Financial Daily from THE HINDU group of publications
Thursday, Oct 03, 2002
Foodgrains surplus, forex reserves Problem of plenty or plus point?
N. A. Mujumdar
INDIAN planners and bureaucrats are adept at managing a shortage economy. When it comes to `affluence' in some segments of the economy, however, the policy-makers seem ill-equipped use the `surpluses' to accelerate the growth of the economy or better realise the end-objectives of development. This is the broad conclusion that any perceptive reader of the RBI Annual Report for 2001-02 would arrive at.
The analysis of the recent developments in the economy clearly shows that the prospects for growth in 2002-03 are marred by the ominous drought: 19 out of 36 meteorological sub-divisions received deficient or scanty rainfall, compared to only 7 sub-divisions the previous year.
This necessitated the downward revision projected GDP growth from 6 per cent to 6.5 per cent to around 5 per cent. In fact, we do not seem to appreciate that such a widespread drought would have, in normal times, proved disastrous for the economy, bringing in its wake nominal or nil growth high inflation and large-scale starvation.
Three factors have saved us from such a possible calamity. First, the economy has inherited from previous years an embarrassingly large stock of foodgrains some 63 million tonnes at end-June 2002.
Second, the country's foreign exchange reserves have reached a new peak of some $60 billion, equivalent to some 15 months of imports. The country can thus freely import any food item, including edible oils, to compensate for domestic scarcity.
Third, inflation is subdued. Inflation, as measured by the wholesale prices on a year-on-year basis, declined to 2.7 per cent on August 3, 2002, from 5.5 per cent a year ago.
Historically, the refrain of Indian planners has been that the availability of foodgrains and foreign exchange are the main constraints to economic growth. Now that these constraints have been removed, at least for the last couple of years, why is India still unable to join the league of high growth economies such as the Asian Tigers, or even China?
One is disappointed that the RBI pundits have not even attempted to explore the possibilities of accelerating growth with the use of foodgrains and foreign exchange surpluses.
Part of the explanation for the relatively slower growth of the economy is that, post-1990, when we changed over to the so-called market-led economy, courting the corporate elite has become an objective of macro-economic policy. The corporate sector wants a low interest rate regime and the interest rate structure has been changed accordingly.
Today, an MNC or a high-rated corporate entity can raise funds from banks at 8 or 9 per cent , whereas a small farmer has to pay minimum interest rate of 12 per cent. The corporate sector wants the capital market to be developed and the Government has gone out of its way to promote the capital market: Fiscal concessions for investment in equity; throwing open portfolio investment to foreign institutional investors; persuading public sector banks to increasingly involve themselves, directly and indirectly, in the capital market; and so on.
It does not matter if sectors such as agriculture or small industries do not have access to the capital market. And it is a different matter that all these heroic efforts have failed. For instance, the total resources mobilised from the primary market added up to just Rs 7,111 crore in 2001-02. In sharp contrast, the resources raised through private placements soared to nearly Rs 65,000 core.
Dr S. S. Tarapore, former Deputy Governor, RBI, sums up the situation in the following words. "The problem with the Indian system is that entrepreneurs have got habituated to unsustainable large borrowings with minimal-owned funds. Any successful entrepreneur must realise that borrowing should only be the icing on the cake and internal generation should form the predominant element. Thus, the question which needs to be posed is not how to stimulate the flow of funds from intermediaries to industry but how industry can become self-financing. Making the interest rate too attractive and credit too easy to obtain is a sure path to disaster".
A corollary of this focus on the corporate sector or large and medium industries was the neglect of agriculture, small industries and micro enterprises. Public investment in agriculture, particularly irrigation, declined. And the flow of credit to the rural sector decelerated; in fact, the rural credit delivery system became moribund.
The policy-makers must realise that despite industrial expansion and export growth, agriculture will remain the main source of livelihood for the bulk of the population. Over the years, though the share of agriculture in national income, or GDP, has declined substantially from 50 per cent to only 25 per cent, dependence on agriculture has declined only marginally. It is still the means of livelihood of as many as 60 per cent of the population. Hence, broad-based rural development should be at the centre of the overall development strategy.
It is refreshing to note that the RBI Annual report recognises the importance of agricultural development, when it says: "Variability in agricultural production has emerged as a cause for serious concern... There is an urgent need to increase public investment in irrigation and water management, given the high correlation between the growth of area under high yielding varieties of seeds and gross irrigated area,"(page 121). The Report adds: "Moreover, investment needs to be directed towards watershed development in view of its salutary environmental implications."
One wishes that the RBI experts could have gone further here, instead of being content with making such a general statement. Using surplus foodgrains to promote rural development and welfare becomes relevant here. The success of this approach lies in linking the use of surplus foodgrains to productive activities.
The most conspicuous programme that comes to mind is the micro-watershed in development programme, which can be undertaken on a massive scale throughout the country. The bulk of the cost of such programmes would be accounted for by wages that can be paid in kind, namely foodgrains.
The technology involved is simple, and village Panchayats can implement these schemes. Thus, using surplus foodgrains, it is possible to create additional employment and income for the rural poor, while at the same time creating large overhead capital. Insurance against drought is another aspect of the gain to the economy.
Another lesson India can learn about its growth pattern is from the Chinese experience. China was able to reduce rural poverty to only 6 per cent of the population in a matter of two decades. This was, in large part, due to the fact that there was an explosion in non-farm employment. Rural industry grew sizably, employing 25 per cent of the rural labour force. Township and village enterprises (TVE) expanded rapidly, contributing 40 per cent to the total industrial output. Access to subsidised credit was an important factors that facilitated such rapid growth.
The point to drive home is that financial and credit polices should be so shaped as to facilitate the growth and expansion of such micro enterprises. Although the annual report makes a passing reference to micro credit institutions, there is no specific agenda for the promotion micro credit institutions. It is easier to wax eloquent on implementing financial sector reforms, by replicating the models embodied in the IMF, World Bank prescriptions or PIS norms. It is more difficult to evolve our own model of a network of micro-credit institutions linked to NGOs and self-help groups (SHGs).
Management of the country's foreign exchange reserves in an art. The level of reserves should be adequate to inspire confidence but not excessive. Maintaining excess reserves is wasteful, especially when the interest rates in such developed countries as the US or the UK are at their lowest. In other words, yields on reserves have declined to their lowest levels. The present level of our reserves $60 billion is indeed excessive, considering that it is equivalent to 15 months imports.
Generally, reserves equivalent to some six months of imports is regarded as reasonable. Our efforts should, therefore, be directed towards using part of the reserves for financing imports of capital or intermediate goods which would boost our domestic production capacity. These imports may be used to develop infrastructure like power or transport. Thus, using foodgrains surplus for productive activities and forex reserves to import capital goods would go some way to upgrade the production capability of the economy. It may not result in accelerating GDP growth immediately, but its impact on GDP growth would be certainly felt in the medium term.
The RBI report should have also emphasised the primordiality of drought-relief during this year. What purpose will the mountain of surplus foodgrains serve if they cannot be used immediately to feed the unemployed and the poor? What is, after all, the end objective of development? Reduction of poverty, unemployment and starvation. In fact, the stocks with the Food Corporation of India (FCI) should be available on tap to all the States affected by drought.
For now, the Government should ignore the fiscal deficit target and the RBI its monetary target. In any case, the use of foodgrains on the lines discussed here will not generate inflationary pressures. Such a strategy of using surplus foodgrains and foreign exchange resources would place the economy on an optimum growth trajectory.
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