ECONOMY POISED
TO GROW BY AROUND 7 PER CENT IN 2003-04
S.
Sethuraman*
For the first time
in three years, the Indian economy seems to be regaining its growth
momentum, on the strength of a good monsoon-led agricultural upswing,
the steady recovery in industrial output, partly sustained by
the rise in exports, and continuing expansion in the services
sector. There has been an impressive revival of business confidence,
reflected in the country’s stock markets, and global perceptions
about India remain buoyant.
Projections for GDP
growth in 2003-04 by IMF and the World Bank are above 5.5 per
cent while the Reserve Bank of India says its earlier estimate
of 6 per cent would be "significantly exceeded" when
the mid-year review is published. Based on the latest data, growth
is expected around 7 per cent, as Prime Minister Vajpayee indicated
in New York the other day and if so, it would mark a return to
the high growth of mid-l990s.
India’s macro-economic
stability has been highly appraised everywhere and the strong
fundamentals have imparted resilience in the face of periodic
shocks, mainly external. The strengths are food self-sufficiency
and stocks (now a little over 30 million tons), low level of inflation
(below 5 per cent) and the extraordinary buildup in India’s foreign
exchange reserves reaching 88 billion dollars by September 20,2003.
However, it is recognised that there has to be greater investment,
domestic public and private, and international, along with resumption
of structural reform process for the country to tap its full potential.
In the current year,
foodgrain production is expected to revert to the 2001-02 level
of over 210 tons, recovering from a drought year, manufacturing
is maintaining a 6 per cent growth (April-July) and exports are
clocking a double- digit growth (11 per cent in April-June). The
monetary policy has been accommodative for growth with adequate
liquidity and soft interest rates which are at their lowest in
several years. All these with the benign inflation environment
point to a higher level of economic activity being sustained especially
when the traditional busy season starts in October and the aggregate
demand revives.
In a global perspective,
India and China are major players in developing Asia, the fastest
growing region even though the world economy has only just begun
to recover. India is getting gradually integrated with world
economy in terms of trade and investment inflows but the pace
would get accelerated with the growing demand for the country’s
software skills and other IT-related services through outsourcing
by major international firms.
India’s share of
trade in services is rising faster than goods, and software exports
totalling 9.6 billion dollars together with over 14 billion dollars
of remittances from Indians abroad in 2002-03, contributed to
the surplus on current account of 3,708 million dollars for the
second year in succession.
The brightest spot
in the post-liberalisation economic scene is the build up of reserves
which became rapid over the last two years, and already in the
first half of the current year (April-September 20,2003), the
increase was 13 billion dollars to take the total to 88 billion
dollars. Though continuing inflows impact on the exchange rate
of the rupee which has appreciated to some extent in relation
to the US dollar, the Reserve Bank keeps monitoring currency movements
and intervenes when necessary to ensure that there is no undue
volatility in the exchange rate movement, keeping in view its
competitiveness for exports.
The Reserve Bank
says it has followed a judicious approach in reserve accumulation
which is made up of non-debt creating flows including worker remittances
and repatriated export proceeds, without allowing the level of
external debt (104 billion dollars in March 2003) to rise. India’s
debt-to-GDP and debt servicing (out of current earnings) ratios
are quite low at 20 per cent and 14.7 per cent respectively. With
more repayments on external loans and commercial borrowings of
the past, debt flows have come down.
RBI says a sufficiently
high level of reserves is necessary to safeguard against unanticipated
pressures on balance of payments or external shocks. India’s strong
position has enabled it to become a creditor to IMF and some external
loans have also been pre-paid – three billion dollars in 2003-03
and another three billion being repaid in the current year.
In the long run,
what is more important is to strengthen India’s position and status
in world trade. This explains the recent initiatives by India
and other developing countries in the Doha Round at Cancun to
secure greater access to the markets of developed nations which
are heavily subsidising their farmers and shutting out products
of primary concern for poor countries. Although India is yet to
hit one per cent as its share of world trade, which is likely
to be realised by 2007, exports and imports have risen as a ratio
of GDP from 21 to 33 per cent within a decade.
Foreign direct investments
are currently averaging five billion dollars a year including
re-invested earnings. With its capacity to absorb large investment
flows, given the infrastructure requirements, the policies and
procedures are continually liberalised so that India could attract
not less than 8 to 10 billion dollars in the coming years. One
of the proposals in this regard is raising the cap on foreign
investment from 49 to 74 per cent in the telecom sector.
Overall, there is
optimism about the medium-term prospects for the economy based
on the current thrust given to roads and telecommunications, the
reform of the power sector becoming a high priority for both the
Centre and the States, which has been facilitated by the Electricity
Act 2003, the new gas finds and production-sharing investments
abroad, and above all, the projected rapid advance in the IT sector,
in both software and hardware. There have to be conscious efforts
to increase the rates of domestic savings and investment toward
the Tenth Plan (2002-07) targets for the coveted eight per cent
GDP growth.
As the Prime Minister
pointed out in a keynote speech at the Columbia University, New
York, on September 24, 2003 during his visit to address the UN
General Assembly Session, India is becoming a production base
and an export hub for diverse goods, from agricultural products
to automobile components to high-end services. Indian manufacturing
firms can be part of global production chains which would enable
them to import sub-assemblies and add value and re-export them.
The Government remains
fully committed to the process of structural reforms, the Prime
Minister said. But it must take note of the debate in the country
on the pace and sequence of reforms as well as make efforts to
cushion the impact of reforms on the poorer sections of society.
‘We have tried to reconcile competing interests and avoid sudden
disruptions in our economy. We believe that reforms following
a democratic consensus are enduring". Shri Vajpayee added.
The biggest challenge
for the economy is the fiscal deficit and hopefully the Fiscal
Responsibility legislation enacted by Parliament would help to
narrow down the revenue deficit to zero within five years, provided
there is political consensus for drastic measures without affecting
the poor and vulnerable sections of society. In the current year,
the budgetary assumptions on receipts are likely to suffer to
some extent because of delays in disinvestments which needs a
new look in the light of the Supreme Court’s judgement which has
had the effect of deferring the equity sales in oil companies. (PIB
Features)
*Senior
Freelance Writer
