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Economy builds new sinews

But for high oil prices and heavy subsidy burden, growth impulses remain active

THE CAUTIOUS optimism expressed by the Reserve Bank Governor, Y. V. Reddy, while reviewing the monetary policy for 2006-07, in spite of fears of an accentuation of inflationary pressures and a harsh impact of the hardening interest rates worldwide, would seem justified. The growth in Gross Domestic Product this year may exceed 8 per cent thanks to the satisfactory behaviour of the monsoon so far and favourable developments in other sectors of the economy.

The major industries have been performing well and several foreign interests are reported to be finalising plans to increase investments in mega projects in the steel, automobile, telecommunication and electronic sectors. Indeed, some international financial consultants have upgraded India's investment potential and are inclined to develop India as their export base. Also, many foreign and Indian interests have decided to set up projects in the Special Economic Zones (SEZs) in different parts of the country. However, it remains to be seen how the high oil prices in world markets will add to inflationary pressures and the Government will meet the mounting subsidy burden. The impact of a bulging oil import bill will also be felt severely in the coming months.

Major industries on a roll

Even with effective use of enlarged capacities in different industries, shortages of steel have been reported in some regions while a larger output of cement is getting avidly absorbed and it has been necessary to divert clinker meant for export to the domestic market. The sugar industry has benefited from a much higher production in the current crushing season. For the first time in recent years, it has realised handsome profits even on exports. A few managements have been inclined to export more because export prices are higher than in India.

The Agriculture Ministry was compelled to ban exports of sugar with a view to conserving supplies for domestic consumption. However, with the prospect of record sugar production, the export ban is being partially lifted with shipments allowed on prior permission basis.

All the efficient units are in a position to realise record profits and at the same time enable the Ministry of Petroleum and Natural Gas to secure larger quantities of ethanol and moderate crude imports. The textile, capital goods, chemical and petrochemical industries have been raising output and planning new projects on ambitious lines.

Industrial output grew by 9.8 per cent in April-May against 9.5 per cent a year ago and the target of 12 per cent will be feasible if the weaknesses in the mining and infrastructure industries can be remedied. The services sector continues to perform spectacularly and forex earnings from this source are helping to prevent an uncomfortable rise in current account deficit. Export growth has been significantly higher at 32.40 per cent in April-June and earnings for the whole year may be sizable at $126 billion.

The deficit on current account was, of course, further higher at $10.61 billion in 2005-06 against $5.40 billion in 2004-05 in spite of rising invisible receipts, as the trade gap according to RBI got enlarged to $51.55 billion from $36.63 billion. There may be a sizable deficit under this head in 2006-07 as well. But there is reason to believe that the situation will get corrected in two or three years.

Intriguing food scene

The food situation, of course, is causing concern to the Government despite bumper crops in the 2005-06 agricultural season. What are the factors behind this situation where wheat and even rice are getting scarce? As a measure of caution, the Agriculture Ministry has had to import wheat for maintaining buffer stocks at the minimum prescribed levels. In earlier years, the problem related to the marketing of bumper crops and intensification of procurement operations. Buffer stocks rose as high as 63 million tonnes in July 2002. But with the vigorous execution of food-for-work programmes and sizable export, these stocks declined steadily.

In the meantime, the demand for fine cereals and indeed all primary products has risen unexpectedly. It has become necessary to plan for increasing the yield of food and cash crops as well as pulses to a total of 220 million tonnes and above in a short period and raise also the share of agriculture and allied industries in GDP growth to 4 per cent. It has been emphasised in the first quarter review of the monetary policy that the targets for expansion of credit to agriculture and other sectors have been exceeded and bank managements are worried about their ability to satisfy all classes of borrowers, in the absence of a substantial rise in the total pool of resources.

Credit explosion

Many enterprising industrial managements have even been borrowing heavily in foreign currencies. The unprecedented rise in short-term borrowing in foreign currencies was mainly responsible for the significant growth in forex reserves in April-June. But these loans will involve larger repayment in rupees, as the Indian currency has been depreciating against the U.S. dollar, euro, pound sterling and other major currencies.

With a view to restricting loans to real estate borrowers and personal loans, interest rates have been raised significantly. In other directions too, fresh borrowing is becoming costlier, as banks have been obliged to increase interest rates on deposits. There has also been a hardening of interest rates in developed countries. Since the Central and State governments also have to increase their borrowing to bridge enlarging fiscal deficits and implementing plan schemes, the additions to bank deposits may have to be more than Rs. 3,50,000 crore in the current financial year while inflows of FII and FDI also have to be on a bigger scale. The fiscal and monetary policies have thus to be designed to enable heavy outlays in close cooperation with Indian and foreign interests in the private sector.

P. A. SESHAN

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