Financial Daily from THE HINDU group of publications
Saturday, Oct 05, 2002
Columns - Economy - A Perspective
CSO estimates No cause for cheer
P. R. Brahmananda
THE Central Statistical Organisation has promptly released the quarterly figures and growth rates of the contribution of different sectors to GDP and also of GDP itself for April-June 2002. Already the media have made their comments which are generally hopeful about the GDP contributions in the other three quarters. These comments are highly impressionistic and need to be whetted very carefully.
The first quarter figures need to be compared with the that period's in previous years, and not just with the immediately past, January-March, quarter.
Graph 1 puts the GDP figures at constant prices of the quarter for the past seven years. The sectoral GDPs are grouped under three heads: a) agriculture, forestry and fishing; b) mining, manufacturing, electricity, gas, water and construction; c) services consisting of trade, hotels, transport and communication, financing, insurance, real estate and business services and community social and personal services.
The real GDP contribution for the quarter from 1996-97 to 2002-03 has a trend growth rate of just 2.8 per cent per annum. However, the growth rate in the 2002-03 quarter over that in 2001-02 is 3.18 per cent. This means that because of adequate and timely rainfall and good harvests, the agricultural growth rate was decidedly and substantially higher and above the trend rate. But we know that the implications of the severe droughts in 2002-03 pertain to the period June-July 2002-03. Insofar as agriculture is concerned, the excellent production of the farm year of 2001-02 has been already reflected in the A-J growth rate of 2002-03.
The real GDP contributions of mining, manufacturing, etc., has a trend growth rate of 4.59 per cent per annum, somewhat higher than the trend growth rate in agriculture. Actually, in April-June 2002-03 the growth rate of this sector compared to the previous year's April-June has been 4.25 per cent, slightly below the trend growth rate.
The real GDP contribution from the services sector has a trend growth rate of 7.37 per cent per annum. But, contrary to the general impressions, the growth rate of this broad group in April-June 2002-03 compared to the April-June 2001-02 was 6.53 per cent, substantially below the trend growth rate of above 7 per cent. Thus, in the two broad sectoral groups which contribute to about 75 per cent of GDP, the growth rates in April-June 2002-03 have been below the trend growth rates.
The overall GDP growth rate for April-June 2002-03 is placed at 5.97 per cent compared to 3.52 per cent in April-June 2001-02. The trend growth rate of GDP in the April-June quarter is about 5.35 per cent. It is the performance in the agriculture sector in April-June 2002-03 that has been responsible primarily for the higher growth rate in April-June 2002-03.
Graph 2 indicates the rates of changes of different sectors and of GDP over sequential April-June quarters. It shows some recovery in mining, manufacturing, etc., as also in the services sector, though to a lesser extent. Since these recoveries can be attributed to the excellent performance of agriculture in the April-June quarter of 2002-03 and the subsequent quarters will show the effect of the macro-drought in agriculture on the economy, there is no reason for any justifiable optimism.
The international situation and the worsening of the relations between the U.S and Iraq may have their effects on the Indian economy as well. Clearly, the oil prices would be higher than otherwise and the inflows of foreign resources to the Indian economy may also be lower than expected. The most distressing factor is the broadly rising price level drift and the worsening fiscal situation in terms of the growing burden of stabilising the public financial sectors institutions.
The multiplier linking aggregate GDP to the GDP contribution of agriculture is a rather important ratio. There has been a rising trend in this multiplier insofar as April-June quarters are concerned. This is the effect of the rabi crops which are not so severely affected by climatic changes. The bulk of agricultural output emerges during the kharif season which falls in the quarters subsequent to April-June.
The agricultural year is from July end to June end. Our financial year is from the beginning of April to March end. The business season is generally from October to end September. The April-June quarter, in terms of production implication, belongs really to a previous year! This gives no clue about the course of production during the rest of the three quarters. It is admitted that during the current year, agriculture will have a rather big dip.
The related sectors will also suffer adversely. The multiplier for the year as a whole can come down and significantly. In one judgment, industry and trade are reacting currently to the good harvests of last year. The momentum cannot be kept up on its own.
There is the greatest danger that the authorities may succumb to the heavy pressures from lobbies to reduce the interest rates, to increase the element of subsidisation, to reduce tax rates, etc., and to further expand the liquidity potential. Currently, the excess liquidity state is so large that even the process of absorption of the same by itself will cause a high monetary growth and to lead to further heavy pressures on the course of the price level.
There may be pressures to draw upon the RBI kitty of exchange reserves for the purposes of expanding domestic consumption. The use of reserves for keeping down price pressures is a costly method of containing inflation arising from domestic sources.
It was the fiscal crisis that led to the reforms, but it is not yet tackled and by pushing reforms further we may land ourselves with more of unemployment co-existing with a state of high inequity and inequality. It is the real sector problems that are preventing the reductions in revenue and fiscal deficits. They are also coming in the way of long-term real savings and investment. How to step up domestic capital formation rates for the long run without causing upward inflationary pressures and without allowing unemployment to grow is the serious challenge before the economy.
Hitherto the World Bank loans and aid etc., were adding to the foreign exchange resources. Now that there is so much liquidity in the Indian economy and the interest rates are so low, it is natural that the World Bank and such organisations may like to borrow in India, at least for their rupee expenditure. But this will mean drying up some of the sources of reserve accretions and since the World Bank rupee expenditures will be probably on non-output yielding items, they may help to rise the velocity of money and consequently add to the price level pressures at home.
If because of low agricultural growth rates, as well as of dips in the agricultural output, we have no adequate generation of real commodity surpluses, there is a great danger that expanding rupee expenditures at a faster rate than output and surpluses will lead to crowding out of the space for government and the private sector. Unless the World Bank's expenditure in India involves long-term real investment in India. If such borrowings lead to expenditures outside of India, there may be exchange implications. This might be a mechanism then for taking exchange out of India!
It would be good to look at the immediate future realistically. It is wise policy not to depend upon external exigencies in the current context. This means that we have to mobilise more of resources for the fisc and shift the attention of the private sector to longer-term ends. If possible, the public sector's key role in filling the gap in long-term investment sequences has to be filled.
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | Home |
Copyright © 2002, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line