Monday, September 3, 2012

Overcoming the crisis

September 2, 2012

The worst setback to the economy since 1991 on account of the weakening rupee and deterioration in the budgetary position has become more daunting as a result of the prevalence of drought conditions in parts of Karnataka, Maharashtra, Gujarat and Rajasthan. The GDP growth for the first quarter, as per the official data estimates released by the Central Statistics Office is placed at 5.5 per cent against 8 per cent in the same period last year. As the performance of the industrial sector has not been satisfactory so far, the growth in GDP has been scaled down to 6.5 per cent for the current fiscal from 7.5 per cent initially, and further to below 6 per cent. Moody's have estimated the growth at only 5.5 per cent. Manmohan Singh, Prime Minister, however, is confident that it may be even 6.5 per cent plus.

C. Rangarajan, Chairman, Prime Minister's Economic Advisory Council (PMEAC), for his part, is exuding cautious optimism and has estimated that the growth may be even 6.7 per cent. This is probably due to the expectation that agriculture and allied industries will be making a contribution of 0.5 per cent against a negative growth assumed in other quarters. The cautious optimism is, perhaps, due to the expectation that the happenings in the second half of the current financial year would be favourable.

The progress of rainfall in the drought-affected areas was somewhat encouraging in August and the deficiency got reduced to 12 per cent from around 20 per cent. The forecast of the Indian Meteorological Department that the monsoon will be near normal has gone awry. It is felt that the deficiency in rainfall will be significantly lower and the output of food and cash crops in the Kharif season would not be affected significantly.


Since the Exchequer would be badly affected due to a shortfall in receipts from direct and indirect taxes and on the foreign trade front too trends are unfavourable, several measures aimed at stimulating growth in exports have been initiated along with other steps for improving industrial growth. Towards this end, the limits for borrowing in forex terms under various heads have been raised. The objective would seem to be to relieve stringency in the money market and increase the forex inflows. When Pranab Mukherjee was the Finance Minister, he stated that there should also be a reduction in non-plan revenue expenditure, excepting interest charges and defence expenditure, by 10 per cent in a year. These exercises have not yielded tangible results so far.


The industrial sector too, has not performed satisfactorily so far. In April-June, there was a contraction in industrial output to 0.1 per cent against 5.3 per cent. It had been hoped that the industrial sector would acquit itself creditably and enable the economy to overcome the meagre contribution of the agricultural sector and allied industries. Since the net rise of over 6 per cent in industrial output is required for the whole of 2012-13, it remains to be seen how the phase of recovery will be aided through new measures.

On the foreign trade front too, the happenings have been discouraging. It has not been possible so far to register a rise in exports in forex terms. The performance in the previous year was creditable in the first six months. In April-June this year, there was a drop in exports by 1.7 per cent. The trade deficit, however, was lower at $40 billion against $46.23 billion as there was a pronounced contraction in imports. The preliminary details for July, however, are more disappointing as it appears that exports in rupee terms also grew in a less pronounced manner than in April-June.

Against this sombre background, it will not be easy for the monetary authorities to effect a significant reduction in key interest rates. The inflation rate, of course, declined to 6.87 per cent in July from 7.25 per cent in June. As the retail inflation rate is still high, a helpful decision by the RBI is still awaited, especially as the borrowing programme up to July accounted for 42.51 percent of the gross amount excluding receipts from the treasury bills. The Union Finance Ministry is, therefore, endeavouring to raise the required resources through borrowing in forex terms and others also are being encouraged to adopt a similar course. There may be an increase in interest rates on loans in foreign currencies. These attempts will be helpful in the short term to overcome resource bottlenecks. But there will be an increase in external indebtedness and therefore in servicing charges in forex terms.

The need of the hour is to augment the pool of resources in forex terms as well as rupee terms. It will, of course, be possible to mobilise the required funds for implementing the projects based on public-private partnership to some extent through issues of tax-free bonds.

Without the requisite resources and an increase in outlays on ongoing and new schemes in the infrastructure sector, the economy cannot be placed on a new growth path.
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