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PM, economic council mull slowdown, agree on making financial sector resilient

Prime Minister Atal Bihari Vajpayee today stressed the need for immediate measures to make the financial sector more resilient to shocks arising from the 'contagion effect'.

Addressing the first meeting of Economic Advisory Council in New Delhi, the prime minister said the issue of sequencing and pace of reform measures requires a broad national consensus keeping in view which reform initiatives should receive priority.

Expressing his satisfication over the expected increase in gross domestic product from 5.1 per cent in 1997-98 to 6.3 per cent in the current financial year, he said, ''Perhaps, apart from China, no other major country would be achieving this rate of growth with relatively modest inflation, low current account deficit and balanced economic growth.''

''Our short-term debt is low, our reserves today are higher than last year and external markets are relatively orderly in spite of all problems around us,'' Vajpayee remarked. There is a lot that remains to be done , he added.

Vajpayee said the country faced a host of problems in infrastructure, exports, fiscal areas, deregulation of public enterprises and in bringing down the prices.

On the question of short-term measures, the prime minister asked the participants to suggest steps to reactivate growth impulses in Indian industry as well as to improve investor confidence.

He also urged them to evolve methods to kick-start the economy without generating further fiscal pressures or rekindling inflationary forces and get public and private investment to move in tandem.

Vajpayee said the ongoing Asian crisis began with severe weakness and over-extension of the financial and banking system. He was in favour of improving the quality of portfolios, tackling the problem of non-performing assets and ensuring adequate financing for the infrastructure.

With regard to long-term fiscal policies, he pointed to the heavy losses incurred by the public sector undertakings and said, ''We cannot afford this fiscal drain.''

Emphasising the need for concerted action, Vajpayee suggested a number of measures including reduction in government expenditure, a sensible expenditure management policy, improvement in the tax-GDP ratio, widening the net for direct taxes, eliminating exemptions and plugging the leakages.

The prime minister said divestment programme of public sector undertakings should be linked to improvement in productivity and efficiency.

Vajpayee said unless fiscal deficit was brought under control, macro management will continue to be difficult with consequences for balance of payments management, creating inflationary pressures and expectations with shrinking availablity of credit and cost for the commercial sector.

''How does one combine the need to kickstart the economy for getting on a higher growth path and yet rein in fiscal deficit at acceptable levels?'' he asked.

He expressed satisfication over the present exchange rate policies. Pointing to the medium-term financial gap, he said there was need to increase the flow of direct foreign investment, a pick up in export momentum and positive foreign financial institutions' flows.

In addition to the external dimension, there is the whole issue of availability of credit for industrial activity at a cost which is affordable and consistent with the need to reactivate the growth momentum, he added.

Vajpayee said every year, when the World Development Report comes out, it serves as a rude reminder of systemic neglect of the social sector and human resource development reflected in the quality of life index.

This needs a reversal by resetting our goals and according the requisite priority to social sector development in our planning priority , the prime minister said.

Vajpayee expressed the hope that in the long run, the Economic Advisory Council would be a good sounding board for inculcating awareness in the government on the different points of view on key economic issues and in shaping perceptions on policy changes, issues of immediate concern as well as those of long-term relevance.

A large part of Asia remained in serious economic difficulties triggered by the financial crisis, which spilled over into a crisis of balance of payments and exchange rate with significant contraction of GDP, he said.

Even today, no one can assert with confidence that the worst is over. The banking bubble which surfaced some years ago was over-blown by unsuccessful efforts to seek an easy way out of the problem.

International economic institutions were yet to fully come to terms with the causes, consequences and prognosis of the deep shadow the economic meltdown has cast on the global economic system, he added.

Vajpayee said to achieve the set objectives, the GDP growth has to be at seven to eight per cent over the next three years with industrial growth at 12-13 per cent in medium term.

Exports should grow by 12 to 15 per cent in dollar terms with high levels of investment, both public and private, in the agricultural sector while giving a boost to agro-processing industries, he added.

UNI