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Home > Business > Budget 2003-2004 > Report

Low growth shocks experts, soft Budget seen

Priya Ganapati in Mumbai | February 27, 2003 18:32 IST

Despite indications that India would see lower economic growth this fiscal, the actual figure of 4.4 per cent gross domestic product growth in 2002-03, has come as a mild shock to most economists.

The actual figures were indicated in the Economic Survey for the year 2002-03 presented in Parliament on Thursday.

The failure in monsoons has been singled out as the most significant factor for decline in the GDP.

This fiscal, India faced one of its worst droughts in a decade when rainfall shortage ranging from 30 per cent to near total failure affected 12 states of the 28 in the country.

The government announced emergency aid and food welfare programs for the affected areas and a quarter million Indians were expected to be affected by the drought.

As a result agricultural growth fell to 3.1 per cent from 5.7 per cent. Agriculture contributes to a little under 25 per cent of the GDP and is still a huge factor in the Indian economy.

The drought, coupled with unseasonal rains in November, led to a major drop in the production of agricultural goods, whose impact can be seen in the overall numbers.

"Agriculture forms a big part of our economy and there has been no investment in agriculture or infrastructure. The drought has led to a further drop in the numbers and this was only to be expected," says Rupa Chanda, associate professor of Economics, Indian Institute of Management, Bangalore.

The impact of the drought is also being seen in the food subsidies, which have risen by a massive 20.3 per cent to touch Rs 21,200 crore in 2002-03.

"The figures for the food subsidy are a little more than expected. But it is important to remember that we had a drought so a large part of the subsidy is going to be driven by welfare programs that are needed to tackle the drought situation," says Rajendra Vaidya, associate Professor at the Indira Gandhi Institute of Developmental Research in Mumbai.

While bad monsoons might be responsible for the high food subsidy bill this fiscal, economists say that the figures could be indicative of a deeper malaise in the system. Mismanagement of food stocks and a continuous increase in procurement prices are two of the problems that need to be tackled.

In the Economic Survey 2002-3, the government has suggested that the high costs of food subsidies has been mainly due to the increasing hike of the minimum support price for food grains and consequently an increase in the Centre's gain procurement over the years.

Though India Inc has remained upbeat about the resilience of the Indian economy to the poor monsoons, the Economic Survey's numbers have proved them wrong. A snap poll of chief executive officers conducted by the Confederation of Indian Industry in August last year, showed that 71 per cent of the respondents expected the economy to end a little below 5.4 per cent in 2002-03.

In the quarterly figures that poured in during the September-December period last year, the impact of the drought was not felt significantly and most thought that the Indian economy had finally developed a resilience to shocks from the agricultural sector. But the numbers released today has proved that wrong.

"If you look at data over a large period, the Indian vulnerability to monsoon has dropped. There is no doubt about that. But the extent of the drought and the untimely rains later in the year has contributed towards low agricultural output this year," says Vaidya.

The drop in agricultural production is also being seen as the reason for the expected increase in inflation. Inflation has been pegged at 4.4 per cent for the fiscal. Though experts say that the figure is not alarming, it certainly could have an impact on real interest rates and cost of goods.

Despite the low overall growth in the economy, there are a few bright spots peeking out. Increase in the Index of Industrial Production, services and exports are three of them.

Exports have growth by 20.4 per cent (April-December 2002) over the corresponding period. This healthy growth in turn is seen as having sparked off a rise in the IIP, which grew at 6.1 per cent from 3.3 per cent a year ago. Services have grown at 7.1 per cent this fiscal.

"Sales in the domestic market have been sluggish. So it is largely the booming exports that have induced the growth in the industrial sector. If the services sector is growing strongly, then it is good. I believe this growth is sustainable. We have to get over the idea of commodity as just a physical thing," suggests Vaidya.

Last year, saw an increased focus on the industrial and manufacturing sector with a plea from industry organisations like CII and FICCI to stem the decline in Indiafs manufacturing sector. The almost doubling of the IIP has, therefore, come as a pleasant surprise.

Though experts say that the 6.1 per cent increase in IIP is commendable, it is not enough to sustain growth in the GDP.

"The IIP is not healthy enough. If you want to look at 7-8 per cent growth in GDP, the IIP has to grow at over 9 per cent. Anything lower than that will drag down the GDP growth," says B K Pradhan, Principal Economist, National Council of Applied Economic Research.

The fiscal deficit is another number that worries Pradhan and his ilk. Fiscal deficit is expected to be at a target level of 5.3 per cent of GDP in 2002-03 as against 5.9 per cent a year ago.

Fiscal deficit in India has been a contentious issue, with India receiving downgrades from international rating agencies like Moody's.

"More than the GDP growth, the government right now needs to stick to the fiscal deficit target and work to bring it down. Some hard measures have to be taken on that front else it will send wrong signals to the world," says Pradhan.

The key question now though is how much can India afford a soft budget, which by all indications is what Finance Minister Jaswant Singh likely to present in lieu of the upcoming elections.

The overwhelming answer is that while the Economic Survey cries out for another round of reforms in the economy, it is unlikely to find a sympathetic ear in the government.

Consensus on divestment is expected to be elusive and labor reforms not likely to be implemented.

With the general elections next year, the finance minister is likely to stay away from introducing big reforms or even rationalizing the tax collection regime as suggested by the Kelkar report.

"The budget is unlikely to be a tough one. Everyone knows what needs to be done to improve the economic situation---increase the momentum on divestment, cut down subsidies, improve tax collection, go ahead with labor reforms. But will this be done? The answer is that it is unlikely. So, we can expect the growth next year to hover around the 5 per cent figure again," says Chanda.

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