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Survey shows growth at 6.8%, calls for deepening reforms

The Economic Survey for 1996-97 presents a mixed picture of the economy with the overall economic growth rate remaining high at 6.8 per cent and underscores the need for maintaining thrust in three key areas of economic policy.

These are controlling fiscal deficit, providing adequate and reliable economic infrastructure services at a reasonable cost with sustainable financing and pricing policies, and ensuring broad-based employment generating economic growth of agriculture, industry, and other sectors. Together with this is the need for strengthening programmes for basic social services and poverty programmes for ensuring rapid alleviation of poverty.

The survey, presented to Parliament on Tuesday by Finance Minister Palaniappan Chidambaram, outlines the need to consolidate and deepen the reforms process and hints at the need for increasing oil prices. It stresses the crucial need for attracting foreign investment and, in this context, calls for an early review of Foreign Exchange Regulation Act. With regard to the crucial need for attracting investment in infrastructure sector, it says construction industry needs a new impetus. In this context, it calls for removing impediments imposed by various laws and regulations such as the Urban Land Ceiling Act.

Although the overall growth remains high at 6.8 per cent, and agriculture has rebounded, the growth of manufacturing value added products has slowed and the performance of key infrastructure sectors, especially power and crude oil, is weak. The annual rate of inflation (point-to-point basis) has risen back to average long-term levels, and export growth has decelerated markedly in recent months.

Despite a slowdown in exports, a combination of sluggish imports and reasonably buoyant inflows of invisibles and capital inflows have led to a buildup of more than 2.5 billion dollars.

Hinting at the need for increasing the petroleum prices, the survey says there is no economically viable alternative to adjusting petroleum prices to reflect the impact of international oil price increases today. The development of the petroleum sector is under a serious threat, with crude oil production having declined, oil imports rising sharply, and the deficit in the oil pool account going up each day and expected to exceed Rs 150 billion before the end of the financial year.

Furthermore, if the economy is to reap the benefits of increased investment and efficient production at all stages in the petroleum sector (ranging from exploration and development of refining and distribution), the government must carry out a phased dismantling of the existing administered price mechanism in this sector. The time for initiating this reform is already overdue, the survey says.

The year 1995-96 witnessed a very satisfactory growth rate in GDP of 7.1 per cent. The momentum of growth was maintained in 1996-97, thus providing increasing evidence that the growth potential has improved as a result of the reforms initiated in 1991. With the growing participation of virtually the entire spectrum of political opinion in the reform process, there is a good prospect that a higher growth rate would become a permanent feature of the economy.

Economic growth in 1996-97 is estimated by the Central Statistical Organisation (CSO) to be around 6.8 per cent (GDP at factor cost), thus the Eighth Plan is likely to end with an average growth of 6.5 per cent per annum, 0.9 point per cent higher than the target rate of 5.6 per cent, and 0.5 per cent higher than the actual achievement of the seventh plan.

More important for the future is the fact that the average growth during the latest three years is 7 per cent, placing India among the top ten performers in the world during the period.

Total gross domestic saving reached a new peak of 25.6 per cent of GDP in 1995-96, exceeding the previous peak of 24.9 per cent of GDP in 1994-95. This vindicates the reform strategy of encouraging savings by expanding saving and investment opportunities, rather than giving special incentives.

The Economic Survey says private sector investment has responded vigorously to the policy of promoting competition, removing policy distortions and hurdles, and improving access to factors of production, such as technology and capital.

The survey, however, says estimates of saving and investment for they year 1996-97 are not not available. Indications are mixed. On the one hand, domestic capital goods production is buoyant and disbursement of financial institutions are significantly higher.

On the other hand, capital goods imports have declined, non-oil imports are lower in the first nine months of the year, corporate demand for credit appears slack, and sanctions of financial institutions are substantially lower.

Agricultural crop production in 1996-97 is expected to show good recovery from the slower growth in 1995-96. Growth is projected at three per cent after a fall of 0.4 per cent in 1995-96.

The sharp decline in foodgrains production by 3.4 per cent, which was responsible for the slow growth in 1995-96, is expected to be reversed by an increase in 3.3 per cent in 1996-97.

Industrial production (as measured by the index of industrial production) grew by 9.8 per cent in the first seven months of 1996-97, 1.9 percentage point slower than the 11.7 per cent growth in the first seven months of 1995-96.

The good performance of industrial production in 1996-97 is due entirely to the manufacturing sector, which has maintained its high growth.

The slowing of industrial production is attributable to the dramatic fall in the rate of growth of electricity production and a slowing of growth in the mining sector, mainly because of the 10 per cent decline in crude oil production.

Another noteworthy aspect of industrial production this year is the acceleration in the rate of growth of capital goods production to 16.6 per cent in the first seven months of this year from 15 per cent in the first seven months of last year.

This has offset the decline in the rate of growth of consumer goods and basic goods. In contrast, capital goods imports have declined by six per cent in the first seven months of 1996-97. This shows the increased competitiveness of the domestic capital goods industry.

The overall performance of the core and infrastructure sectors during the first eight months of 1996-97 has been poor.

The survey says it is essential to keep reducing the Centre's fiscal deficit to below four per cent of GDP as soon as possible to reduce interest rates and free resources to finance the high levels of investment, both public and private.

It notes that the government has taken a wide range of initiatives to accelerate expansion of infrastructure services in power, telecommunications, roads, ports, civil aviation, and irrigation. All these initiatives need to be followed through with vigour and dedication.

The survey calls for quickly resolving the residual difficulties in the induction of private providers of basic and cellular telecom services. ''We must follow up on the experience with the recently announced guidelines for private projects in roads and ports to iron out any difficulties that may arise.

"We must resolve the remaining ambiguities about our policy on civil aviation. We must urgently complete as many ongoing irrigation projects as possible to bring the benefits of assured water supply to millions of farmers.

"Above all, we must press ahead with the recently agreed common minimum national action plan for power on a war footing,'' the survey says.

The survey says a pickup in the growth momentum in the economy will intensify the need for garnering increasing amounts of foreign savings to meet investment requirements of the economy and to sustain the growth momentum itself.

''We must ensure that the regulations governing the inflow of foreign investment are transparent and attractive in comparison with what other Asian economies offer. A review of FERA is under way in this context,'' the survey says.

It further says the government's programmes must accord the highest priority to encouraging growth of sustainable and productive job opportunities in all sectors. In agriculture, income earning opportunities for farmers should be expanded by removing existing impediments to domestic and international trade in agriculture products and removing controls on key agro-processing industries.

At the same time, there have to be renewed efforts to strengthen rural infrastructure in the form of irrigation, rural roads, soil conservation, seed development, research, and extension of rural credit systems.

In many cases, this may call for a review and redirection of existing programmes. Besides, it is imperative to find incremental resources for public investment in rural infrastructure. Such resources can be raised only partly through the budget without hurting the poor; the bulk of the resources would have to come from the larger and better-off farmers, the Economic Survey concludes.

UNI