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In a
pre-election propaganda move, the NDA government has taken
credit for spurring an economic boom by managing
everything-from the monsoon to the speculative appetite of
foreign institutional investors. The Mid-Year Economic
Review, released by the Finance Ministry on 14
November 2003, paints a hyped-up picture of an economy
ostensibly on the roll, and promises more if the reforms
are kept on track.
As the media has been quick to note, the timing of the
document's release, besides its content, establishes the
real motives of its authors. The Fiscal Responsibility and
Budget Management Act (FRBMA) enacted earlier this year
requires the government to place before parliament a
quarterly report on receipts and expenditures, as a means
to monitor the government's efforts at realizing the
inexplicable fiscal targets it has set for itself. The
first of these (relating to April–June) was placed before
parliament on 7 August. So it is indeed time for the
second. But neither is the quarterly report meant to be a
major event in the government's reporting calendar, nor is
it expected to be released to the public if the parliament
is not in session, as is the case at the moment. This
lends credence to the view that it is not the FRBMA but
the impending elections in a number of states that have
encouraged the government to stick to the reporting
calendar. Using the FRBMA's mandate and a badly formulated
excuse that 'a pathological report' cannot wait, the
Finance Ministry has chosen to contribute to the ruling
coalition's election effort by rushing to the press with
this document.
There is much that the Finance Ministry has dredged up to
crow about. GDP, it claims will grow by 7 per cent this
financial year (2003–04) as compared with 4.4 per cent the
previous year. Inflation, which was a threat at the
beginning of the fiscal, having risen to 6.6 per cent in
April, has since shown signs of decline and is predicted
to rule at just 4 per cent over the financial year.
Mid-year results reported by a number of leading
corporates point to a year of higher profits. Above all,
India's foreign exchange reserves have risen by $17.2
billion during April–October to a record $92.6 billion,
despite outflows of $5.18 billion on account of redemption
of the Resurgent India Bonds.
While some of these figures may be in the nature of
optimistic projections, they are more or less in line with
what other agencies like the Reserve Bank of India have
put out in recent times. The hype lies in the
interpretation that has been put on them. Explanations for
the current upturn in the graph of economic performance
are not difficult to find. The year ending October 2003 is
best characterized as one of transition from a
drought-induced slump in the principal commodity-producing
sectors of the economy to a situation of modest
across-the-board revival. The agricultural marketing year
2002–03 saw a sharp fall in kharif output from 112 to 91
million tons, and in rabi production from 101 to 92
million tons. A poor monsoon during June–September 2002,
when rainfall was 19 per cent below normal, is apparently
the principal explanatory factor.
One remarkable feature of this period is that, unlike in
the past, a monsoon as poor as this, with its attendant
effects on output, did not impact too adversely on prices.
The most immediate explanation for this is of course the
large grain stocks with the government, which helped
ensure that supply was well in keeping with demand. These
stocks, however, have been attributed by many economists
to inadequacy of purchasing power resulting from an
overall deflationary environment during the latter half of
the 1990s, when the hopes of a 'new growth trajectory'
promised by the reformers were belied
It is against this background that the signs of a recovery
in growth over the last year have been received with some
relief. But the recovery has been hesitant and far too
slow to realize the 8–9 per cent growth targeted by the
planners. Despite the fact that rainfall figures pointed
to a gradual end to the drought starting October 2002 and
the fact that the monsoon during June–September was
extremely good, with excess rainfall in more than 90 per
cent of the subdivisions, the rise in agricultural
production has been limited. The revival in kharif
production in 2003–04 by 20 per cent, to a projected 108.5
million tons is still below the level attained in the
2001–02 season. Based on optimistic estimates of what the
rabi crop will be, the Review expects foodgrains
production in 2003–04 to surpass its previous high of 212
million tons achieved in 2001–02. But even that does not
imply that the trend rate of growth over time will
be significantly raised.
Further, thus far the good monsoon has not provided much
of a stimulus to industrial growth. The most recent IIP
figures suggest that industrial growth during
April–September was only 5.8 per cent, while the
manufacturing segment has recorded a marginally higher 6.3
per cent growth. If corporate earnings have been buoyant
despite this, it is primarily because of the 'other
incomes' of corporates, possibly derived from their
treasury operations.
Overall, however, there is some evidence to corroborate
the assessment of a revival of growth in recent months.
