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Economic Survey 2005-06: Disregard of the Downside

Disregard of the Downside The authors of the Economic Survey 2005-06 seem quite excited and elated; in some places, they seem to have lost self-control. Plainly speaking, they seem intoxicated in the act of painting the Indian economy in flying colours. As they put it, the economy has finally displayed a

ECONOMIC SURVEY 2005-06

Disregard of the Downside

T
he authors of the Economic Survey 2005-06 seem quite excited and elated; in some places, they seem to have lost self-control. Plainly speaking, they seem intoxicated in the act of painting the Indian economy in flying colours. As they put it, the economy has finally displayed a “robust demonstration of its nascent strengths”. They go on to say that a growth rate of more than 8 per cent of real gross domestic product (GDP) has “been achieved in only five years of recorded history, and two out of these five in the last three years”. Is this just the case of “the economy is doing well; the people are not”?

The reference is to the Central Statistical Organisation’s advance estimate of the growth rate of GDP (at 1999-2000 prices) in the current financial year of 8.1 per cent and the provisional estimate of 8.5 per cent growth in 2003-04 when

Economic and Political Weekly March 4, 2006

India was apparently shining but the people were not. Taken together with the quick estimate of real GDP growth rate of

7.5 per cent in 2004-05, and the step up between 2003-04 and 2004-05 of the gross domestic savings and capital formation rates (as a percentage of GDP) from 26.5 per cent and 25.3 per cent, respectively to 29.1 per cent and 30.1 per cent, respectively, the government discerns “the beginning of a new phase of cyclical upswing in the economy from 200304”. Further on, the Survey believes that the “virtuous cycle of growth and savings…is likely to continue for some years to come”. It goes on to predict that the investment rate is set to attain the heady level that countries of the east Asian “miracle” had “during their take-off stage”. If the mandarins in the finance ministry are to be believed, the Indian economy is now on its way to achieving “growth rates close to the rates observed then in the east Asian countries”. Now, one can grant the top functionaries of the government the need to pat themselves on the back, but to lose one’s intellectual autonomy and attribute the creditable performance of the Indian economy on the growth front to fiscal prudence is going too far.

What’s worse, the attempt to link the more than 100 per cent increase in the BSE Sensex over the last one and a half years or so (the Sensex crossed the 10,000 mark on February 6 this year) with the so-called cyclical upswing of the economy from 2003-04 borders on deception. Stock markets can go into an upward or downward tizzy irrespective of whether the real economy does well or not. The figures of net inflows from foreign institutional investors from 2003-04 onward seem to suggest that foreign portfolio investment has played a major role in the present stock market boom. The neoliberal foreign portfolio investment policy changes around the 2003-04 union budget of the BJP-led government, buttressed further by the present government on its assumption to office in 2004, seem to have done the trick. India was made a tax haven for capital gains from listed equity. Besides, the equity capital caps that FIIs were subject to were eased, hedge funds got a freer rein, sub-accounts were permitted, and the derivative instrument of the participatory note, sufficiently opaque, was resorted to, much to the liking of those who otherwise cry hoarse about the government’s lack of transparency.

Foreign portfolio investors need to be pampered if they are to place even a fraction of their portfolio in an underdeveloped open economy. Earlier, the real interest rate was high not because of the high fiscal deficit, as the economic doctrine of the World Bank and the IMF would have us believe. Having chosen financial openness, the conduct of Indian monetary policy is constrained by what the US Federal Reserve does in that realm. The interest rate is a monetary phenomenon, and the practice of monetary policy kept it high, that is, high enough to maintain an interest rate differential to offset higher financial risk and expectations of depreciation in the real exchange rate. The present high real GDP growth rate is driving the high growth rate of imports of capital and intermediate goods, as well as upper-end consumer goods. Export earnings presently finance much of this; albeit, the trade deficit is huge, cushioned though by private transfers and non-factorial services export earnings. But, what if the growth of exports falters?

In a heady mood, the Survey authors seem to disregard the possibility of a downside. With an advance estimate of a 2.3 per cent growth in agricultural real GDP in the current financial year, compared to the quick estimate of 0.7 per cent in 2004-05, they seem to take a rather complacent view of the problems of agriculture. Agricultural GDP, which had grown at 3.1 per cent per annum during 1980-81 to 1995-96, witnessed a sharp deceleration thereafter. The setback to agriculture is not merely a result of supply-side factors related to input use and productivity, but is also due to low growth in demand; real per capita food consumption declined after 1998-99 despite the fall in relative food prices. What needs to be done? The Survey seems to have nothing to offer over here. It reports a sizeable increase in the outstanding credit balances to agriculture. But the question needs to be posed as to how much of institutional credit has actually been disbursed to small and medium peasants. Going by the agrarian distress still prevailing, most of them may not even have access to institutional credit.

EPW

Economic and Political Weekly March 4, 2006

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