The provisional figures for India's gross domestic product (GDP) for the period 2003-04 released by the Central Statistical Office last month show that real GDP grew by 8.2%, making it the world's second-fastest-growing economy after China.
Only on three occasions earlier has India's GDP growth surpassed the 8% mark - 8.1% in 1967-68, 9% in 1975-76 and 10.5% in 1988-89. In fact, in terms of US dollars, the growth rate of India's real GDP was 13.98% as the Indian currency appreciated by as much as 5.3% between 2002-03 and 2003-04. With the Chinese currency directly pegged to the dollar, this makes the Indian economy the fastest-growing in the world in dollar terms.
The data for the last quarter of 2003-04 showed the economy decelerating to 8.2% growth during the January-March 2004 quarter from the 10.4% recorded in the preceding October-December 2003 quarter, but still extending a trend of strong expansion that emerged almost a year ago.
The growth can be attributed largely to a sharp turnaround in agriculture. Farm output increased by as much as 9.1% in 2003-04 (again the highest during the post-reform period) after contracting 5.2% in the previous year because of severe drought.
The output of the agricultural sector was 10.5% higher in the January-March 2004 quarter as compared with the corresponding period in the previous fiscal. It was, however, lower than the 16.5% growth recorded in the preceding October-December 2003 quarter.
However, not all of the 8.2% growth is attributable to the recovery from the drought factor. The numbers show that the industry and service sectors have also performed creditably, registering growth rates of 6.7% and 8.7% respectively during 2003-04 vis-a-vis the levels of 6.4% and 7.1% respectively that were recorded during the corresponding period in the previous financial year.
The farm sector accounts for about 22.12% of India's GDP and sustains nearly 700 million of the country's billion-plus population, making it a key driver of demand. Industry accounts for 26.86% of GDP, while the service sector accounts for the maximum - 51.02% - of GDP.
On the macroeconomic front, India has quite a rosy picture to present, a rarity perhaps in today's vacillating now-cheery, now-troubled international environment. With strong economic fundamentals, sustained robust GDP expansion, robust balance of payments, healthy foreign-exchange reserves, etc, and a domestic market of colossal expanse and depth, India today is strappingly positioned in the international economic landscape, though behind the global economic powerhouse and regional Goliath China.
The moot point, however, is can India do a China and continue to grow at a scorching pace, or has it just been a blip in the radar, as has been the case in occasions mentioned earlier? Indications available so far do point to the latter possibility. The reasons for the same are not far to seek.
Despite the service sector becoming India's engine of growth (accounting for more than 50% of GDP), there's no gainsaying the fact the India is still an agrarian economy, with close to 70% of the population depending on this sector. The agricultural sector, which continues to be highly monsoon-dependent, has been one of the most erratic sectors.
Indications are that during the current year the monsoons are likely to be less than normal. Moreover, while some areas face severe flooding, others are still in the grip of acute shortage. In such a scenario, India would struggle to record even 2% growth in this sector, after having recorded a massive increase last year. Even if one assumes that both industry and the service sector record growth rates of, say, about 8% and 9% respectively (higher than last year), the likely GDP growth for the current year would be between 6.5% and 6.75%.
This is the immediate short-term impact; the long-term scenario is less than rosy, as hardly much is being done to reduce the monsoon dependency of the agricultural sector and improve efficiency in the system. The agricultural sector in India is in crying need for improved infrastructure, both at the pre-harvest and the post-harvest levels. However, increasing budgetary allocations for this sector over the years have failed to have the desired impact as inefficiencies in the system (euphemism for leakages) and administrative hurdles have resulted in a number of projects being inexorably delayed or shelved altogether.
Consider these. Up to March 2002, a whopping Rs100 billion (US$2.1 billion) in the District Rural Development Authority went unaccounted for. Similarly, under the scheme "Rajiv Gandhi Drinking Water Mission", Rs890 million was released as on July 2002 for the year, while only Rs294.7 million was utilised in that period. It is not surprising, therefore, that the real gross fixed capital formation (GFCF) in the agricultural sector rose by a compound annual growth rate of a mere 2.82% between 1995-96 and 2001-02. Also, the recent economic survey points out the fact that public expenditure in the agricultural sector has been declining. Clearly, intention and rhetoric are not matching real action on the ground, thereby depriving the sector of the necessary thrust to achieve its potential.
Another likely roadblock will be the fiscal deficit. While the new government is projecting a lower fiscal deficit figure (a reduction from 4.8% to 4.4% of GDP), the numbers seem to be too optimistic to be true. For example, the gross tax revenue for the current financial year is expected to increase by about 25%, while the average growth rate of gross tax revenue in the post-reform period has only been 11.92%. A perfect example of highly misplaced optimism on tax buoyancy.
On the other hand, while total expenditure is planned to be maintained virtually at the same level (an increase of a mere 0.75%), the average increase in expenditure experienced since 1991 is 12.82%. There seems to be a clear case of overestimation of revenues and underestimation of expenditure. In all likelihood, the fiscal deficit for the current year will cross 5%. Even a study of the expenditure components reveal that the proposed capital expenditure of the government has been scaled downward from Rs1.11368 trillion to Rs923.36 billion, a reduction of 17%. On the other hand, in a clear indication of the government's inability to curtail its own expenditure, often wasteful, revenue expenditure is estimated to increase by 6.23%. Nowhere in the recent budget was there a strong statement about the government mending its ways as far as managing its expenses is concerned.
There are two major ramifications of this. First, capital formation in the economy (especially of the infrastructure type) will be compromised, as public expenditure is the major growth driver for infrastructural development. Available data show that real GFCF for the economy has increased by a mere 3% since 1991, and has actually started declining since 1995-96. With inadequate infrastructure acting as a constraint for India's growth potential, the future prospect is indeed worrisome. The second impact is on inflation and interest rates. A high fiscal deficit will crowd out private investment, raise inflation and interest rates, and generally spook the growth path.
An important recipe for last year's high growth performance was low inflation and, concomitantly, low interest. However, the lagged effect of a spike in global oil prices and hardening of global interest rates can rock the boat. Also, India's inflation rate has recently crossed 6% and promises to be higher, given the provisions of the recent budget. A hike in service tax rates from 8% to 10% and an imposition of a 2% education excess on all central taxes in India, including service tax, excise, customs etc, will drive up prices, especially since India does not have a value-added-tax regime and the impact of the excess on final products and services can be substantially high. Add to this the likely impact of a higher fiscal deficit and one is looking at potentially high inflation and interest rates.
Even public-sector disinvestment is out of the window. The budget of the new government still talks of providing support to loss-making public-sector units to nurse them back to life. If experience is anything to go by, there is a clear sense of deja vu. The government is still intent on throwing good money after bad, thereby further locking up vital resources.
This budget was supposed to be all about boosting public investment, without compromising on fiscal prudence. Clearly, neither is happening.
We all know India has the potential to grow at a consistent rate of 8% or more. Unless policymakers bite the bullet and go for the politically sensitive second-generation reforms, such as bureaucratic and labour reforms, disinvestments etc, India will continue to envy China, not emulate it.