The quarterly estimate of GDP (at factor cost) relating to
the first quarter of financial year 2003–04 released by
the CSO suggests that the quarterly growth, which stood at
2.3 and 4.9 per cent, respectively, during
October–December 2002 and January–March 2003, rose to 10.5
per cent during April–June 2003. While these figures are
provisional, they do suggest that the monsoon-induced
agricultural recovery and the modest industrial revival
suggested by the IIP must have combined with some dynamism
in services to help the GDP along.
The government has been arguing that there are pieces of
indirect evidence to suggest that industry too is turning
buoyant. Growth in the capital goods sector has picked up
sharply. And much is being made of the recent signs of
buoyancy in India's imports. Despite trade liberalization,
India's import growth in recent years, especially of its
non-oil imports, had been subdued, largely as a result of
the sluggishness of growth in the commodity producing
sectors. However, recently released figures indicate that
India's imports during the first quarter of fiscal 2003–04
stood at $17.3 billion, the highest in a decade. In fact,
since the third quarter (October–December) of fiscal
2002–03, imports have been growing at over 20 per cent
relative to the corresponding quarter of the previous
years. Since such high and sustained import growth rates
were last seen in the mid-1990s, this rise in import
growth is being attributed to the revival that the economy
is witnessing.
As a result of the higher imports, the trade deficit has
already touched $6 billion for the first five months of
fiscal 2003–04, and the first quarter of that fiscal year
has seen a current account deficit of $1.2 billion against
a $4.1 billion surplus for 2002–03. Under different
circumstances, this would have been a cause for some
worry. But the revival that it is seen as signifying has
been received with some celebration, as it is associated
with three other signs of ostensible 'robustness' of the
economy.
First, there was a sharp rise in the inflow of foreign
institutional investor capital that touched record levels
and established India as a favourite among emerging
markets. Even by 30 September this year, FII inflows at
$3.09 billion had exceeded their previous full-year peak
of $3.058 billion recorded in 1996. What is more, the
evidence suggests that inflows are accelerating, with net
inflows in October exceeding $1 billion, which is the
highest for any single month since Indian markets were
opened to these investors.
Second, there was an unusual strengthening of the rupee,
especially vis-à-vis the dollar, leading to a situation
where exporters and even the government have started
worrying about the adverse impact this would have on the
competitiveness of India's exports and the size of the
balance of trade deficit. The export growth in dollar
terms during April–September has fallen from 18.1 per cent
in 2002 to 10 per cent in 2003. The recent surge in
foreign capital flows to India, at a time when India's
need for foreign exchange to finance its current account
deficit was minimal, has obviously been responsible for
this. In the more liberalized foreign exchange management
system introduced post-liberalisation, wherein the
availability or supply of foreign exchange relative to the
demand for the same has a role in determining the exchange
rate, this has led to an appreciation in the value of the
rupee relative to the currencies of its trading partners.
Between 8 November 2000 and 10 October 2003, the exchange
rate of the rupee vis-à-vis the dollar rose from 48.34 to
45.38, and from 47.87 to 53.12 vis-à-vis the Euro. A
sudden appreciation of the rupee renders exports more
expensive and imports cheaper. This could result in
sluggishness in export growth and an increased demand for
imports, leading to a widening of the balance of trade
deficit, a process of domestic deindustrialization and a
subsequent weakening of the currency that may be difficult
to halt because of panic withdrawal by foreign portfolio
investors.
Third, to prevent such developments, the Reserve Bank of
India has been forced to purchase dollars from the market
and adjust the imbalance between the demand and supply for
foreign exchange in order to reduce the pace of
appreciation of the rupee, even if not to reverse the
process. The consequence has been a massive acquisition of
foreign currency by the central bank, which resulted in
record foreign exchange reserves, in excess of $90
billion, by mid-October 2003.
The government's 'feel-good' propaganda blitz, reflected
in the Mid-Year Review, is driven more by these
factors than the modest revival in the commodity producing
sectors. However, it should be clear that these signs of
'buoyancy' are double-edged in nature. While the
nationalist sentiment may be buoyed by a stronger rupee
and a large foreign reserve, indications are that these
financial successes have not translated into real growth;
that India is finding it difficult to 'absorb' the huge
inflow of speculative portfolio investment into the
country; and that there is a danger of the rupee's
appreciation having adverse balance of trade and growth
effects. All of these could result in a rapid change in
the international financial investors' view of India, from
being today's favourite to tomorrow's feared destination.
But such caution is hardly material to a document seeking
to paint a pretty picture of the economy prior to a series
of elections.
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