Looking Ahead: Powering growth with equitable distribution
Akrita Reyar and Stanly Johny
There are some pertinent questions facing the Indian economy. Will India achieve the 9% growth target set by the Finance Minister? Even if it does, do we have the capacity to absorb double digit or even 9% growth? Will we be forced to make choices between growth and social spending? And most importantly, will the government be able to rein in high food prices?
Credible Fiscal Policy
India’s gross fiscal deficit remains one of the highest in the world. The overall government deficit had stood at just under 6 % in 2007-08. But it shot up to 6.2 % in 2008-09, and further to 6.6 % in FY 2010. It has only now been brought to 5.1%.
The fact that fiscal deficit has been brought down to around 5% does not necessarily have to do with fiscal prudence. The growing economy has inflated itself brining down the deficit level.
At such high levels, government borrowing crowds out private sector credit, adds to already high government debt, and becomes a key source of macro vulnerability. A medium-term strategy for fiscal policy, which reduces the overall deficit to a sustainable level, is critical for India. EU has set the cut off at 3% for countries to qualify for membership; the Euro debt crisis though has exposed major violations and holds a lesson for India as well.
Financial Market Reforms and Security
The state still dominates India’s financial sector, holding 70 percent of banking assets, a majority of insurance funds and the entire pension sector. Additionally, markets are lacking in corporate debt. The total credit, at 50 percent of GDP, remains well below that of its Asian neighbours (an average of over 100 percent of GDP) and especially compared with China (111 percent of GDP).
Within this, consumer credit remains abysmally low (at 11 percent of GDP) compared with an Asian average of over 40 percent of GDP. Household savings tend to be in physical assets and gold, and risk diversification channels are not adequately available.
To meet its growth potential, India needs to pursue financial reforms to channel savings effectively into investment, meet funding requirements for infrastructure and enhance financial stability.
There is also an unimpeded threat to our economy through the flood of fake currency in circulation. Individual banks need to improve their check systems and be alert about transactions that are out of the routine and raise suspicions. For example, there were allegations that a front for Madhu Koda made a deposit of over Rs 640 crore in Union Bank of India in Mumbai, and this went unnoticed despite clear RBI guidelines to cross-check such an enormous deal.
One of the earliest and most brilliant Indian civil servants of the late 1800s, Romesh Chandra Dutt, who had thrown light on peasant economy in his letters to Lord Curzon on famine and whose papers in 1897 produced a great stir, had predicted that it would take 100 years to comprehensively cover the whole of India with irrigation facilities.
A century later, and we are still grappling with the same problems. Increasing agricultural growth is essential not only for India to sustain high growth rates, but also to move millions out of poverty. Currently, 60 percent of the labour force is employed in agriculture, which contributes less than 1 percent of overall growth. India’s agricultural yields are a fraction of those of its more dynamic Asian neighbours. For instance, rice yields are a third of China’s and half of Vietnam’s.
Israel is the most shining example in the use of drip irrigation and is able to come up with bumper produce from its highly arid land. I have personally seen this system function productively in sandy regions like Suratgarh in Rajasthan. Why can’t we create replicas of this across the country, especially in Andhra and Vidharbha of Maharashtra.
Though the UPA’s Rs 70,000 crore debt relief package sounds stupendous, money has not been dispensed effectively as farmers suicides continue unabated. I cannot understand why administrative officials can’t come up with a delivery mechanism that works.
Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and lose 7 percent of the value of their sales due to power outages.
Incremental demand for infrastructure will continue to increase due to economic growth and urbanisation. The Planning Commission estimates that India needs to almost double its ports, roads, power, airports and telecom in the next five years to sustain growth.
Infra bonds have been proposed by Montek Singh Ahluwalia to fund projects, but efficiencies can’t remain at NHAI levels.
Scouring for new trading partners
India currently accounts for no more than 1.5 percent of global trade, which is much below the average of most fast developing countries.
We had just been concentrating on the West. With the meltdown hitting the occidental areas most, late PM Narasimha Rao’s ‘Look East’ policy becomes relevant. We have established better links with Asean, but we could also look more intensively in the neighbourhood and at other emerging economies.
China and the US are our biggest trading partners, but the volumes with both are still fairly low. India’s total trade with China in 2009-10 stood at around USD 43 billion, while trade with US was at USD 36.5 billion.
An account written by 17th century Frenchman, Francois Bernier, who resided in India for many years, says that despite administrative arbitration of those days, people of India were a great manufacturing nation, and exported vast quantities of cotton and silk. Most of the factory output was then fuelled by small scale units.
The same answer is relevant today. We need to improve micro finance as well as make credit available for small and medium scale industry. China has used the model and is today called the ‘Factory of the World’. It is now gaining ground in software development, an area where we still retain the edge. If China can pose a challenge in our territory, then we can make incursions in theirs.
As per Hu Jintao’s vision of spreading wealth, China has announced that it will encourage investors to set up units in mainland China, so as to take growth to small towns. We need not tailor a new cloth, when we have found an exact fit off the shelf.
(This article on Economy is part of the Looking Ahead series.)