The Hindu : Euphoria over growth prospects

Online edition of India's National Newspaper
Monday, Mar 08, 2004

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Euphoria over growth prospects

The high rate of inflation has been causing anxiety to the Planning Commission and the Union Ministries as it is feared that an accentuation of inflationary pressures may get reflected in an undue rise in the cost of living.

THE GROWTH in gross domestic product by 8.9 per cent in April-December 2003 and the expectation of a rise under this head by over 8 per cent for the whole year have given rise to euphoria in Government and Planning Commission circles about the outlook for the economy in the coming years.

The Reserve Bank governor also is confident that the rise in GDP will be 8 per cent and 2004-05 too will be satisfactory with growth likely to be 8 per cent again.

While the changes in GDP in the past decade and more indicate that a satisfactory rise can be ensured only if the agriculture sector shows robust growth, a view is now held by Kelkar and other economists that the future engines of growth will be the industrial, services and petroleum sectors. The happenings in these three sectors have, of course, been heartening recently though sustained growth can be expected only over a period. This is because any sustained growth in demand for goods and services can come only with rising incomes in semi-urban and rural areas.

While a definite view of the growth outlook will depend on developments in 2004-05, the question now being asked is whether an increase in GDP by 8 per cent plus is possible in 2004-05 even if the yield of food and cash crops cannot be raised substantially over the record levels of the 2003-04 season. It is , however, not clear how the bumper food and cash crops this year have been absorbed as there has been no noticeable decline in prices for primary products.

Concern over rising inflation

It is necessary, however, to point out that the absence of any significant drop in the inflation rate is due to the prevalence of high prices for crude and petroleum products in world markets and an upsurge in prices for steel, aluminium, copper and even cotton.

Notwithstanding a steady rise in production of steel and base metals and a higher output of cotton, prices have risen because internal demand is rising and export prospects have improved. The situation can get corrected only if there is a softening trend in world prices for related products and a reduction in import and excise duties.

The Central Government has facilitated a drop in prices for steel with adjustments in import and excise duties.

The price situation may stabilise at reasonable levels in the coming months if the agricultural sector performs again creditably in the new season.

Major developments in petro sector

In the petroleum sector, the growth in refining capacity has taken place on ambitious lines and the emphasis is now on enlarging the marketing network. At the same time, the find of huge reserves of natural gas in the Krishna Godavari basin and in the offshore areas of Gujarat will facilitate a reduction in the use of petro products for the manufacture of fertilizers and petrochemicals. The prospect of a big increase in supplies of LNG from indigenous sources and the arrangements for importing huge quantities have been responsible for foreign entrepreneurs setting up huge terminals and laying pipelines over long distances.

Reliance Industries, for its part, has grandiose schemes in this regard and it is visualised that the huge quantities secured from the Krishna Godavari basin will be transported through pipelines and power projects based on this gaseous fuel can have huge capacities in the next five years. Efforts are also being made to execute hydel projects and coal based thermal stations by entrepreneurs in the public as well as private sectors.

In other core sectors too, huge capacities are proposed to be created with debottlenecking and improvement in productivity.

Similar trends have been witnessed in the consumer electronics industry with foreign interests entering the fray in a big way. The pharmaceutical industry is endeavouring to take advantage of the unlimited potential for growth. But here, it is the Indian segment that has been active. With success in inhouse research, the range of products is getting widened facilitating an increase in output and sales. The research facilities are also sought to be utilised by MNCs. But there is a big gap in the industrial sector with the output of computer hardware not being adequate to meet a burgeoning demand. Actually, with boom in sales of mobile telephones, passenger cars and electronic products, the expanded facilities are proving to be useful.

However, it has become necessary to import increasing quantities of telecommunication equipment, components and parts for other industries and computer hardware in spite of the bulging order books of Larsen and Toubro, Siemens India, Bharat Heavy Electricals, ABB and other manufacturers of plant and machinery. Non-oil imports have risen by 28.26 per cent to $45.29 billion in April-January 2003-04 from $35.31 billion comparably.

As there has also been a larger outgo in respect of oil imports — to $16.64 billion from $14.36 billion — the trade deficit has nearly doubled to $14.43 billion from $7.57 billion, even in the face of an increase in exports by 12.83 per cent to $47.50 billion from $42.10 billion. While efforts have to be made to reduce dependence on imports of computer hardware, the larger trade deficit should not cause anxiety, as it is developmental in nature and can be easily bridged with rising invisible receipts.

No dearth of forex and rupee resources

The new developments in important segments of the industrial economy should be helpful in minimising dependence on agriculture for raising GDP on a stipulated basis. But there will have to be integrated and balanced growth of the economy for achieving optimum results. Fortunately, there has been no dearth of financial resources in foreign exchange and rupees. The financing of projects in the telecommunication, automobile and software sectors has not been difficult as foreign investment has been sizable in the telecommunication and automobile industries while software companies have been utilising internal resources.

Active secondary and primary market

The active functioning of the secondary and primary markets also has helped in mobilising the required rupee resources for ambitious schemes in the form of equity capital as well as owned funds. There is also no dearth of forex resources, as the reserves are growing as never before and the inflow of foreign direct investment in select directions has been increasing latterly.

It is estimated that the resources secured by various promoters in the form of public and right issues will be over Rs.60,000 crores in a year. Also, loans in foreign exchange and rupees can be obtained at low interest rates.

With the augmentation of the pool of resources following the use of participation notes and the success of the Centre in its effort to mobilise nearly Rs. 15,000 crores for achieving the target under the disinvestment programme, the response to entirely new issues has been encouraging. It is noteworthy that the dilution of ownership in ONGC by the Centre has been a signal success, as the issue was oversubscribed within one hour on the opening day.

With these favourable developments, industrial growth can be pushed up at the desired rate and the secondary and primary markets will probably be entering a new phase of hectic activity after the outcome of the elections to the Lok Sabha and four State Assemblies becomes known.

P. A. Seshan

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