| Whither the Economy |
A look back at the government’s report card for the last
fiscal ending March 2001 shows that the final deficit figure for 2000-01 has overshot the
revised estimates by just Rs 2,397 crore, not withstanding a hefty Rs 9,210 crore
shortfall in tax revenues. This has been due to a major expenditure compression by the
government. As a result, the fiscal deficit has been contained at 5.2 per cent of GDP,
representing a 0.1 percentage point slippage over the revised estimate of 5.1 per cent.
However, the underlying fact is that the problem has been postponed to the current fiscal,
with the figures for April 2001 showing a spill-over in non-Plan expenditure which stood
Rs 12,835 crore. With revenue collections lagging behind, the fiscal deficit was nearly 18
per cent higher than in April 2000. So, it seems that the problem has been rolled over to
this year.
With exports having registered a modest 5.5% growth in the inaugural month of 2001-02, as
against the sterling performance last year, and the fact that the economic growth has not
as yet kick started, things look grim for the coming year.
A recent NCAER – document - A Review of the Economy has said that the real GDP is
projected to grow by 6.3 per cent under the baseline scenario under which agricultural
output growth is 3.5 per cent, industrial output (includes mining but excludes power) is
set to increase by 7 per cent and services sector (including construction, public
administration and defence but excluding transportation) is projected to increase by 7.9
per cent. The overall inflation rate is projected to be 6.1 per cent in the baseline
scenario,lower than the 7.1 per cent experienced in 2000-01.
But these prospects critically hinged on the performance of monsoon rainfall. Though poor
distribution of the monsoon rainfall across different regions of the country during the
1990s was one of the reasons for the poor performance of productivity growth, the report
said the larger issues related to the slowdown in the technological development and public
investments in the agricultural sector which have led to the decline in productivity
growth had yet to be dealt with.
On industry, the report signaled a grim picture of slowdown in the different sectors of
the industry. However it pointed out that the expansion of telecommunication industry as a
result of regulatory reforms and rapid growth of the software services would help the
services sector grow on a significant scale. While the investment climate is likely to get
boost from the bold steps unveiled in the budget for 2001-02, the slowdown in the US
economy which absorbs 22 per cent of India's exports would cast "a shadow" on
the growth projections of the Indian economy.
The report said that though the need of the hour may have been to push aggregate demand,
an expansionary fiscal stance also has its flip side. The principal macroeconomic
constraint to softer interest rates remains the size of the fiscal deficit. The export
front looked dim as per the report. The salutary export performance of 2000-01, would not
be replicated during the current fiscal due to growth slowdown during the last quarters in
the US economy. And the distinct slowdown in India's non-oil import growth is "a
signal of sluggish performance in the domestic economy.''
Also clearly highlighted was the importance of a vibrant capital market in today’s
economy. The report says “the expectation of a recovery of growth rate in the economy
during the current fiscal is predicated on the effectiveness of the fiscal incentives or
an expansionary fiscal policy being able to revive the investment spending which has been
in the doldrums.” It emphasises that an early end to the stock market irregularities
and return of investor confidence will provide impetus to new investments. The report also
highlights that the revival of capital markets is linked both to the restoration of
investor confidence through implementing more transparent market mechanisms and a recovery
of industrial growth in the economy.
The report also mooted a reduction in tax rate with the reasoning that the real GDP
growth, fiscal deficit and overall price level in case of a reduction in corporate income
tax rate and increase in private investment would be equivalent to the tax relief. It
illustrated that reduction in tax rate by 10 per cent, and investment of this tax relief,
the real GDP would increase by 0.36 per cent. Inflation rate would be greater by 0.19
percentage points but fiscal deficit of the Central Government as a percentage of GDP
would decline by 1.5 percentage points. This fiscal stimulus would provide the source of
additional demand and hence output growth. The resultant estimated impact would increase
investment by about Rs 3,000 crore.
The overall growth engines for the economy as surmised by the report hinged on
infrastructure provision by the government and the investment zeal of the entrepreneurs.
Aru Srivastava
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