Right time for a big push to economy
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The happenings in July-September and subsequent months are of special significance
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With the inflation rate unlikely to rise much in the coming months, a good beginning can be made with credit expansion in a big way for all purposes.
The Lok Sabha poll results have upset the calculations of many opposition parties, the Left Group in particular. The Congress Party, on the other hand, had an agreeable surprise and could increase its own tally to 206 seats from 145 in the 2004 elections.
The recast United Progressive Alliance also improved its strength to 262 from 219. While it was necessary earlier to secure outside support from 61 members of the Left camp, this time unconditional support has come from other secular parties taking the total tally for the UPA to 322 in a house of 543.
Manmohan Singh, elected Prime Minister for a second term, is thus in a position to formulate new policies boldly.
These will help revive the economy by enabling different segments to mobilise substantial rupee as well as foreign currency resources.
With the new government in place the various ministries can finalise their budgetary demands.
While the Prime Minister wants the government to proceed on the basis of a 100 day agenda, Finance Minister Pranab Mukherjee has indicated that the government would aim to revive the economy with fresh sops to different industries.
At the same time, spending by various ministries would increase along with financial prudence.
Domestic entrepreneurs and foreign interests will be enabled to mobilise resources in a big way.
Propping up demand
The accent will necessarily have to be on stimulating domestic demand even while making exports more competitive through interest subvention for another six months and assistances to export industries badly hit by the global recession. There will also have to be full drawback facilities for export goods acquired from the local market.
It will not be easy to achieve 15-20 per cent export growth this year from the 3.4 per cent rise in 2008-09.
In October-March last year, there was a decline of 18.41 per cent in dollar terms against a growth of 31.39 per cent comparably.
Also, even with a cheaper currency, rupee earnings grew by a meagre 0.66 per cent against 16.98 per cent. Besides the fall in exports, local demand for various products also contracted. Thus industrial output rose by 2.4 per cent against 8.5 per cent comparably.
Despite the dismal performance on the foreign trade and industrial fronts in the latter half of 2008-09, GDP growth last year is placed at 6.7 per cent — earlier projection was 7.1 per cent. This achievement has been helped by a satisfactory performance of the agriculture and IT sectors.
Hopes on the budget
It is against this background that Mr. Mukherjee has to devise measures to boost industrial production and exports.
This objective can be realised only if all segments of the economy are helped through lower interest rates, liberal credit and much larger spending by the Central and State governments. It will however be difficult to increase plan expenditure without substantial reduction in non-Plan expenditure under some heads. Even with optimistic estimates of tax revenue in the Interim-Budget and reduced burden of subsidies, the revenue deficit is estimated at 4 per cent and the fiscal deficit at 5.5 per cent in 2009-10. The lower deficits in percentage terms as compared to 2008-09 can be explained only by the expectation of a modest GDP growth. In absolute terms, the revenue deficit is only slightly lower while the fiscal deficit will be much higher than last year.
If the actuals of revenue receipts for the past year happen to be higher, estimates for 2009-10 can be more liberally conceived.
In that event there can be a further step-up in non-Plan as well as Plan expenditure. But with the necessity to increase net market borrowing to Rs. 3,08,647 crore (Rs. 2,61,972 crore revised) and reduced relief through unwinding of loans secured under the Market Stabilisation Scheme (MSS), the Finance Minister may find it difficult to raise aggregate expenditure.
Buoyant bourses
In the changing situation however it will be possible to mobilise large rupee and forex resources once the new government adopts a bold approach to revive the economy and a cheaper money policy is vigorously pursued by the monetary authorities. There has been a sharp rebound in equity values on the bourses since the middle of May and the BSE index has soared to 14625 from 12173 on May 15. In the same period the rupee has risen to 47.12 a dollar from 49.43. Even with larger FII buying no significant improvement in foreign exchange assets has been noticeable so far.
If the regular budget in the first week of July fulfils market expectations there may be a repetition of the happenings of 2007-08 in the external sector though not to the same extent. As Dr. Manmohan Singh has considerable clout with the western countries which are only too eager to extend liberal credits, developments in July-March should be heartening.
The agriculture sector is expected to do well again and the yield of food and cash crops may be tangibly higher in the coming season. With sizable procurement of rice and wheat in 2008-09, buffer stocks are at fairly high levels and there is the prospect of a further increase in these stocks in 2009-10.
With the inflation rate unlikely to rise much in the coming months, a good beginning can be made with credit expansion in a big way for all purposes. The requirements of worthy borrowers should be met liberally with a lowering of interest rates.
The monetary authorities should therefore lower repo and reverse repo rates further for inducing banks to cut lending rates. There will also be no immediate need for reducing the cash reserve ratio. Deposit rates too may be on the down trend if net forex inflows get reflected in faster additions to bank funds. The happenings in July-September and subsequent months are thus of special significance. There may well be a noticeable improvement in economic activity in the remaining three quarters with the growth in GDP likely to improve to 7.5-8 per cent.
P. A. SESHAN
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