Jan 18, 1999
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FORECASTS If Fortune Smiles Analysts expect the economy to do marginally better in the next financial year but any slowdown in reforms may derail projections. By Shefali Rekhi
However, it may be too early to begin celebrations yet. The negative factors far outweigh these positive signs. With revenue receipts dropping due to a fall in indirect taxes and the disinvestment programme fetching a mere Rs 225 crore against the projected Rs 5,000 crore, the fiscal deficit is threatening to spin out of control and hit the 7 per cent danger mark. This will constrain the Government's spending capability. Also, the consistent fall in net profits of corporates over the past three years is bound to curb new investments. Moreover, the rains may fail this year because the country has experienced the unusual phenomenon of 11 consecutive good monsoons. And the coalition partners of the ruling BJP may just throw the spanner in the works to scuttle the reforms process. INDIA TODAY got five premier think tanks -- the Institute of Economic Growth (which has a tie-up with the Delhi School of Economics), Oxus Fund Management, Tata Services, Centre for Monitoring Indian Economy (CMIE) and National Council of Applied Economic Research (NCAER) -- to assess which way the economy would head in 1999-2000. The results are not very bright. At best, the economy may do slightly better than it did in 1998-99. "We can expect some improvement and the probability that things will worsen is lower," says NCAER Director-General Rakesh Mohan. "But a lot will depend on the intensity with which the Government pushes reforms." With the current pace of change, however, most of these institutions believe that the GDP will grow marginally from slightly over 5.5 per cent in 1998-99 to just over 6 per cent in 1999-2000 (see chart). This is far lower than the 7.8 per cent growth rate clocked by the Indian economy in 1994-95, thanks to a 5.1 per cent growth in agricultural production, 10.4 per cent growth in industrial production and exports zipping at 18 per cent. In fact, for two more years the GDP growth was 7 per cent plus. But the tight monetary policy in the following years negated that growth, causing demand to slump. In the first half of this year too, 1,280 companies reported a drop in net profit. As a result, capital investment has taken a knocking. Once growing at a healthy clip of 10 per cent in 1995-96, the growth rate slumped to about 5 per cent in 1998-99. "Corporate financials are still stretched and they might not be planning fresh investments next year. I don't see 1999 as a happy year for business," says CMIE Director Mahesh Vyas. He says the companies need at least another year to cover their accumulated losses. The BJP-led Government did intend to pull the economy out of the rut. However, it made a mess of the budget and the roll-backs thereafter hit its credibility. "I think the Government made major mistakes like the timing of the nuclear blasts, the budget and the delayed import of onions," says Surjit Bhalla, director, Oxus Fund Management. "The good news is that the reforms are high on its agenda now." But there is always a gap between intention and reality. The Government wanted to pump-prime the economy by splurging in 1998-99. However, rising inflation forced it to curb its plans. Indeed, the Government might find it difficult to raise the money for the grandiose Rs 50,000 crore highways project unveiled by the prime minister recently. With the fiscal deficit heading northwards, the Government may not be able to make the investments it wants to. Already there are differences between the Planning Commission and the Finance Ministry on the outlay for next year. While the Planning Commission wants to increase the outlay from Rs 72,000 crore to Rs 90,000 crore, the Finance Ministry does not favour an increase beyond Rs 75,000 crore. Economists believe the time has come for the Government to take some hard decisions. "The economy is at a stage where you have to take decisions on critical issues," says Mohan of NCAER. "The investments in infrastructure won't happen unless proper user charges are levied." The list of such crucial decisions is long but policy watchers feel that priority should be given to tackling indirect and direct subsidies to enable investors to get a return on their investments; reduction in excise rates and the number of slabs; dereservation of the small-scale sector to enable exporters to compete in the global market; and passing of crucial economic bills on insurance, Companies Act and foreign exchange management in the forthcoming budget session. Many of these decisions have been forced into the background because of opposition from within the coalition. Sunil Bhandare, who heads the Economics and Statistics department at Tata Services, says, "If the Government can effectively implement many of the decisions it has taken, it will improve sentiments." This feeling is echoed by K. Krishnamurthy, who teaches at the IEG: "Unless you trigger change now, you won't be able to achieve the revised 6.5 per cent growth rate for the Ninth Plan." That is something the BJP-led Government can ill-afford. |
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The past two years have been
particularly gruelling for the Indian economy. Agricultural and industrial production have
slowed down while exports have actually shrunk. But leading economists believe there are
signs to suggest that the Indian economy will manage to crawl out of the recession rut.
The world economy is expected to pick up in the coming months, signalling better prospects
for exports. The rabi crop looks promising and rural consumption, which was in the dumps
due to unseasonal rains last year, could therefore get a boost next year. Besides, the
Government is investing heavily in infrastructure projects and seems more resolute than
ever in pushing reforms. 
