December 31, 2002
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Money > Column December 31, 2002 |
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What the New Year holds
Are the future colours grey and saffron, or is something more interesting in store? I have been looking at figures, and they give some pointers. The economy has been growing at 5-6 per cent; that is quite a respectable figure by world standards. Where has the stimulus for such high growth been coming? I identify two sources. One is exports of both goods and services. They have been growing faster than imports; the resulting improvement in the current account has been driving growth. The year 2000 was a good year for exports; 2001 was bad. The current account started to recover in 2002. This improvement will continue in 2003. The industries leading exports are engineering and chemicals. Within engineering, cars and two-wheelers are doing well. Within chemicals, pharmaceuticals have led. Our biggest markets have been the USA and the EU. Because of poor growth there, their share in exports has been shrinking; new markets are being developed in the east Asia and the Middle East. Thus the structure of exports is changing; so is their direction. India is moving away from its traditional textiles and gem-cutting, and showing competitive strength in new industries. The movement is slow, but unmistakable. In services, information technology continues to lead despite the world slowdown in the industry. The change in the composition of industries will also impact the structure of economic activity. The rise of IT is reflected in the rising share of services in GDP. The other source is infrastructure investment. The telecommunications companies have been investing heavily in cables and towers. The sums are huge, and they have been spent over large areas. The stimulus is akin to that of large public works projects. The other is infrastructure investments by governments. There is an army of workers engaged on the Golden Quadrilateral and the Platinum Cross. Flyovers are very popular. Stalin began in Chennai; Shiv Sena followed in Mumbai, and Delhi has followed on. Other cities are not far behind; Chandrababu Naidu has smoothed out traffic in Hyderabad with flyovers. The Metro has just opened in Delhi. These are expensive investments. Somehow, even bankrupt governments have found money for them -- presumably because they yield rich bribes. Will these investments continue? Telecommunications investments are approaching the end. The bulk of the expenditure has been made, capacities have been built up, and I think there will be a hiatus until the companies begin to earn some return. Hence their investment is going to taper off. The governments, on the other hand, are getting rather fond of big investments, and will continue them until they run into a financial crisis. Where did the money come from? The telecommunications companies have foreign partners; quite a bit of the money has come from abroad. The rest has been raised from financial institutions -- only a little bit from the public. The central highway project has been financed from a cess; most of the other investment in road and rail has been financed from borrowings of various governments. Industry has placed little demand for funds from banks, so they have plenty of money to lend to the governments. The banks have been able to lend to the governments because they were flush with money; and that money was coming from abroad. Capital inflows so far exceeded the current account deficit that exchange reserves kept mounting; and as Reserve Bank bought foreign exchange it released Rupees into the economy. It is this surfeit of foreign exchange that kept the banks liquid and financed bankrupt governments. I see this flow slackening. The current account is in surplus, which may continue to increase. But capital inflows are definitely coming down. Portfolio investment has already almost vanished. FDI approvals have been falling, and are now no higher than actual inflows -- which means the inflows must fall. Reserve Bank has shown indications of changing its exchange rate policy. For many years it has steadily depreciated the Rupee. But from last April it has allowed the Rupee to drift up. Presumably it is embarrassed by the huge reserves it has accumulated. If it continues to let the Rupee appreciate, that must bring down export growth and hence the stimulus it has provided to the economy. That must worsen the current account, and slow down the injection of money into the economy. If it did, the ability of banks to continue financing governments and business must suffer. This year also happens to be the year when the India Resurgence Bonds must be repaid. The reserves are ample; they put no constraint on repayment. But the banks have been using the money from the bonds for lending on at a fat profit. They will not want to forgo it; and the State Bank, their leader, will certainly lobby for another bond. So will the NRIs, who are close to the BJP and who too make easy profits of arbitrage by borrowing abroad and investing in these bonds. If another bond is floated, that will add to the reserves and to the money supply. But floating another bond would be the height of irrationality, and I do not think this government will go that far. So on all three sides -- external accounts, infrastructure investment, and money supply -- I do not see the highly favourable constellation of the past year continuing for much longer. So unless some other stimulus arrives on the scene, I see the economy beginning to slow down in the course of the year. So taking all the factors into account, I am mildly bearish on 2003. If the economy continues in the direction in which it is heading, then a slowdown looks inevitable. But favourable accidents should not be ruled out. For instance, agriculture could recover. The chances are very small that the coming year will see another disastrous harvest. If farm sales recover this year, they will raise farm incomes and rural consumption. The magnitudes are small. Agriculture accounts for only a quarter of GDP. But it still makes a difference -- as well it may from May onwards. Nor should favourable policy interventions be ruled out. This government has less than 20 months left till the general election; governments do tend to be expansionist in their final years. Kelkar has shown the government a good way of being expansionist, namely reduce corporation taxes. The government may just possibly do it. Powered by ALSO READ:
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How will the economy do in the coming year? Will it continue to drift, or can we expect better times? Can industry expect an upturn, or will cutthroat times persist?
