People's Democracy

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The Economy, According To The RBI

Jayati Ghosh

AMONG various official publications, the Reserve Bank of India’s reports have tended to be more objective in describing the basic economic reality. This makes the latest Annual Report of the RBI very depressing reading, since it describes a situation of deceleration of growth in the major productive sectors along with greater financial fragility. Furthermore, it becomes clear (although is not stated so explicitly in the Report) that this is not accidental, but is very much a result of the economic strategy of the past decade.

Thus, real economic growth has slowed down, to reach only 5.2 per cent last year, and there is "a discernible downturn in the second half of the 1990s," which brings the average growth rate over the 1990s to only 4.4 per cent. This clearly shows that the process of liberalising reform has not delivered the higher rates of growth that were promised and anticipated.

These lower rates of GDP growth have also been associated with lower rates of aggregate savings and investment. This marks a break from the overall trend increase in savings and investment rates that is evident over the five decades since Independence. It reflects the depressed private expectations emanating from the general slowdown in economic activity, along with substantial declines in public sector savings and investment.

The agricultural sector has experienced the sharpest deceleration in growth terms in recent years, and the past two years have witnessed complete stagnation. This is part of a longer term tendency which has meant that there has been a very significant deceleration in the average annual growth rate of the all-crop index of agricultural production from 5.2 per cent in the 1980s to only 2.3 per cent in the 1990s. Further, during the second half of the 1990s the volatility of agricultural production has increased.

However, the factors which are behind these agricultural trends are not adequately captured by the RBI report. These factors are very much part of the overall economic strategy of the 1990s. Thus, one important factor behind the drop in foodgrain output growth is the drastic decline in real public investment that has occurred in agriculture over a long period. The deceleration had started during the 1980s, but the 1990s have furthered that trend. In addition, the 1990s have witnessed a decline in other infrastructure development in the rural. The strategies of reducing subsidies on fertiliser and attempting to increase user charges on water, electricity and other farming inputs which a number of state governments have tried to implement, have also raised costs for farmers and in some cases led to reduced use of commercial inputs.

The most glaring problem in the food economy of India at the moment is the presence of huge excess stocks of foodgrain with the Food Corporation of India, which are now as high as 62 million tonnes, up by more than three times in just six years. These are not being effectively utilised either to reduce hunger in areas and among populations which are food deficit, or to promote public works which in turn would develop infrastructure. This is a reflection of the peculiar combination of increased procurement despite lower harvests and lower off-take by consumers from the Public Distribution System.

And this too, is very much a creation of economic policies of the past few years. The expansion of buffer food stocks to 3 times the desired level has been accompanied by a decline in per capita availability of foodgrain in the economy as a whole. This fell from a high of 505.5 grams per day in 1997 to 470.4 grams in 1999 and then to 458.6 grams in 2000, indicating that the basic food security problem, far from being solved, has actually worsened. Simultaneously, the economic conditions of most cultivators has deteriorated because the falling international prices of most agricultural commodities in a context of more open trade in these goods has combined with higher input prices to squeeze cultivating margins. Falling market prices have meant that more cultivators have chosen to sell to official procurement bodies, thus adding even more to the excess food stocks.

Even industrial growth has shown signs of not just deceleration but actual recession over the past few years. While the manufacturing recession was evident from late 1996, there were expectations of a recovery based on a slight increase in growth rates over 1999. However, these hopes of a quick recovery have been belied and the last year’s industrial performance shows deceleration once again. Indeed, the quarterly data show a more worrying pattern of deceleration over each quarter in recent times, suggesting a deepening of recession.

Capital goods and basic goods are the worst performing sectors in the recent period. This of course reflects the slowdown in investment, in turn reflecting the depressed private expectations in a context of recession and reduced public investment. The infrastructure industries have also performed poorly, reflecting low public investment. In addition to a low average rate of growth, most of these sectors have displayed very high volatility and fluctuation in growth rates even over a relatively short time period. This is also bad news for the future prognosis for industry as a whole, which would be affected by the slowdown in these sub-sectors.

The government’s obsession with fiscal correction is well known, even though its declared intentions have tended to be far more "fiscally disciplined" than its actual performance. The 1990s were marked by frequent references to the need to rein in the fiscal deficit as the major, even primary, goal of the government. Of course such an obsession was problematic at several levels. Thus it treated capital expenditure, implies important and necessary public investment, as being just as bad as the revenue deficit which reflects the excess of current spending over current receipts.

But the concern with controlling the large fiscal deficit has become completely ridiculous in a period of economic recession, which is also characterised by large and growing foreign exchange reserves and large and growing public holding of food stocks. It would be difficult for anyone to argue that a more aggressive fiscal stance would be inflationary in such a context, and hard to deny that this would play a positive role in moving the economy out of recession. But this, nevertheless, is what the government continues to maintain : that the need of the hour is continued or even greater fiscal rectitude, regardless of the cost in terms of reduced levels of economic activity.

What is interesting to note is that, despite all this emphasis on fiscal discipline, the 1990s showed very little tendency towards fiscal correction overall. The fiscal deficit (calculated according to the new definition, that is, excluding the share of small savings that go to the state governments) has hardly declined between 1990-93 (when it was 5.4 per cent of GDP on average) and 1998-2001 (when it was 5.2 per cent of GDP). And what is worse, the revenue deficit climbed to the very high levels of 3.5 per cent of GDP by the period.

Meanwhile, central government capital expenditure declined to only 1.15 per cent of GDP, not just well below the levels at the beginning of the decade, but many multiples less than the rate of 4 per cent achieved in the 1980s. And developmental expenditure of the central government, which also includes the items described as "social expenditure" also fell continuously over the 1990s, to pitiful levels of less than 7 per cent for the last years of the decade.

If the fiscal deficit has remained "high" despite such falling public expenditure of the socially desirable variety, it is largely because interest payments constitute a growing and dominant part of expenditure, accounting for nearly half of current revenues. And this in turn is not because of the burden of past debt alone, but more importantly because of financial liberalisation measures which have forced the government to take greater recourse to open market borrowings and raised the cost of financing the deficit. The share of the fiscal deficit being financed by market borrowing has ballooned from less than 18 per cent at the beginning of the decade to nearly 70 per cent by the year 2000-01. This not only means that less of government expenditure has positive linkage and multiplier effects which could generate more economic activity, but it also and naturally makes the task of actual fiscal correction that much more difficult.

The picture of the real economy that emerges from the latest RBI documents is therefore one that calls for an urgent and thorough reconsideration of the current economic strategy.