Economy Has Passed Test By Fire In 2002

‘Economy Has Passed Test By Fire In 2002’

Sanjaya Baru

Ashok Lahiri, the new chief economic advisor to the government of India, and that is his designation, not just an advisor to the finance minister, sits confidently below an imposing black board that lists the names of many illustrious predecessors – IG Patel, Manmohan Singh, Ashok Mitra, Bimal Jalan and Deepak Nayyar, to mention a few.

Ashok Lahiri
A weighty heritage sits lightly on a media-savvy and ever-smiling professor Lahiri, a seasoned television anchor and a popular classroom teacher, Dr Lahiri is happy to present to us his first official ‘oeuvre’, the mid-year review of the economy (MYRE), 2002-03.

“For the first time ever, the Indian economy has been through a failed monsoon, drought in many parts of the country, a global slowdown, decline in world trade and capital flows, uncertainties in the international economy made worse by the Argentinian crisis, terrorism and its fallout and continued fears of a war in the region — and despite all this in one year, we have expectations of a growth rate of 5-5.5 per cent,” says Dr Lahiri.

“The economy has been tested by fire and has not been found wanting, it has performed well.”

Why the MYRE now, we ask. “This is international practice which we have now come to adopt” he says, and curiously adds, “on our own”. That is to reassure that MYRE is not an idea of the International Monetary Fund, which encourages member-countries to produce such documents in the interests of policy transparency.

“The United States, Australia, Canada, Poland, Vietnam and many other countries present a mid-year review of the economy and a mid-year financial statement. The government has committed itself to doing this in the Fiscal Responsibility and Budget Management Bill. Though the Bill has not yet been passed, the finance minister has decided to place this before Parliament. It is good practice.”

The MYRE will hopefully result in an informed debate on policy options before the finance minister, as he begins his annual budgetary exercise, says Dr Lahiri. The ministry’s annual Economic Survey comes too close to the Budget day to be of any help in informing pre-budget discussions. Reserve Bank of India’s annual report comes too early in the year and does not reckon with the impact of the monsoon. Hence MYRE.

So what are the budgetary signals in MYRE? There is concern about a fiscal deterioration. The first half of 2002-03 saw improvement in revenue collections and deficit was within limits. However, a “failed monsoon”, “drought in many parts” and rising oil price, resulting in a higher petroleum subsidy bill have all worsened the fiscal situation in the second half.

The finance ministry is constantly under pressure from both within the government and outside to increase expenditure, but there are limits to how much the finance minister can ease the purse strings. So, it is best to educate the people and others within the government as to what the real state of affairs is.

So what is the state of affairs? The real economy has proved its resilience but the fiscal situation needs improvement. Does this mean the finance minister will be cautious experimenting with tax reform? He is certainly committed to protecting the lower and middle income groups, he is also committed to improving tax administration and modernising it, he will also not remove such tax exemptions as do promote investment in employment-generating sectors like housing and tourism. With those caveats entered, he will try and increase the revenue to national income ratio and is open to ideas on how to do this.

Apart from fiscal consolidation, Dr Lahiri’s MYRE focusses attention on investment augmentation. The rate of investment has to be pushed up, he admits, and policies will have to be put in place to encourage this.

The external economy is an area of stability and satisfaction. The RBI has done a splendid job managing the rupee, but there are concerns about the impact of rising forex reserves on money supply. Broad money growth in the first half of this year was 10.3 per cent compared to 8.4 per cent last year. MYRE refers to “incipient pressures” on the inflationary front, with the money multiplier “pretty high”, as Dr Lahiri puts it at 4.9 per cent.

Apart from the deficits and low investment what else worries the new CEA? Low imports, especially low capital goods imports, he says. On the brighter side, Dr Lahiri says there has been considerable action in the infrastructure sector this year, in roads, housing, telecom and even power. This has helped push gross domestic product growth up. He sees the finance minister committed to financial sector reform and reform of financial intermediaries like Unit Trust of India, Industrial Development Bank of India, IFCI Ltd and to getting public investment in, apart from moving ahead with disinvestment.

MYRE offers an upbeat if realistic assessment of the economy and the challenges it faces, even if we were to discount for a newcomer’s enthusiasm. Dr Lahiri is off to a good start!