Business Daily from THE HINDU group of publications
Thursday, Nov 23, 2006
IMF's study on India Is the `economic renaissance' sustainable?
The economy is in the penultimate quarter of the current fiscal, a time when Budgetary preparations for 2007-08 have just begun. The Finance Minister, Mr P. Chidambaram, the architect of the UPA Government's fourth Budget, has lost few chances to drive home the message of fiscal prudence to husband resources for development.
Whether it was his much-ballyhooed talk on India's Economic Reforms at Stanford University in October or the address at the Economic Editors conference or the Consultative Committee meeting with Members of Parliament (MP) attached to his Ministry, Mr Chidambaram's mantra of choice was the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
While expatiating on the challenges confronting the economy in his Stanford lecture, Mr Chidambaram said that it was essential to create fiscal space to augment public investment in infrastructure by restricting public expenditure in current consumption. In a statement circulated at the Economic Editors Conference, he admitted that the FRBM-mandated fiscal consolidation was largely revenue-driven.
"In my view," he said, "equal emphasis has to be placed on revenue mobilisation, on the one hand, and containment of expenditure, on the other.
So long as we are not able to eliminate wasteful expenditure, we have to adopt a cautious attitude towards tax concessions and revenue sacrifices. While sectoral policies aimed at giving a thrust to the sector concerned are necessary and desirable, such policies should rely more on better infrastructure, new technology and removing any structural constraints.
The magnet for new investment should be better infrastructure and not tax concessions alone." Echoing similar concerns at the MPs meeting earlier this month, but without identifying any segment or industry, the Finance Minister called for "a close and hard look at the present system of exemptions in favour of particular sections of tax-payers."
Limited fiscal elbow-room
He said that incentives must be pruned to meet the FRBM goals and the tax-GDP ratio raised. Given the compulsions of coalition politics, particularly the wish-list of allies and also the major constituent, the Congress party, to put in place a slew of welfare measures, the fiscal elbow-room that he is seeking will be difficult to achieve.
Strangely enough, at a time when the economy is doing well, the Finance Minister, much like the cautious central bank, is underscoring the importance of continuing with the fiscal consolidation course.
It is not the Finance Minister alone who is keen on meeting the goals set out in the FRBM Act to ensure non-inflationary sustainable inclusive growth that does not entail any trade-off across growth, equity and inflation. The International Monetary Fund (IMF), the major trigger for India's tryst with reforms during the early 1990s, is very optimistic on India, provided it mends its fiscal troubles.
In a recently published tome, India Goes Global Its Expanding Role in the World Economy, senior officials of the Fund who interacted with mandarins in the Ministry of Finance and also the RBI, put it elegantly: "A sustained takeoff in India can have a substantial impact in Asia and the rest of the world," if what they set out in the study are achieved by the authorities.
Their optimism over India emanates from a combination of factors, a few of which are:
India contributed nearly one-fifth of Asian domestic demand growth over 2000-05. Looking forward, India is slated to be the second-largest demand driver in the region, after China.
India accounts for almost one-quarter of the global portfolio flows to emerging market economies, nearly $12 billion in 2005.
India is the world's leading recipient of remittances, accounting for about 20 per cent of global flows.
India is the world's leading outsourcing destination and is fast emerging as a top 10 tourism destination.
Indian corporates are emerging as key players in their own right. Reliance owns one of the largest refineries in the world, while Tata Steel is among the most efficient producers in the world. Indian industries, including those in steel and oil, are looking abroad to acquire assets.
The IMF treatise aptly characterises India's demographics as underlining the potential for an extended period of rapid economic growth because it is a young country and is one of the few large ones forecast to sustain a growing labour force over the next 40 years. Estimates point to between 75 million and 110 million entrants to the labour force over the next decade with the obvious potential to raise economic output and bolster its competitiveness.
Yet, continuing success, despite sustained high growth during the last three years, is by no means assured, the Fund officials say, adding that India has experienced previous rounds of rapid growth the mid-1990s, for instance which did not sustain.
The current economic renaissance, as the Fund puts it, is a reflection of 15 years of reforms; hence, continued strong growth will need to be infused by more such reforms. It is small wonder that Mr Chidambaram quite often remarks that, "what is needed is not less but more reforms and deepening of reforms on the institutional and governance fronts," even as poverty reduction post-reform has led to a broadening of the constituency base for reforms.
While pushing for pressing ahead with reforms, both the Fund and the Finance Minister lay due emphasis on fiscal prudence.
The Fund points out that a period of robust growth in the 1980s was brought to a halt in large part by high fiscal deficits and macro-economic imbalances and "with fiscal deficits still high, India cannot be considered out of the woods in this regard."
The Fund states in unmistakable terms that despite recent progress, India's high fiscal deficits and heavy debt burden remains "a barrier to more rapid sustained growth." It said that tax and expenditure reform would be needed to create space for infrastructure investment and social spending and facilitate private investment.
This is a point the Finance Minister had made quite often in his recent speeches.
Towards exponential growth
Even as domestic companies are going global via the M&A (mergers and acquisition) path, the IMF tome cites the Prime Minister's speech in 2005 when he said, "we must move away from the paradigm of incremental growth to a paradigm of exponential growth and growth into uncharted territory."
The Fund looks more closely at that paradigm of exponential growth and laments that India's role as an engine for global growth has been limited by the still relatively closed nature of its economy.
Hence the Fund's emphasis on structural reforms aimed at raising productivity in agriculture, more rapid development of the manufacturing sector, broad labour policy reforms and reform of food, fertilisers and petroleum subsidies, along with more private ownership in the banking system, eliminating structural shortcomings to lending to small enterprises and agriculture and continuing to reinforce prudential oversight in banking.
If Mr Chidambaram, concerned as he is with fiscal prudence, can convince allies in surmounting the structural constraints in the economy, it will pave the way for "new and improved Indian firms and offer a huge new middle-class of several hundred million consumers to the global economy, with a major impact on world trade, prices and growth" as voiced by the IMF.
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