Economy not what it’s pumped up to look like

HIGH fiscal deficits do not automatically mean bankruptcy, but they do constitute an ominous road sign.

The Economic Survey ’99-00 implies, without quite saying so, that India may be closer to the brink than optimists in stock markets and chambers of commerce think. The combined fiscal deficit of the Centre and state, which was 9.1 per cent in the crisis year of ’91, touched 8.5 per cent in ’98-99 and is likely to be even higher in ’99-00.

So over-spending is as chronic at the end of a decade of supposed reform as at the beginning. Mr Yashwant Sinha keeps promising second generation reforms. The Economic Survey suggests that the first generation reforms have not exactly matured yet. The Survey says, as it has been saying for years, that high fiscal deficits mean high debt, high interest rates, crowding out of private investment, crowding out of government investment by debt servicing, and pressure on the balance of payments. Yet, in the same breath, the Survey claims that industrial growth is recovering smartly, the balance of payments is in fine shape and inflation is at an all-time low. This needs qualification. This year’s industrial growth of 6.2 per cent is barely half the rate achieved in the mid-90s, inflation is low primarily because of falling import prices, and the balance of payments is in good shape mainly because of an inflow of invisibles of $10bn or so.

But politicians will doubtless conclude that over-spending is sustainable, at least within their short time-horizons. Mamata Banerjee has already demonstrated this. Many chief ministers may follow suit. In which case the Economic Survey next year will have fresh cause for moaning and groaning.

The Big Picture is mixed, with lots of good as well as bad news. The bad news is that the savings rate has fallen from a peak of 25.5 per cent in ’95-96 to 22.3 per cent in ’98-99, and the gross investment rate has fallen correspondingly from 27.2 per cent to 23.4 per cent.

Foodgrain production in the ’90s has grown at only 1.8 per cent per year, no more than population growth, against 3.4 per cent in the ’80s. This is one reason why poverty is not falling nearly as rapidly as in the ’80s. However, real wages of unskilled rural workers have risen by around a quarter since ’92, suggesting that the next NSS survey will reveal some reduction in poverty.

There is some good news too. Software exports continue to boom upwards at the rate of 50 per cent per year, and this is one reason why there is no pressure on the balance of payments. Indeed, forex reserves are at an all-time high. This in turn means the rupee is a strong currency, and so import prices remain subdued, helping tame inflation.

While public debt keeps rising in nominal terms, the government’s outstanding liabilities, adjusted for exchange rate changes, have actually declined from 65 per cent of GDP in ’93-94 to 56.6 per cent in ’98-99. The ratio of external debt to GDP has fallen from 41 per cent in ’91-92 to 22.3 per cent in September ’99, and the debt service ratio is down from over 30 per cent at its peak to just 18 per cent in ’98-99. Export growth is now estimated at 12 per cent in April-December ’99, a welcome recovery after two years of stagnation.

The Survey has for years bemoaned the growing mess in the power sector, but the state electricity boards remain unmoved. The gross power subsidy for agriculture and urban consumers has risen relentlessly from Rs 7,449 crore in ’90-91 to Rs 33,820 crore in ’99-00 and is projected to rise to Rs 37,962 crore next year. This is one-and-a-half times the entire income-tax collection in the country.

Yashwant Sinha may talk of hard decisions, but chief ministers (including NDA ones) clearly have a soft corner for soft options. Even if the chief ministers eventually implement the proposed minimum tariff of 50 paise per unit, that will reduce the subsidy by only Rs 2,746 crore.

The Survey points out that implementation of the Fifth Pay Commission award has blown a hole in Central and state finances, even while inflating GDP estimates. Our statistics assume that higher pay means higher value added by bureaucrats, even though evidence suggests that they actually subtract value from the economy. The Survey tells us that the higher Central payout raised GDP in ’97-98 by 0.7 per cent, the states’ payout raised it another 0.7 per cent in ’98-99, and higher pension payouts have raised it still further in ’99-00. The Survey bemoans that lack of will to reduce staff strength, as recommended by the Pay Commission, means that many states have no money to do anything but pay salaries, and sometimes not even that. Despite deregulation, the regulators remain on the payrolls: their number (in the Centre, states and local bodies) increased from 187 lakh in ’90 to 194 lakh in ’98. No reversal is in sight.

The Economic Survey wants “a redefinition and narrowing of government responsibilities to those functions that only government can discharge effectively, with a view to downsizing government; systematic efforts to reduce subsidies by targeting them to the poorest segments of society; a vigorous drive to divest commercial undertakings such as power utilities and transport undertakings; a concerted programme to deploy user charges for economic services rendered by the government…” Alas, the chief ministers do not seem to be listening. Not even BJP CMs, who have more important things to do like singing Vande Mataram in schools and chasing away Deepa Mehta.

Even as the Prime Minister surrenders to blackmailing tactics by striking lawyers, the Survey urges legal reforms to reduce legendary delays. Experts have identified several economic laws as redundant and these need to be scrapped or amended. The government itself is a litigant in 60 per cent of all appeals, most of them doomed to failure. The result is that the government is crowding out private court cases. This produces a judicial deficit which is as deleterious as the fiscal deficit.

The Survey emphasises the need to strengthen the financial sector. “Difficult decisions have to be taken in respect of the problems of weak banks.” Does this mean closing down United Commercial Bank? No, cynics will say; the difficult decision probably means recapitalising every dud bank. The waiver of over Rs 5,000 crore of SAIL’s dues is a sad pointer.

The Survey emphasises the need for states to remove controls on the movement of agricultural goods. It also suggests the removal of all export controls on agriculture to benefit farmers. “The plethora of state-level laws, regulations and rules, which constrain private investment and participation in agricultural marketing, storage and transportation, need urgent review.” In sum, the economy has many serious problems, some of which seem to defy solution for political reasons, yet there are enough positive factors to keep the country muddling through. A fair indication of this is the government’s interest payments, which have slowly crept up from 4 per cent of GDP in ’90-91 to 4.6 per cent in ’99-00. Viewed from this perspective, the fiscal deficit is a creeping problem rather than a galloping one. Still, history shows that it is as possible to creep over the brink as gallop over it.

What do you think?