Search the Internet          Tips  Sites: Finance, Investment

Economy in tailspin but some hopes of revival as year closes

Marred by stock scam and September11 terrorist attack, economic reforms took a backseat in 2001 making prospects of recovery more difficult as the year closes with projections of a lowest ever growth of less than five per cent in a decade.

BUDGET

The year started with Finance Minister Yashwant Sinha unveiling a blueprint for the second phase of economic reforms in the Budget but it remained only on paper as the major promises like labour, fiscal, financial sector reforms and privatisation remained unfulfilled.

SCAMS

Soon after the Budget, the stock scam surfaced after the Black Friday in the capital markets in March followed by UTI (Unit Trust of India) fiasco forcing the government to go on back-foot on economic issues derailing reforms meant to spur demand and investment.

The government claims that the economy is on road to recovery and has done reasonably well considering the global recession aggravated by the Sept 11 attack but analysts armed with statistics see it otherwise painting a gloomy picture.

They say that the much needed push to growth would have to wait for at least one more year.

With revenue collections at less than half of the targeted Rs 2270 billion this year, exports recording negative two per cent growth, industrial growth low at 1.9 per cent and divestment receipts at a mere Rs 2 odd billion against the target of Rs 120 billion, the fiscal deficit is bound to go beyond the targeted 4.7 per cent of GDP this financial year.

FOREX

But the silver-lining is that foreign exchange reserves continue to swell at over record $47 billion. Inflation remains at moderate level of over 2.5 per cent and with good monsoon for the 13th consecutive year, agriculture, considered to be the backbone of the economy, is showing signs of recovery.

WTO

The year also saw the launch of new round of trade negotiations at WTO (World Trade Organisation) ministerial in Doha where India put up a brave fight for increased market access to developing countries' exports but the gains were not commensurate with the tough posturing, analysts say.

With exports recording a negative growth, the 12 per cent growth projected for this year seems a far cry. Rightly, the government itself scaled down the target to three per cent, one forth of the original target. The medium term export strategy, supposed to have been unveiled this year, has not seen the light of the day so far.

DIVESTMENT

On divestment and privatisation, the government announced an ambitious plan of strategic sale in 27 leading public sector undertakings but so far only two small companies Hindustan Teleprintes and Computer Maintenance Corporation have been divested for a mere Rs 2.07 billion. Even formation of a separate ministry last year has not hastened the process, analysts argue.

DIFFERENT BILLS

Economic legislations, believed to be crucial for stepping up reforms have been put in the backburner with none of the major ones like Fiscal Responsibility Bill, Prevention of Money Laundering Bill, Banking Companies Amendment Bill to allow lowering of government equity to 33 per cent in public sector banks and amendments to Industrial Disputes Act and Contracts Labour Act coming up for passage though Sinha had promised to take them up in the Budget session itself in last March.

GROWTH

Sinha always quotes World Bank and IMF (International Monetary Fund) forecast to say large economies like China, India and Brazil have potential of staying well above the world's sedate growth in 2002. But the extent to which they would be successful was largely up to their own efficiency or inefficiency in the use of domestic financial and physical resources, the analysts say.

The government's mantra this year is pump-priming of the economy even at the risk of mounting fiscal deficit by boosting investment in infrastructure and social sectors to reverse the economic slowdown. But so far this is not visible excepting in the ambitious highway project to link four metros and create north-south-east-west corridor.

GDP

Because of non-action by the government, the growth prospects for 2001-02, appear to be bleak. Fiscal first quarter of April to June this year, GDP growth has been estimated by the central statistical organisation at 4.4 per cent.

GDP arising from the non-agricultural sector was reported to have risen to 5.1 per cent, which was lower than the 5.4 per cent recorded in the previous 15 quarters. It was much less than eight per cent recorded in the first quarter of the previous year.

The Reserve Bank of India on its part brought down its April estimates for GDP growth in 2001-02 of 6-6.5 per cent, to the significantly lower band of 5 to 6 per cent in its mid-term review of Monetary and Credit Policy in October end this year. Now all pointers say the growth could be less than five per cent this year, lowest ever in a decade.

AGRICULTURE

Though monsoon has been good for the 13th year in a row, concerns have been expressed both in official and unofficial circles about the decline in public investment in agriculture and consequential fall in productivity. If the government was serious about pump-priming, it should immediately step up investment in agriculture on which 70 per cent of the population depended.

With good rains, the outlook for the winter crop is, however, strong and the government agencies expect the rabi foodgrain harvest to cross 107 million tones, 15 per cent more than last year. Side by side with overflowing granaries, starvation deaths too are reported indicating faulty distribution system.

The latest ICRA bulletin warns that the movement on economic reforms continues to be "glacial" despite official statements to the contrary.

BANKS

Banks are flush with money and the lowering of interest rates to a record six per cent this year has not enthused business community to step up investment.

Weak credit flows are a manifestation of structural deficiencies in the industry, which is the principal borrower. At the same time non-performing assets of the banks have mounted to Rs 560 billion.

ICRA says the total bank credit on year-to-date basis to the commercial sector up to the end of October 2001, was Rs 242.27 billion. This was not only much lower than that in the last year, but was only marginally more than that at the same point in time in 1999.

This weak trend in credit and other financing off-take has been in evidence right through the past months of the present fiscal. Measured on year-on-year basis, the flow of total bank accommodation to the commercial sector at 12.5 per cent in early October this year, was 30 to 40 per cent less than in two previous years.

The progressive lowering of base lending rates, prime lending rate and restrictions on the size of the risk spread that banks may charge has also perhaps further impeded the flow of finance, by under-pricing the risk of the credit.

Another unwelcome trend in the banking sector is that a significant part of non-food credit has been extended to central energy utilities, mainly for financing of the arrears payments by the state electricity boards. The quasi-fiscal account - the oil pool deficit has also been financed from the banking system, which is not good.

TAX

The rapid and progressive weakening of tax collections this year coupled with not much headway in expenditure control is expected to seriously affect the government efforts to control fiscal deficit.

With a plethora of scandals in 2001, stock market crash and terrorists attacks have left the reform process incomplete this year and low growth, mainly due to structural deficiencies, is, therefore likely to continue in the coming year.

ALSO READ:
2002: The Year That Was...
Money

Tell us what you think of this report