Need to heed to the warning bells

Pro-trader policies of the earlier NDA Government have undermined the Public Distribution system and agriculture to such an extent that poverty and hunger in the rural areas has increased. The future of the economy is grim indeed and with the global slowdown the situation is likely to get worse. In fact unless investment in the infrastructure increases there is little chance of improvement.

by M. K. DHAR

The global economic slowdown, which is likely to intensify in the next financial year, is bound to impact on India’s growth prospects, regardless of the assurances by those in charge of the country’s economy. India has failed to achieve the targets set for infrastructure, agriculture and services growth and the planners’ hopes of achieving double-digit growth towards the end of the 11th Plan also rest on the assumption that technological, as well as, monetary investments in these sectors will be commensurate with the needs. If past experience has any lesson, it is that investments of such high magnitude are unlikely to materialize and may, in due course, entail unforeseen political costs.

The government has acclaimed the likely 8.9 per cent growth in the current fiscal, which is lower than 9.4 achieved in 2006-07, and projects a still lower 8.5 per cent in the next fiscal, all going well. What has prevented a further slide in growth is the plentiful rainfall which the country received last year and which has pushed up agricultural growth to 3.6 per cent against the earlier estimate of 2.6 per cent. This has helped partly neutralize the negative effect of a lower expansion rate in the manufacturing and energy sectors. In 2008-09, the growth rate is expected to dip further as the demand for consumer goods is likely to record only a marginal rise, while the farm sector is assumed to be growing at around 2.5 per cent, as projected last year, but for the intervention of the rain god. Even the usually buoyant services sector is likely to see slow growth in trade, hotels, transport and communications.

However much our planners might try to rely on non-agricultural sectors to keep pushing the overall growth rate, they are unlikely to succeed. There is no escaping the fact that unless agriculture is lifted from the state of stagnation and productivity and investment, it will not be possible to make a big dent in the level of poverty in the country. In the past five years the poverty index has remained static and hunger and malnutrition in the rural areas, where 70 per cent of the population lives, has increased. The collapse of the Public Distribution System, due to the pro-market, pro-trader policies of the Vajpayee NDA Government, has rendered the rural poor more vulnerable to food scarcity and pushed down their already miserable living standards.

The impact of the economic slowdown in the US is already being felt on our exports, whose growth rate is also expected to fall next year. The sharp increase in global food prices, partly due to diversion of grain to biofuels, is hurting the poor in the developing countries. With low global food surpluses, the prices have become unaffordable for developing nations which were forced to import poor quality wheat at exorbitant prices. Food and Agriculture Minister Sharad Pawar has warned of a food crisis if farm production and productivity are not increased and approach to research was not changed. A situation of mismatch between demand and supply in respect of wheat, oilseeds and pulses has developed and is unlikely to be mitigated in the near future.

Prime Minister Manmohan Singh is more to the point when he stresses the need for a growth process that will achieve a rapid reduction in poverty, accelerate the pace of both industrialization and employment generation, reduce rural-urban divide and bring measurable benefits to SCs, STs, and other included groups. He admits that food shortages will persist in the next decade and prices were likely to climb due to lower production. It would be necessary to revisit food procurement strategies in the short term to maintain both a steady flow of food items and stabilize prices. Dr. Singh now accepts the need to increase food buffer stocks and also consider buffer stocks for pulses and edible oil. Subsidized food grains should be targeted only at the needy and misdirected subsidies need to be stopped.

Reverting to the strategy adopted during Indira Gandhi’s regime of creating food buffer stocks to prevent hunger and starvation may be galling to the free-market economists. Who want to hand over the economy to private operators with scant regard to the needs of the consumers. The dismantling of the system during the Vajpayee regime has crated the present situation and the UPA Government is being forced to revive it to avert political consequences of widespread food shortages and hunger. Those free-market economists who argued that food could be imported if rapid industrialization took place and incomes went up, have been proved wrong. Owing to world food shortages, the commodity is not available for hulk impost, hut people, the bulk of whose diet comprises cereals, cannot be left to starve.

It is surprising that the planners, who had set the development goals reiterated by Dr. Manmohan Singh in the year 2007, over half a century ago, are still nowhere near realizing any of them. In the 11th Plan the major objectives are listed as raising the investment in infrastructure from 5 per cent of the GDP to 9 per cent and achieving 4 percent stable growth in agriculture. Planning Commission Deputy Chairman, Dr. Montek Singh Ahluwalia also admits that the present level of infrastructure is not enough to sustain 8.5 per cent growth and massive investments in this area are needed. The education system is geared to meet 6 per cent growth and a lot of emphasis needs to be laid on education and skills development. During the 11th Plan investment in infrastructure should be higher than the business-as-usual level. “But I do not think that is happening – and extra $ 150 billion in five years”.

With industry, services and other sectors growing at more than 10 per cent, the level of inequity in the country was bound to increase owing to the fact that the same tempo of growth could not be expected from agriculture. Therefore, promises Finance Minister P. Chidambaram, the Government would adopt a two-pronged approach to tackle the problem of growing inequity. Apart from accelerating growth in the farm sector, the Government will raise public expenditure on health, education, drinking water and other social sectors for rural area development. A chunk of the rural population would also be engaged in sectors like industry and services as the country does not need more than 10-20 per cent population to grow food for the whole population. These are indeed noble thoughts but, what is intriguing is that little action along these lines has been taken during half-century of planning.

There is no certainty that agriculture will grow at 4 per cent unless there are massive investments in irrigation, fertilizer, quality seeds, improved practices and above all, genuine land reforms.

Accelerated development needs substantial foreign investment in the core sector which will lead to higher production for internal consumption, as well as, exports and technology up gradation. The huge adverse trade balance of around $ 65 billion and current account deficit close to $ 10 billion last year reflects adversely on the foreign exchange reserves which will soon tough $ 300 billion, and which is a liability than an asset are in real terms. Indian corporate sector has been recklessly borrowing abroad at lower interest rates than within the country and the inflow, together with other foreign borrowings; involve huge repayments in foreign currency. The foreign reserves on such account are available for short-term investment, but the crunch will come when these become due for repayment. That would repeat the vicious circle of foreign borrowings going mainly towards repayment of debts already incurred, with little becoming available for investment to create permanent assets within the country.

The 3,000 points fall in the Sensex in three days has underlined the volatility of the stock market and some of its undesirable features over which the Government refuses to exercise some sort of control. The bulk of the foreign investment in India last year was portfolio investment which accounted for $ 18.3 billion. The possibility of the American economy going into recession made foreign portfolio investors panic and withdraw their investments in the share market. A phenomenon akin to this nearly two decades ago had led to the crash of the East Asian “Tiger” Economies and they have yet to recover from that shock fully.

None of the portfolio investment is going into development activity and is used purely for speculative purposes of making a quick buck and departing at will. Such build up of debt and portfolio investment entail capital, interest and dividend outflows which does not match India’s earnings from exports and remittance from expatriates abroad. With the government now concentrating on expanding the internal market and reconciling to dwindling export growth, the capacity to earn foreign exchange will also be hit. That could undermine foreign investors confidence and the reserves that give India its current “strength” could shrink. Therefore there are many things wrong with the Government’s planning and monitoring of the economy and unless corrective are applied soon, the political costs be paid may be heavy and the dreams of all inclusive growth may sour.