. The prospects after the elections are really exciting.

The author is a Delhi-based investment banker and Convenor of the BJP Central Economic Cell. The views expressed herein are personal. He can be contacted at pnvijay@vsnl.com