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Rapid economic growth despite paradoxes

The harsh impact of higher crude prices may be overcome in a year or two

THE OUTLOOK for the economy for 2005-06 and subsequent years is viewed with confidence by P. Chidambaram, Union Finance Minister and Dr. Y.V. Reddy, Governor of the Reserve Bank of India, despite soaring world crude prices and no indication of the reversal of the uptrend in the immediate future. It is inexplicable that the demand for crude oil has remained unsatisfied, notwithstanding the claim by members of the Organization of Petroleum Exporting Countries (OPEC) countries that they have been maximizing their output and currently the world supply is stated to be in excess of total consumption by one million barrel daily.

There is, of course, a queering effect of the severe damage caused to oil producing centres in the Gulf of Mexico region due to a severe hurricane. It has also been emphasized in the latest Annual Report of RBI that the world oil situation gives cause for serious concern and the significance of fresh developments has to be carefully assessed, as inflationary pressures may get accentuated, if fresh adjustments in petro-product prices have to be effected.

Centre's halting decisions

The United Progressive Alliance (UPA) Government had been delaying its decision about fresh upward adjustments in ex-refinery prices for gasoline and High Speed Diesel Oil (HSD). However, with world crude prices hovering around $65 a barrel, after touching a peak of over $70 per barrel and the need to minimize the burden of subsidies on the public sector enterprises, ex-refinery prices for gasoline and HSD have been raised, while those pertaining to Liquefied Petroleum Gas (LPG) and kerosene for supply through fair price shops remain unchanged.

Pressure on resources

The Union Finance Ministry is obviously disinclined to reduce further excise or import duties, as its finances are already under severe strain due to mounting non-plan expenditure and the compulsion to avoid a reduction in the allocations for plan schemes. The Quarterly Review of the Union Finance Ministry tabled in Parliament recently indicates that the fiscal and revenue deficits are in excess of the Budget estimate on an adjusted basis, even though tax collections have been quite impressive, with the receipts from corporate tax particularly, being highly encouraging.

Boom in bourses

Since these paradoxical trends are expected to be transitory in nature and the fundamentals of the economy are sound, the Reserve Bank has estimated that the gross domestic product (GDP) will grow by 7 per cent in 2005-06 and the inflation rate may be around 5.0-5.5 per cent. It has also been announced by the monetary authorities that interest rates will remain unchanged and that there is high liquidity in the economy.

These assessments and the exuding confidence of FIIs and others have obviously been responsible for the sustained boom in bourses and the inflows on account of FIIs and Foreign Direct Investment (FDI) have been even heady.

The happenings in the latter half of the current financial year will be heartening and the secondary and primary markets will remain buoyant. This will be facilitating the mobilisation of resources of unprecedented dimensions, which will be useful in avoiding bottlenecks in respect of financial resources for Planners as well as the entrepreneurs and others in the private sector.

The harsh impact of prohibitive prices for crude and petroproducts may be overcome after one or two years, as a new energy policy is being formulated with great accent on the creation of generating power capacity in a big way. The availability of larger natural gas supplies from the different offshore regions in the country may also get reflected in a slower growth in the cost of oil imports.

While it remains to be seen how the difficulties arising out of the soaring oil prices are overcome, the progress in other directions will be on different lines. This is especially due to the fact that the oil shock may get absorbed fully in two or three years with the continuing rise in net invisible receipts and the success in efforts of the Union Minister of Commerce to maximise export earnings.

P. A. SESHAN

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