Economy poised for new leap
The Indian economy is entering a new phase of development as the prospects for balanced growth in 2010-11 have given rise to expectations that the performance in the next and subsequent years will be even more heartening. As a result of the bountiful rainfall in many regions in North India and even in the areas such as Bihar and Eastern States where it was apprehended for a time that severe drought condition would prevail, the yield of food and cash crops in the kharif season may constitute an all-time record.
The outlook for the rabi season too is promising as storage in the major reservoirs is very comfortable. It is thus estimated that the output of the agricultural sector will increase by 4 per cent in the current season against 0.2per cent comparably. It is even emphasised by agricultural experts that there has been a tripling of investment in the agricultural sector in recent years and that modern techniques also are being adopted. These measures have been responsible for a significant improvement in productivity. There is thus the confidence that even 5 per cent growth is feasible if only the monsoon does not prove to be much below normal.
Assuming that there is no drag in GDP growth by the agricultural sector, the increase in GDP in 2010-11 is estimated to be even 8.75 per cent with rising industrial output. Details for July are impressive as the output has risen by 13.8 per cent and the average for April-July is 11.40 per cent. The Union Finance Minister has suggested that the average growth may be 12-13 per cent in the whole of 2010-11. The trends in foreign trade in April-August too have been flattering and it is now hoped that export earnings may exceed $ 200 billion in a whole year.
The producers of capital goods, consumer durables and even textiles have been faring well while the increase in the production of coal and power is restricted only by the non-availability of the requisite capacity. Prime Minister Manmohan Singh has therefore emphasised the importance of removing the deficiency in power, coal, capital goods, transport and other sectors. The need of the hour is to ensure availability of the requisite financial resources in forex and rupee terms as there is no dearth of viable projects. In this context the policy of the monetary authorities to adopt a dearer money approach may well prove to be counter-productive and result in an undue increase in the cost of credit and chocking up demand which can be avoided.
All the major industries are in a position to market a rising level of production remuneratively. It is needless to emphasise that this growth process in evidence latterly should not get unduly discouraged.
The UPA Government has actually two major challenges which have to be imaginatively tackled. The postulated increase in the yield of foodgrains to 238-240 million tonne may well compel intensification of procurement operations in rice from October and in wheat from April next year. All going well the aggregate quantity of fine cereals procured may easily be 65 million tonne or more. With the off take through fair price shops and other various welfare programme being not more than 55 million tonnes, the additions to buffer stock may prove to be highly uncomfortable at 75 million tonnes by July next year. How should this huge quantity will be stored in good condition and what is the strategy of the Ministry of Agriculture for tackling this embarrassing situation? Even for maintaining buffer stocks for 65 million tonne the requisite capacity is not available. There is a huge controversy over the storing of sizable quantum of fine cereals which are deteriorating in quality causing heavy losses to the Exchequer. It remains to be seen how this formidable challenge will be overcome.
Food inflation may not be as worrisome as it is now because of the reports of an increase in the area and yield of different types of pulses and coarse cereals. The output of oil seeds too may be distinctly higher than in 2009-10. As overseas reports also suggest that there is distinct softening of prices, food inflation can thus be effectively tackled though the WPI index based on 2004-05 has risen to 15.10 per cent for the week ended September 4 against 11.47 per cent in the previous week under the earlier base. The link factor may well explain how exactly the variation has taken place. It can be anticipated in any event that prices for primary products will tend to decline with an improvement in the supply situation to some extent though the constraints may not be fully removed. Against this background it is necessary to remember that food inflation can be effectively controlled only with the removal of supply constraints and monetary measures alone may not yield the desired results.
As there is the prospect of food inflation getting under control due to natural factors the decision of the monetary authorities to raise the repo rate by 25 basis points to 6 per cent and by 50 basis points in the reverse repo rate to 5 per cent with immediate effect may result in higher deposit and lending rates and create problems for those executing mammoth projects with loaned funds constituting a fairly good proportion of total outlay.
Money becoming dearer
Many banks have already raised their deposit and lending rates as the pool of resources has to be considerably augmented. The demand for funds has off course remained unsatisfied and the executives of major banks may not experience any difficulty in utilising available resources effectively. The Governor of the Reserve Bank of India has understandably refrained from raising the cash reserve ratio (CRR). A squeeze is already emerging in the money market and many financial institutions may not be in a position to provide the requisite resources fully for the constituents.
The absence of liquidity in the banking system will be evident from the fact that the growth in deposits of scheduled commercial banks in the 12 months ended August 27 was distinctly slower at Rs.5,89,527 crore against Rs.6,93,875 crore in the same period in the previous year. On the other hand fresh bank credit has soared to Rs.5,44,655 crore from Rs.3,45,987 crore while fresh investments accounted for only Rs.1,10,126 crore (Rs.3,50,196 crore). The situation can ease only if forex inflows turn out to be encouraging in the coming months. The RBI may have to provide ample refinance facilities and even lower the CRR if it becomes necessary.
The reaction in the bourses to the latest developments was not initially quite favourable though there has been subsequently a significant recovery. The central exchequer has to complete its borrowing programme albeit on a restricted basis and make a success also of the disinvestment programme. Others engaged in the implementation of infrastructure projects have also to raise huge resources through tax free bonds.
The Union Finance Ministry is in a comfortable position as tax collections have been brisk and the receipts from indirect taxes particularly in April-August have risen by 46 per cent to Rs.1,24,170 crore (Rs.85,097 crore). The Budget Estimates for 2010-11 have assumed that collection from indirect taxes will increase by 29 per cent over the revised estimates for 2009-10. Even if indirect tax collections increased by 40 per cent in a whole year the surplus over the estimate may well be Rs.28,000 to Rs.30,000 crore. As receipts from direct taxes also will be higher than the Budget Estimates and non-tax revenues will be noticeably higher than the Budget Estimates the borrowing through market loans can be reduced suitably to relieve strain on the money market. In that event, the fiscal deficit may be much lower than the visualised 5.5 per cent.
The bourses should remain buoyant with larger inflows from foreign institutional investors (FIIs) and others. The BSE Index has been rising in a pronounced manner latterly and it was felt in knowledgeable circles that the high levels reached in January 2008 may even be surpassed. The happenings in the coming months will thus be significant though it remains to be seen to what extent there will be an increase in non debt and debt forex inflows. The buoyancy in the bourses can then be sustained and emerging squeeze in the money market will not be allowed to have a throttling effect.
The bullish sentiment was aided by the revised Direct Tax Code Bill which may become effective after scrutiny by Parliament from April 2012. The income tax assessees will stand to benefit by the higher exemption limit and the elongation of the tax slabs. Dividends paid by corporate as well as long term capital gains will continue to be exempt from taxation while the undistributed profits tax and transaction tax will continue to be levied.
P. A. SESHAN
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