The Hindu Business Line : Economy in pre-election year — Ground realities matter, not promises

In this pre-election year, there is a clear change in strategy by the BJP, which has shifted the emphasis from the Hindutva theme to development. But whatever may be the positive results of performance claimed by government spokesmen, the party will be judged only by the ground realities. .

AFTER last year's poor performance, the economy is showing signs of getting back on track. Latest macroeconomic data suggest that it may be in for better performance during 2002-03, the pre-election year, though sustained improvement in growth in the months ahead cannot be assumed.

According to recent CSO statistics, the manufacturing and mining sectors together have shown growth of 5.8 per cent during 2002-03. This is good news as manufacturing was doing poorly in recent years.

The rupee has also gained in strength. This may be more due to the weakening of the dollar given the huge current account deficit in the US economy. A strong rupee may, however, lower our competitiveness in world markets, particularly at time when exports may be poised to gain momentum.

The recent rise in the inflation rate, at 5.21 per cent, though not alarming, is due to domestic shortage of daily consumable items and the persistent fiscal deficit. India is yet to show a credible record in fiscal deficit management despite political rhetoric.

On the negative side, such software majors as Infosys, Wipro and Satyam have posted lower growth in their last quarter earnings. The valuation of tech stocks took further steep downward correction in the face of decline in earnings and profits, and uncertain export prospects in the coming year.

Major software importing countries, such as the US and the EU, are yet to come out of recession, and corporates are cutting down on fresh contracts and renewing contracts at lower prices. Investments in new technology ventures are on freeze. Margins are under pressure due to severe competition in the domestic market.

There is a visible trend to reduce outsourcing of BPO in order to preserve jobs in developed countries. Although the dotcom debacle may not repeat itself in this field because of the vast potential for diversification into high value-added services, India should take note of the writing on the wall and redraw its strategy in this fast-changing field by expanding into high-tech areas such as embedded software and large-volume complex processing operations that may preserve the unique selling proposition, competitive cost and premium quality. Infrastructure for this effort needs substantial augmentation. There is concern that small and medium companies may find themselves left out of the race.

India should also explore other opportunities of outsourcing in manufacturing areas, such as pharmaceuticals, engineering, electrical and electronic items, automobile parts, where a good manufacturing base exists with low-cost operation, but attention has to be paid to quality and international standards to win global customers.

In the manufacturing sector, despite investment intentions being announced, an investment famine continues in major sectors. For reasons of global uncertainty and India's tardy performance in implementation of second-generation reforms, actual flow of FDI has stagnated at $2.5 billion.

Falling interest rates alone will not work magic in promoting investment. The major stumbling block is absence of pick-up in domestic and global demand and overall improvement in investment climate.

Despite recession, the US economy is still the locomotive. This is also a pre-election year in the US, and the President, Mr George Bush's preoccupation is more with political and foreign policy issues, embroiled as he is in the West Asian crisis.

Global economic matters seem to be on the backburner for a while. On the domestic front, the Government should allocate larger sums in opening the rural sector through schemes like gram sadak yojana and linking of the major cities through the Golden Quadrilateral and other plans being implemented at the initiative of the Prime Minister. Major initiatives in sound water management and water sharing are needed.

Employment, in general, has to come largely from the rural sector. The rate of growth in employment has been falling 1 per cent per year in the last decade. This is an alarming trend and the Government should increase public investment in agriculture and related fields of irrigation and rural industries so that the migration from rural to urban areas in search of non-existent jobs is stemmed.

Wherever feasible, the expertise of credible corporate sector cooperation and involvement of local NGOs must be ensured on project basis to improve rural living conditions.

Given the primacy of concern about preserving jobs and stimulating exports in their own economies, developed countries will not be in a mood to listen to developing countries demands at WTO meets. The Doha declaration has been a non-starter.

It would be naïve to expect any breakthrough at the Cancun conference of WTO scheduled in September on outstanding issues of review of agriculture agreements, patent relaxation for pharmaceutical sector for control of major diseases and review of the so-called Singapore ministerial agenda on competition law, free investment regime and labour reforms.

Meanwhile, pressure is mounting from developed countries for launching negotiation on global investment regime which will benefit them. It would be desirable that in the context of a global economic impasse in the short term, India should try to concentrate on domestic reform package and kickstart the economy.

Stabilisation of macroeconomic factors is a necessary condition for growth. The economic stagnation should be an opportunity for us to improve the local infrastructure and market functioning. Industrial revival would depend on stimulation of domestic demand.

The policy regime for exports needs to be constantly monitored on a sector-specific basis and strengthened suitably. In a thought-provoking paper before the World Bank Annual Conference on Development Economics almost a decade ago, Rudiger Dornbusch, Professor of Economics at MIT, had laid down four key elements of policy to move from stabilisation to growth.

A manageable inflation target, fiscal consolidation, appropriate monetary policy and exchange rate policy and finally an incomes policy. In all but the fiscal and incomes policy areas India has done reasonably well. It is now time to turn our attention to these critical components.

In a pre-election year there are obvious limitations in venturing into areas like labour reforms, disinvestment, subsidies and agriculture taxation, which are major elements in the reform package. The RBI has tried to send right signals for investment and market recovery by lowering interest rates and bringing down SLR to 6 per cent.

While low interest may help borrowers, the negative real rate of interest that we are witnessing may dampen savings effort. Given the state of the capital market, the options available to savers and investors are limited. There is, thus, a vicious cycle of savings and investment stagnation and falling employment growth.

The RBI sees growth at 6-6.5 per cent of GDP for the economy for 2003-04. On the industry side, the CII sees growth of 6 per cent. Of course, any forecast is based on the assumption of normal rainfall, to which the Indian economy is hostage.

The coming year being the last year for the BJP-led NDA Government at the Centre before the general elections, there is a change in strategy on the part of BJP which has shifted the emphasis from Hindutva theme to development, as is clear from the recent statements of BJP President, Mr Venkiah Naidu.

He has been urging party cadres to explain to the people the "achievements" of the NDA government, particularly that of the BJP under the leadership of Mr Vajpayee.

From the common man's point of view, whatever may be the positive results of performance claimed by party and government spokesmen, he will judge the outcome by ground realities of income generation, employment and overall improvement in social and economic well being.

(The author is a New Delhi-based management and financial consultant.)

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