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The new
Finance Minister, Mr. Jaswant Singh, has already
declared his intention to try and increase purchasing
power, especially of the domestic middle classes.
Clearly, the government has designed this particular
Cabinet switch of portfolios to restore the government's
popularity, and therefore its electoral fortunes, before
the next general elections. The aim, presumably, is to
undo the damage to the BJP's middle class constituency
which was caused by the last Budget presented by Mr.
Yashwant Sinha.
But if this is going to
be Mr. Singh's sole, or even major, preoccupation in the
immediate term, then it may prove to be
counter-productive. In fact there are far more serious
danger signals looming, which suggest future trouble for
the macroeconomy, and the Finance Minister will need to
address these on an urgent basis if a future financial
crisis is not to unravel all the attempts at economic
recovery through generating more middle class purchasing
power.
Consider the following features of the Indian economy at
the middle of 2002. The economy is widely acknowledged
to be still in recession, and though optimists have
detected a turning point in recent months, there is
little evidence to support this so far. The recovery in
agricultural production was from the collapse of the
previous year, and has been accompanied by further
increases in the excess level of foodgrain stocks held
by the public sector.
Industrial production decelerated further in fiscal
2001-02. The aggregate manufacturing index went up by
only 2.7 per cent, and capital goods production actually
declined by 4 per cent. Only consumer durables bucked
the trend; in all other industrial sectors, including
infrastructure, the growth rate was well below 4 per
cent. Investment has probably continued to stagnate, if
not decline. One important indicator of this, the
assistance sanctioned and disbursed by all the All-India
Financial Institutions taken together, actually declined
even in nominal terms by 23 per cent over 2001-02, to
less than Rs. 56,000 crore.
Nevertheless, the balance of payments indicators are, if
anything, booming. One extraordinary feature of the past
fiscal year has been the dramatic and unprecedented
increase in the external reserve position of the RBI, by
more than $12 billion just over twelve months. By the
end of May, external reserves stood at more than $56
billion.
What is behind this tremendous spurt in reserves ? What
is clear is that it is not any development on the trade
front which has contributed. Exports over 2001-02 were
stagnant, growing at a negligible 0.1 per cent over the
previous year (which was substantially below even the
downscaled target of 4 per cent set by the Commerce
Ministry.) Meanwhile, imports actually increased
slightly, by 1.1 per cent, leading to a slight increase
in the trade deficit. It is true, of course, that the
current account has still been kept in check,
essentially because of invisible payment inflows in the
form of large-scale remittances from Indian workers
abroad.
The real factor behind the increase in reserves has been
the large increase in various short-term and
debt-creating flows, as well as a dubious category in
the balance of payments data called "errors and
omissions", which essentially represents extra-legal
capital flows. Foreign direct investment inflows (which
includes mergers and acquisitions as well as Greenfield
investment) amounted to just above $3 billion. But more
short-term portfolio inflows by Foreign Institutional
Investors along with purchase of shares by non-residents
amounted to nearly $ 3 billion as well. |
