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Cut in interest on savings will hit growth

Will Budget 2001 propel India Inc towards a higher growth trajectory or will it tailspin the economy deeper into the recessionary pit?

Prime Minister Atal Bihari Vajpayee wants the Budget to push the economy to eight or nine per cent GDP growth and indications are that some prescriptions of Finance Minister Yashwant Sinha's may not help achieve this goal, experts said.

Tax breaks for savings and higher differential interest rates for small savings seem to be on their way out. Pointers from the Economic Survey, Prime Minister's Economic Advisory Council and top officials of the Finance Ministry seem to indicate just that.

A savings rate of 35 to 40 per cent is needed to achieve economic growth of eight to nine per cent. The present savings rate, which has fallen to 22.5, is just not sufficient. The savings mobilised through the banks are decreasing because of the deliberate policy of induced reductions in deposit rates, economists say.

Leading economist P R Brahmananda notes that the rate of growth of net capital stock has been falling from 1995-96 at the same time the capital-output ratio is slightly going up. Further the net savings ratio has come down, especially the financial savings ratio.

In framing the Budget, if the finance minister is serious about raising the industrial growth rate and employment, and in making the industrial economy an active agent in exports, he should be concerned about the declining drift in industrial growth. This is due to the increase in capital intensity in this sector, which requires more and more investment every year to obtain even a given growth rate.

The need to boost domestic savings rate is thus more urgent than ever before, Brahamanada said.

Strangely, after the reforms, the net capital intensity of the manufacturing sector is rising at a remarkable rate. This means that employment growth rate in this sector will go up at a decreasing rate.

"We seem to have reached the nemesis of higher wage rates in the manufacturing sector leading to greater capital intensity in that sector," Brahmananda pointed out.

The proponents of the reforms in the government and elsewhere have been arguing that the reforms should lead to greater labour intensity in industrial output. The capital-ouput ratio should therefore be coming down. But the reality is that capital intensification process has been gaining more strength, exactly the reverse of what the finance ministry and Planning Commission officials intend.

Brahmanada said finance ministry officials should ponder about the need for more and more domestic savings if they are earnest about their business. Referring to reports that incentives for savings rate are to be further reduced in the Budget, Brahmanada said, "this means the pious pronouncements about higher growth rates in the immediate future are, in effect, are just words".

Chief ministers of various states have also recently gave their approval for providing greater incentives to push savings.

Arun Kumar, professor of economics at Jawahar Lal Nehru University, said it is just not possible to achieve nine per cent growth with the present set of policies. More incomes in the hands of poor, common man and agriculture are needed to create demand, which through the multiplier effect will generate demand for industrial goods.

But above all concerted effort is necessary to curb black incomes and unearthing of black money, which has now permeated all powerful sections of the society. Black money, which is hovering at 50 per cent of the GDP, is the single biggest cause of policy failure, he said. The political system is just not able to cope with this.

Economic picture is gloomy. Growth rate slowed down to six per cent from 6.4 per cent last year, mainly due to a fall in the growth rate in the services sector to 8.3 this year from 9.6 last year. Agriculture shows only a marginal increase in growth rate from 0.7 to 0.9, but foodgrain output is down to 199 million tonnes from 208.9 million tonnes.

The inflation rate has gone up to more than eight per cent largely due to higher energy prices. Industry is in any case passing through a bad patch with growth rate limping to 5.7 per in April-December, 2000. Economists speak of an investment famine and industrialists are quick to point out that returns to investment are extremely low. Only 20 per cent of FDI approvals are realised and FDI flows are a mere two billion a year.

Prescriptions for a reversal of fortunes vary. Indian industry wants more protection, a solution, which hawks within the ruling NDA support, but something, which Sinha abhors. In any case, corporate chiefs admit that there is unfair pressure from the WTO and developed countries. But they also believe that the government is completely confused over how to tackle globalisation and is acting in an ad hoc manner.

Some businessmen and economists say that Sinha has little freedom in working out the budget--most of the numbers are already in. They want the government to raise money, drastically prune unproductive expenditure and go for growth.

Vinod Madhok, an executive with the Dalmia's and an offfice bearer of the Indo-American Chamber of Commerce, said VRS for the government is ideally suited to increase efficieny of expenditure.

D S Mehta, an industry consultant and freelance writer, however, said the budget will be positive and provide necessary incentives and a pointer for growth. It will address issues relating to fiscal responsibility of the government. In financial and banking sector, there will be incentives for mergers.

He said he is expecting a strong growth and recovery oriented budget, post-earthquake. A strategy for long-term recovery is urgently needed. He said the budget will bring back the feel good factor.

To fuel growth and recovery the business community wants the budget to focus on some issues--large scale privatisation, which has become the panacea for the perennial resource starved economy, spending on infrastructure and boosting exports. They want excise relief for software and sops for stockmarkets, especially abolition of dividend tax.

CEO's say time has come to introduce tax on farm incomes and the government should stop taxing the export income. Shekhar Bajaj, president of Assocham also wants the service tax net to be widened and cuts in fertiliser subsidy. He suggests a tax holiday for infrastructure projects. Most corporate executives believe that big ticket privatisation will happen.

Agriculture economists and experts have stated the need for the budget to spell out policy actions that would put Indian agriculture on a higher growth path to correct the weak performance of this sector during the past two years. Most of all, they say there is a need to step up public investment in this area. The short term measures suggested include removal of all restrictions in the domestic market that obstruct the movement of agricultural commodities and that which come in the way of private trade.

These include licensing and stocking limits and future trading.

They argue that reforms which have so far bypassed agriculture must finally be signalled in the budget. With the lifting of quantitative restrictions (QRs) on imports, such restrictions in the domestic market will put local producers, suppliers and traders at a disadvantage vis-a-vis their overseas counterparts.

Some even argue that there is a need for land reforms, including management of land and water resources.

Experts point out that the agricultural sector is confronted with the threat of large competitive imports, which it cannot absorb. The limited purchase system has meant that in one crop or the other, farmers are not able to get fair prices, with the result suicides are becoming a phenomenon among the peasantry.

Nagesh Kumar, a senior Economist at the Research and Information System for non-aligned and other developing Countries (RIS), pointed to another problem. He said the economy is strangely not witnessing wide-spread austerity in the light of the misfortunes that hit two states in the form of an earthquake and cyclone.

UNI

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