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KAUTILYA
The
Momentum of Drift
The
economy is now suffering from the QSQT effect-Quarter Se Quarter
Tak
By
Jairam Ramesh
Remember
the hit Hindi film of the late 1980s-Qayamat Se Qayamat Tak, popularly
known as QSQT. The economy is going through what can be called the QSQT
effect-quarter se quarter tak. The summer of hope has become the
winter of gloom. Compared to the first quarter last year when real GDP
growth was 6.9 per cent, this year's first quarter (April-June) has seen
5.8 per cent growth. Of course, it is entirely possible that these figures
will be revised later but for now the gospel is that the economy has lost
its fizz. But a 6 per cent growth being defined as a slowdown is a remarkable
tribute to the new level of aspirations created by the reforms programme.
 It
is a mixed picture. Exports are growing very healthily and the current
account deficit is in a safe zone. Overall tax collections, particularly
those of direct taxes, are buoyant. Housing finance trends are robust.
Current bank credit growth is over 20 per cent. The inflation rate has
gone up as a result of inevitable hikes in administered prices but it
is not spinning out of control. Tough decisions on telecom deregulation
and particularly on oil prices have been taken by the Government. New
private insurance companies have finally been given the green signal.
But on the
flip side, the monsoon has been less than normal in six states, industrial
production appears to have slumped even after allowing for statistical
aberrations, interest rates have increased across the board and the rupee
has depreciated vis-a vis the dollar by almost 5 per cent since April
1, 2000. Investment continues to be extremely sluggish and business sentiment
is unusually depressed.
The response
of industry has been predictable: increase import duties; speed up privatisation
and increase government spending. Of these three, the most dubious is
the recommendation relating to import duties. In fact, it could well be
argued looking at the data that the Indian economy has moved to a lower
growth path since 1997-98 precisely from a time when the downward trend
in import duties was reversed first under P. Chidambaram and later by
Yashwant Sinha. Moreover, when the rupee depreciates, imports immediately
become costlier giving protection to domestic producers.
Due Diligence:
As far as privatisation is concerned, A.B. Vajpayee's Government has taken
bold steps although only one deal relating to the sale of Modern Foods
to Hindustan Lever has been consummated so far. Many more transactions
are on the anvil but these must go through the process of due diligence.
There is no point short-circuiting this process and giving privatisation
a bad name just to deal with some short-term hiccups. And while on privatisation,
the government cannot escape its responsibility for eroding the market
value of a number of blue-chip PSUs by half-baked pronouncements and actions.
The third
option is the standard Keynesian prescription for reviving an economy
during a depression. But we are not in a depression. Keynes' solution
of more government spending was made when governments in the West followed
conservative fiscal and balanced budget policies. What he would have recommended
in a situation when an economy's overall fiscal deficit is around 10 per
cent of the GDP is something worth speculating about. Former RBI governor
C. Rangarajan put it well in his JRD Tata Memorial Lecture in Delhi in
July 1988: the argument that borrowing by the public sector for the purpose
of capital expenditure which create assets is not harmful, loses much
of its validity in India, since the rate of returns on these assets is
nowhere near the interest rate paid on the borrowings.
Government
spending on infrastructure like power, roads, irrigation, railways and
housing must undoubtedly increase. But it cannot as long as government
expenditure is consumed by salaries, pensions, subsidies, bailouts and
debt servicing. Neither the Central budget nor the state budgets can sustain
any increase in investment expenditure. Thus, additional public investment
in infrastructure must come from restructuring existing government expenditure
consistent with the need to reduce both the fiscal and specially the revenue
deficit.
In developed
countries, interest rates are raised to cool overheating or lowered to
revive decelerating economies. We have yet to reach that stage. But we
must move faster towards creating a framework that allows interest rates
to be used as an instrument of macroeconomic management. Meanwhile, what
can be done to deal with QSQT pains is to maintain an overall policy stance
to keep sentiment bullish. Vajpayee has allowed drift to gather momentum.
It is this, more than anything else, that is causing nervousness. It is
not enough to like business. You have to be business-like to be taken
seriously and for investment psychology to be positive.
(The
author is with the Congress party. These are his personal views.)
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