Self deception over economic fundamentals

By Prem Shankar Jha

In recent weeks the country has heard a chorus of acclamation from widely divergent quarters for the performance of the Indian economy. The Confederation of Indian Industry led it off with a statement that the fundamentals of the economy were sound. Mr. Yashwant Sinha, whose Economic Survey and budget speech had painted a grim picture of the economy only two months ago, joined in the chorus. And, most surprising of all, the International Monetary Fund endorsed this claim. Admittedly not with too much enthusiasm, but an endorsement nonetheless. This is a vast concerted exercise in self deception. The truth is that the Indian economy is locked in the grip of stagnation and no one has the courage to take the steps needed to break this grip and start it moving once more.

At first sight everything does look rosy. The Central Statistical Organisation has predicted that the economy will grow by well over 6 per cent this year too. That means that India will have maintained a growth rate of around 6.5 per cent throughout the decade after the economic crisis of 1990-92. Can there be a heartier endorsement of the success of the economic reforms? Inflation too has remained moderate - 4.89 to 5 per cent in April. This is a full 2 per cent below India's historical rate of inflation. Exports increased last year by almost 20 per cent - 2 per cent more than the Government had targeted. The trade deficit has, therefore, remained under control. The foreign exchange reserves are healthy at well over $42 billion, and rising.

It is only when one looks more closely that the phoniness of this assessment becomes apparent. Let me start with the most obvious piece of self-deception. Our reserves are not genuine. On the contrary, more than nine tenths consists of borrowed money. At the end of last year, foreign currency reserves amounted to $37 billion and gold and SDRs to another $2.98 billion. Of this, vulnerable liabilities, that is, money that is fairly mobile and can leave the country at short notice, added up to $36.1 billion. These consisted of foreign institutional (portfolio) investment - $11.237 billion.; NRI deposits $13.365 billion and trade credit and short term debt $11.454 billion. But the so-called vulnerable liabilities do not reflect the true vulnerability of the rupee to a sudden loss of confidence in the Indian economy. For, in addition there were also $9.7 billion of NRI deposits of less than one year that are not counted in the reserves, but whose sudden outflow could bring the rupee down and start an exchange crisis without any change in the apparent reserves. If one adds this to short term debt and trade credit, India's short term debt was $21.1 billion. This was almost 60 per cent of India's total foreign currency reserves - a dreadfully dangerous figure.

The low rate of inflation is also deceptive, because it is far too low. As the Economic Survey had pointed out, if one removed the rise in fuel prices, the "core" rate of inflation was only 1.5 per cent in 1999 and 2.4 per cent in 2000. In India, these figures reflect a serious slump in demand and the prevalence of recession.

In the last four months every indicator has shown that the industrial recession is deepening. In February, industrial production grew by only 0.8 per cent over a year earlier. This was the lowest increase recorded since the nil growth of September 1999 and second slowest growth since the severe contractionary phase of economic reforms in 1992. This continued the steep curve of decline that began in December when the Index of Industrial Production grew by 3.3 per cent (against 7.4 per cent in November) and January when it grew by 4.4 per cent.

Even these year-on-year growth rates are misleading. In absolute terms the index of industrial production fell from 171.6 in December to 170.4 in January and much more steeply to 162.6 in February. Consumer durables have been the hardest hit. While car and two-wheeler sales have fallen by 6 to 16 per cent, colour TV sales have fallen by 30 to 50 per cent for various companies. Even Samsung, the Korean giant, has been forced to cut production sharply and produce only against firm orders.

The slowdown is reflected in a similar decline in inflation. After hitting a peak of 8.6 per cent in the first week of February, the inflation rate, measured by the wholesale price index, has fallen to 4. 87 per cent in the first week of April and 4.94 per cent in the second. This fall reflects the fact that the economy has absorbed the impact of the fuel price hikes the Government had announced in November last year. But the year-on- year comparison is once again deceptive and if one excludes fuel prices the core rate of inflation has remained virtually static. The Wholesale Price Index was 157.8 in October 2000. Despite the petroleum products price hike it has risen to only 159.2 in the first week of April this year.

The only way to break the grip of stagnation is to bring down the Government's unproductive spending and invest the saving in the development of infrastructure. But it is already becoming clear that the loosening of the NDA alliance has impaired the Government's capacity to enact the structural economic reforms needed to do this. Two of these - the drastic reduction of food procurement and the amendment of the Industrial Disputes Act to permit the retrenchment of workers in factories with fewer than 1,000 workers - are almost certain to face rough weather. Trade unions have already organised a series of strikes against the latter. This is bound to strengthen the resolve of the Congress party to oppose economic reforms tooth and nail, a decision that its leadership took at their Bangalore meeting in March after the Tehelka exposes hit the streets. Unfortunately for the Vajpayee Government, the voting system for the upper house of Parliament, the Rajya Sabha, has ensured that the NDA does not have a majority in it. As a result, the BJP leaders know that they cannot enact any important structural reforms without the support of the Congress.

What is more serious, faced with a bumper wheat crop of almost ten million tonnes, the Punjab Government has already instructed its procurement agencies to buy up all the foodgrains that the farmers offer at the current support price. This price too has been raised, against all market trends, by around 5 per cent. To whom Punjab will sell this wheat, at what price and what loss, and how will a Government already unable to pay its civil servants will meet the additional loss is something that its chief minister has preferred not to reveal, but what he will do is no secret: if the Centre refuses to buy the surplus wheat of his government, he will threaten to pull out of the NDA.

While further structural reform is in danger of being stymied, one reform of the past - the privatisation of power generation - seems to be going into reverse gear. Enron, the first and biggest private investor in power, is trying to pull out of India altogether and is looking for someone to buy up its $900 million stake in the Dabhol Power Corporation in Maharashtra. Enron has come to this decision because of the Central Government's refusal to honour its counter-guarantee to Dabhol that if the Maharashtra Government does not pay its bills, the Centre will.

The, the root cause of the dispute - Maharashtra's absolute refusal to charge an economic price for the electricity it sells and its simultaneous refusal to let private power producers sell power themselves - is the norm in India. It is, therefore, not surprising that in 13 other private power projects with a generating capacity of 6,275 MW, the promoters, all but one of whom are Indians, have obtained all the necessary permissions, but have not invested a penny so far. This has forced the financial institutions to cancel their loans to 10 of them. More defaults will doubtless follow.

Today, India faces a future without real growth, without job creation and without the courage to do the one thing that could set it all right. The country is drifting towards crisis and the price it will pay next time to be baled out by the IMF will be entirely political.

Send this article to Friends by E-Mail

Section  : Business
Previous : FICCI seeks more reforms on urban coop banks
Next     : Kazakhstan keen to strengthen ties with India