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Prognosis of a slowdown

Abhimanyu

A COUNTRY facing an economic slowdown is like a patient who is ill because of lack of appetite. For getting the patient back on his feet, it is essential to serve him nutritious food, and also administer the medicine, appropriate to his problem. The prob lem becomes serious if the sufferer does not respond to the usual prescriptions. It takes a graver turn if the illness becomes chronic. That would imply that the causes behind his poor health have not been identified correctly.

How ill is the Indian economy right now? The GDP growth has taken quite a beating. The initial estimates of a 6 per cent growth for 2000-01 have been revised to just above 5 per cent. This would be more than a percentage point lower from the previous yea r. And if growth figures are not inspiring, industrial results are positively depressing.

Industry is facing one of the worst crunches in recent times. The heady days of the mid-1990s seem to be memories of a distant past when industrial growth had reached 13 per cent. Last year saw industry struggling to reach 5 per cent. And this year is tu rning to be worse. The first quarter saw an industrial growth of just above 2 per cent. If the current trends continue, the year may end with one of the lowest industrial growths in the post-liberalisation era.

Infrastructure is doing no better. Coal, steel and crude oil have slipped into negative growths, with electricity and cement hovering around the 2 per cent plus level. The exports scene is not encouraging either. Last year exports had grown 20 per cent p lus. Now reaching one-tenth that figure looks difficult. Imports are declining heavily with even oil imports dipping in the first quarter. Tax receipts have fallen sharply with both Customs and excise collections dropping to uncomfortably low levels. All this is taking its toll on the exchequer.

There are however, a few silver linings. These would suggest that all is not lost with the patient. The economy is stagnant but mercifully without inflation. Both the WPI and the CPI are within bounds. Though exports and imports have been poor, foreign c urrency assets are healthy at $41 billion-plus. Foreign direct and portfolio investment, though not overwhelming by any yardstick, are not declining. FII investment, in particular, has been promising. How it would turn be in the coming months, with the d own-rating by Standard and Poor's and Moody's, remains to be seen. Yet, the patient is not lost. But if not managed well, the problem can become unmanageable. Rushing to revive the economy would be difficult.

The important question, however, is why is the economy's health failing? For some time now, it has not exactly been robust, but the condition appears to have worsened over the past few months.

Over time, the contribution by agriculture, industry and services to GDP growth has changed. This is, of course, to be expected since with development first manufacturing and then services usually take charge of shoring up growth. In this regard, the eco nomy is no exception. Manufacturing and, services in particular, have contributed significantly to economic growth. A change in the sectoral composition of growth, however, is not supposed to be the only upshot of economic development. The higher importa nce of manufacturing and services in the overall economic activity is expected to be accompanied by corresponding changes in the occupational pattern of the population. People, previously employed in agriculture and farming activities, should be shifting to manufacturing and, subsequently, services, as the latter create fresh employment opportunities. The migration would bring down the population in the farm sector to optimal levels, thereby increasing farm productivity. As a result, agriculture, which was initially the largest contributor to economic growth, would gradually take up a more supportive role, leaving the hard task to the other sectors.

The change in the occupational pattern in India's economic structure has not occurred as much as it was expected to. This is in spite of the increasingly significant roles being played by manufacturing and services. Agriculture continues to be the bigges t source of livelihood in the country.

Why have not things happened as expected? The explanation seems to be in the inability of the secondary and tertiary sectors to provide adequate alternative employment opportunities. The shortcoming is possibly more for the services sector. Taken togethe r, manufacturing and services have still not been able to outstrip agriculture in terms of occupational importance.

With agriculture still the lifeblood of the economy, its poor health would certainly affect overall growth. But that is not where the story ends. Its depressed condition is going to affect manufacturing too, since a significant part of the demand for man ufactured products comes from agriculture. Smooth functioning of the agriculture-manufacturing linkage is vital for the health of the Indian economy. In recent years, manufacturing has been in a depressed state. One of the reasons for this is the lack of adequate demand from the farm sector. The strength of the linkage is also becoming questionable. Despite a record harvest of foodgrains a couple of years back, manufacturing demand did not take off the way it should have.

Infrastructure services can also give a 'big push' to manufacturing. Would greater state investment in such core areas as power, roads and ports help? Pump-priming could be one of the immediate drugs to administer. By shoring up activity in the core sect ors, ancillary demands may be generated for others. But the recovery will only be temporary. Given the state of the fisc, public investment in core areas cannot be of substantial amounts. The injected stimulus would keep the patient on his feet till the effects of the limited investment last. Thereafter, he may collapse again, unless propped up otherwise. Private investment must come in, in a big way, for sorting out things. Right now, it is showing little signs of materialising, despite a slew of tax s ops and other incentives. And it possibly will not till the private investors are assured of at least a minimum decent return on their money. Which means rationalising user charges. How soon that would occur is anybody's guess.

Some help for manufacturing could have come from exports. But given the depressing conditions in practically all parts of the world (particularly the US), recovery through exports does not appear feasible. The low export figures are indicators of a rough ride in this regard. Manufacturing seems to be at a dead-end, both at home and outside, at least for the time being.

What does the doctor order then? Getting agriculture in shape and strengthening its demand linkage with manufacturing seems to be the core issue. That would call for radical restructuring in the agrarian economy, particularly in land ownership patterns, and several measures for improving the distribution channels. Meanwhile, good monsoon can help for the time being. But the patient's hopes of a sustained recovery do not appear bright, if favourable climate is to be the only effective medicine. What if t he next year does not turn out to be as wet as this one? A repetition of history seems only too likely.