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Growth rate for 2001-02: A first estimate

P. R. Brahmananda

IN ALL probability unless the fourth quarter estimate of GDP turns out to be substantially higher than the estimates for the first three quarters, the growth rate of real GDP for 2000-01 may turn out to be somewhat less than the 6.1 per cent figure in ci rculation. During the first three quarters of 2000-2001, the growth rates were respectively 6.3per cent, 6.5 per cent and 5.7 per cent. The fourth quarter performance will have to be about 5.9 per cent, for the overall growth rate during the year to be 6 .1 per cent.

In 1999-2000, the fourth quarter growth rate was 6.3 per cent. It is doubtful if in 2000-01, the fourth quarter figure will be as high as that. One hunch is that the growth rate for 2000-01 may be about 5.5 per cent. Interestingly, growth rate in service s had started decelerating in the last quarter of 1999-2000. The April-February growth rate in the index of industry is about 5.1 per cent over a similar period in the previous year. The growth rate of infrastructure for a similar period during 2000-01 would be 5.2 per cent compared to 8 per cent in a similar period in the previous year.

The Index of Industrial Production may go up in 2000-01 by about 5 per cent compared to 6.5 per cent in the previous year, but the overall growth rate of industry as per the National Accounts data may be less than 5 per cent in 2000-01. In agriculture, a growth rate of 0.9per cent was projected for 2000-01. But it seems it may turn out to be less than the above. It is reported that production of foodgrains in 2000-01 may be just about 196 million tonnes compared to 209 million tonnes in 1999-2000, a sho rtfall of nearly 6 per cent.

The latest data, till February, indicates that the overall stocks with the PDS is higher by 15 million tonnes, and procurement is higher by 4 million tonnes but the offtake is lower by 4 million tonnes. The weather has been adverse in 2000-01 compared to the previous year. The higher procurement may be because of higher prices but the lower offtake is also because of higher prices.

There is a conflict between the interests of surplus producers and those of the income-deficient population. The larger procurement is not an indication of larger production just as the lower offtake is not an indication of Engel's law. Oilseeds output will also be less by 3 million tonnes compared to 1999-2000. Sugarcane may be less by 8 per cent and cotton by nearly 20 per cent. Jute and mesta may be about the same as last year. Overall, the index of agricultural output may fall by 7 per cent or so, whereas the Economic Survey expected a shortfall over the previous year by about 3.5 per cent.

In services, we should be content if we can reach a 7 per cent growth rate. The revenue-earning goods traffic during 2000-01 shows an increase of only 5.2 per cent compared to the 8 per cent growth rate the previous year. The cargo cleared in ports also shows a lower rate of increase over the previous year. My estimate of 5.5 per cent probable growth rate in real GDP in 2000-01 is clearly lower than the RBI's estimate of 6 per cent.

What is the outlook for 2001-02? The RBI Governor has projected a growth rate between 6per cent to 6.5per cent. Let us go sectorwise. In agriculture and allied activities, in 1998-99 we witnessed a growth rate of 7.1 per cent. But agriculture is having a lean time in 1999-2000 and 2000-01. Suppose we expect a most favourable monsoon ahead. The outer limit for agricultural and allied growth would be about 7 per cent. Agriculture and allied have a share of about 24 per cent in GDP.

On that basis, the most optimistic projection would be a relative contribution from agriculture of 1.7 per cent for growth in 2001-02. In industry, looking at the performance during 2000-01, and the continuance of world recession along with the prospect of upsetting WTO-compliance in imports and exports, we should be thankful if we can obtain a growth rate of at least 3 per cent in 2001-02.

Overall, industry has a share of about 22 per cent in GDP. The relative contribution of industry to growth in 2001-02 may be about 0.7per cent. Let us now look at services. The world conditions are not favourable to the New Economy services. Real governm ent consumption expenditure will not increase except by a small extent. Most community, social and personal services may not see a growth rate above 6 per cent. Transport and communications depend on commodity growth and if this is lower, their growth ra te will also be lower.

Finance, etc., are also adversely affected when the commodity growth rate is lower. All in all, the growth rate in services in 2001-02 may lie between 6.5 per cent and 7 per cent. Their relative share in GDP is about 54 per cent. Their contribution to g rowth rate in 2001-02 would be 3.5-3.7 per cent.

Adding up the contributions of the three sectors to the growth rate in 2001-02, we get a figure of 5.7per cent to 5.9per cent. Clearly, the projected growth rate for 2001-02 may be less than 6 per cent. Even this depends on a substantial recovery in agri cultural output in 2001-02 of the order witnessed in 1998-99. If this does not turn out to be so, we must be prepared for a growth rate not higher than 5.5 per cent anyway. Actually the growth rate of net capital stock has been going down and may be 5-6 per cent.

There is no reason to assume any reduction in the capital output ratio in 2001-02 compared to its level in 2000-01. On this basis as well, one should not expect a growth rate above 6per cent. It may be on the wrong side of 6 per cent. We have been accust omed to New Delhi, especially the Finance Ministry, to project higher growth rates than can be reasonably expected. The RBI Governor has done a service to the country by placing the projected growth rate for 2001-02 at 6-6.5per cent. The Finance Ministry probably expects the growth rate to be closer to 7 per cent. This year's experience of shortfalls in revenue receipts as against expectations should be a warning for the next year.

It is in the above context that the Finance Minister's readiness to forego revenue resources for next year is very disturbing. He is so much confident of large borrowings from the RBI that taxes and domestic savings do not seem to bother him overmuch. It is not at all clear how he hopes for the country to take a big leap from the 6 per cent growth rate to 8 per cent and 9 per cent. With no consideration for savings improvements and no prospect of productivity improvements, how do we return to the growth rates of 7 per cent at least?

The RBI's careful study on macroeconomic and monetary developments points out that it is only the growth rate of capital stock that is most material in the determination of the growth rate. But it is here that both financial and monetary policies seem to be non-optimal in my judgment for whatever it is worth because of the neglect of the importance for increasing savings to obtain higher growth rate.

The IMF Chief recently stated that according to Mr Yashwant Sinha, if India completes the reforms in full, its growth rate can go up to more than 8 per cent. During the last three years reforms are being implemented. It is true that capital convertibilit y is not desired at this stage by any economist in the country. Full labour mobility among the different states is also not possible nor is this contemplated.

Full goods mobility exists to the exclusion of foodgrains. But even this may be achieved. We have gone to the maximum feasible in regard to incentives for foreign capital and foreign financial institutional investors. It is incorrect to think that remova l of restrictions on hire and fire will suddenly move up the growth rate. The chief factor inhibiting higher growth is the inadequate growth of real capital stock.

This can be remedied only by improving the domestic savings ratio. Measures for this are not under contemplation by the Finance Ministry. The latter expect that lower and lower interest rates will increase production levels. This is not happening. Nor ca n this policy lead to higher growth rates through higher savings ratios. Given the political uncertainties, the government can do its best by encouraging thrift and savings and making the policies move in that direction.

Monetary and financial permissiveness can only increase the fiscal deficit and augment monetary liquidity. We have to keep imports at higher levels to bring down prices. But this policy hurts domestic producers. The way-out would be to reduce the growth rate of money magnitudes, reduce government expenditures by reducing staff substantially, increase incentives for savings, reduce the propensity for governments and industry to borrow from the monetary and financial institutions, etc. All this requires a U-turn in current monetary and fiscal policies. The IMF should put its weight in favour of the above. Reforms are necessary but they are not the panacea for improving the growth rate. If my estimates and projections turn out to be nearer reality, it me ans that for four years successively, we will have growth rates lower than in the period from 1990-91 to 1995-96.