Urgent need for downward rupee adjustment

Updated: Feb 6 2002, 05:30am hrs
The year 2001-02 has been characterised by a fairly depressing macroeconomic scenario. Real GDP growth rate during the first half has been below 5 per cent, industrial growth rate has been below 3 per cent, performance on the export front has been poor, the primary equity market is in a bad shape and the fiscal position has deteriorated. The brighter side of the picture consists of the sharp decline in the inflation rate, improved agricultural performance and softening of international crude oil prices.

The agenda for second generation reforms proposed in the last budget has not been implemented yet. Thus, our concerns relate more to the internal situation rather than the external position as our balance of payments is quite healthy.

The main factors behind inadequate export performance seem to be the appreciation of real effective exchange rate (REER) and major infrastructural bottlenecks. REER has appreciated by about 3 per cent during March 2000 to November 2001. Given the global scenario and the recession at home, what is required is a depreciation of the rupee in real terms. There is an urgent need for a downward adjustment in the rupee by about 5 per cent by March 2002.

The peak rate of customs duty should be brought down by, at least, 5 per cent and preferably by 10 per cent. A 5 per cent cut in peak rate would lower overall average rate of customs duty by about 2 per cent, while 10 per cent cut would reduce it by about 5 per cent. However, with 5 per cent depreciation of the rupee, the actual protection enjoyed by industry would remain the same even if the peak rate is reduced by 10 per cent.

The share of capital expenditure in total expenditure has been steadily falling from over 22 per cent in 1998-99 to around 15 per cent. In the current year, there has been practically no growth in capital expenditure during the first nine months. The budget should aim at restoring the capital expenditure to total expenditure ratio to the level of 22 per cent in 1998.

Similarly, the share of revenue deficit in fiscal deficit has been steadily rising. Earlier, the revenue deficit used to account for about half of the fiscal deficit. Now it accounts for almost three-fourths. It is necessary to reverse this trend and bring down the revenue deficit to fiscal deficit ratio to below 50 per cent. To restructure and control fiscal deficit, it is necessary to downsize government in accordance with the recommendations of the Expenditure Reforms Commission and accelerate the divestment pace.

There is considerable scope for reducing food subsidy by optimal inventory management of foodstocks and better targeting of PDS.

Rationalisation of direct taxes has been a long pending item on the reform agenda. Majority of the exemptions granted in personal income tax (I-T) should be removed and simultaneously the tax rates should be cut across the board by 5 per cent, with the three I-T rates being 5 per cent, 15 per cent and 25 per cent. There is also a need to raise the I-T exemption limit.

There is a need to step up public investment in agriculture and corporatisation of agriculture needs to be encouraged.

(The writer is Professor of Economics, Indian Institute of Management, Ahmedabad)