The word had been going around for some days. It's more than your standard review of the economy, stating what everybody knew but were just waiting to reconfirm.The economy is in worse shape than expected with the growth rate decelerating to 5 per cent for 1997-98 - substantially lower than the 7.5 per cent marked in the previous year - public finances in a mess with fiscal deficit having slipped drastically to 6.1 per cent of the GDP from a targeted 4.5 per cent and exports are sluggish. What you knew.Here, breaking convention, the Economic Survey for 1997-98 becomes a statement of purpose as much as a realistic review of the economy. It combines points from the National Agenda for Governance of the BJP-led coalition, and the renewed, reworked pro-reform statements that have characterised the past two weeks since India's nuclear tests. A blueprint for the economy before the budget.The survey sets limited options for getting the economy back on a growth path of 7-8 per cent per annum. For instance, it emphasises - surprise, surprise - that the share of foreign capital in total capital flows "must be raised". On slowing industrial growth and exports, it holds a relatively strong rupee partially responsible and argues for a market-determined rate. It acknowledges how there is "enormous scope" for scaling back hidden subsidies to fix a fiscal balance. "The analysis is correct, the target instruments have been correctly identified," says Surjit S. Bhalla, President, Oxus Research and Investments. "Now they have to get their delivery right."Economic Reforms Where are we now?The survey acknowledges that reforms have helped - the average growth rate of the economy rose from 6 per cent a year in the Seventh Plan (1985-90) to 6.8 per cent in the Eighth Plan (1992-97), but while worrying about the current slowdown, it correctly records that reforms have yet to touch the entire economic fabric of the country.It's scathing too, on problems like red tape. Assuming a tone normally reserved for manifestos, for instance, it quotes a high-level government committee from 20 years ago which had recommended replacement of controls and licences by fiscal and other indirect policy instruments. While there has been progress, it says the "controls mindset remains influential" and "inspector raj continues to flourish".The survey has identified some other key problem areas besides infrastructure, exports and fiscal imbalances:.preferred-source-banner{ margin-top: 10px; margin-bottom:10px;}Agriculture, which is suffering from falling investment. During the Eighth Plan, 18.7 per cent of total investment was to be ploughed in this sector, only 11 per cent was, and it's affecting food-grain production. In 1997-98, production was more than 5 million tonnes lower than the previous year's peak of close to 200 million tonnes.Fiscal prudence of states. They are responsible for much of the infrastructure (irrigation, electricity, roads, and so on) and human capital formation (among other things, education and basic healthcare). But because of their populist pattern of spending, they don't have enough left for real development expenditure.Capital markets have not responded despite several initiatives by SEBI. The transparency and accountability of listed companies as well as those of intermediaries need to be improved.Public Finance How severe is the problem?The situation has deteriorated to such an extent that today half the total revenue inflow is getting consumed in just interest payments on old debt.There is no fixed rule about the level of fiscal deficit appropriate for an economy. But benchmarks exist for developed economies. The European Union, for instance, has said it will not admit any member country which has a fiscal deficit in excess of 3 per cent of its GDP.They have a point. In India, higher levels of deficit are beginning to constrain growth because they are forcing higher government borrowings. This, in turn, is pushing interest rates and dissuading private investors from borrowing. The survey points out that "the slippages ... could dampen the recovery of private production and investment and constrain the pace of financial liberalisation".With expenditure needs growing - defence will need higher spends while the economy is awaiting a cash injection with an increase in public spending - and revenue collections unlikely to bounce back until the economy recovers, the Government needs to take some hard decisions. The survey points to pruning hidden subsidies which,unchecked, could grow to a mammoth Rs 24,000 crore this year, as a way out. But that calls for political will, something which previous administrations lacked. And this one can't afford to follow."These may be politically difficult decisions," says Rakesh Mohan, director-general, National Council of Applied Economic Research. "But reforms are today at a stage where such decisions cannot be avoided any further." Foreign CapitalIs it necessary for recovery?It always helps, though the Government, till a few weeks ago, projected a contrarian view. It's a refreshing, realistic change of stance.And the first clear official acknowledgment - the survey is scripted by the Ministry of Finance, not the RBI - of the role of foreign direct investment (FDI). As the survey states, "Capital flows in the form of direct foreign investment inflows have been a major strength ... of the balance of payments in recent years."Common Sense Says ...Rupee Value: "Essential to maintain a market-responsive" rate. RBI won't unduly prop rupee.Foreign Investment: "Most stable form of capital flow." Flows to be increased, bury the who cares jingoism.Subsidies: Scope for "effective strategy of cost recovery through user charges for non-merit services." Target hidden subsidies, re-focus others.PSUs: "Reform inefficient public organisations and projects to generate hope for a more productive future." PrivatiseRecognising that FDI can help bring in new technology, techniques and practices into the Indian economy, the document recommends greater simplification of procedures. The potential is enormous. For, the rate at which FDI approvals are getting translated into inflows is still only a fifth of all cleared projects, and India's share of the total FDI inflows in developing countries, worth $119 billion (Rs 476,000 crore), is just over 2.2 per cent.Such inflows assume greater significance with poor showing on the export front. More FDI will make external debt management easier."The focus is on external variables, which is not surprising with the sanctions and the South-east Asian crisis," says S.P. Gupta, Chairman of the Society for Social and Economic Transition. "So the survey is being pragmatic in assessing the role of FDI."It will help, as lately, investors have not been enthused. Total inflows fell by more than $1 billion (Rs 4,000 crore) to short of $5 billion (Rs 20,000 crore) in 1997-98. Foreign Institutional Investors backtracked even faster. Portfolio inflows from them dropped from almost $2 billion (Rs 8,000 crore) in 1996-97 to $752 million (Rs 3,008 crore) last year, in part because of the South-east Asian currency turmoil. This exerted its own pressure on the depressed sentiments in the capital markets and in turn on economic revival. If the economy is to crank up again, this budget and related policy initiatives that follow will have to ensure the tide turns.Published By: AtMigration Published On: Jun 8, 1998--- ENDS ---
