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Mid-year review: Lower interest rate regime essential, says Manmohan Singh

Former Finance Minister Dr Manmohan Singh said on Saturday there was need for correction in the fiscal system to achieve lower interest rates to fuel the long term infrastructural growth.

Good signs should not lead to complacency

Chairing the discussions on the mid-year economic review, Dr Singh who is the Leader of Opposition in the Rajya Sabha, said the economy was in a better shape and the key sectors like growth in the gross domestic product, improved exports and lower level of inflation were all good signs but they should not lead the country towards complacency because there were challenges ahead.

He said poverty eradication should be high on the agenda and it would depend on how central the system would be to propel the economy to achieve the object.

If the fiscal system is in a bad shape, you cannot bring changes in the social sector and bring cheer to the vulnerable sections, he said.

Lower interest rate is essential, but is it possible?

On the savings and interest rate structure, he said lower interest rate is essential because higher interest hurt the growth and the households continued to be a major source of savings.

With the government and the corporate sector continuing to remain major borrowers, he wondered how the interest rates could come down.

There were many benefits like a stronger economy and a stronger currency if the real interest rates were low through a monetary mechanism.

Power sector disappoints

Dr Singh regretted that not much had happened in the power sector in spite of opening it for private sector investment and the government had even cleared eight fast-track projects.

Citing the example of telecom sector, the former finance minister said, the Telecom Regulatory Authority of India had been marginalised and made practically 'dysfunctional'. When a regulator is made helpless, one could not hope to get investments, he remarked.

Surplus funds of PSUs should not be used to fund the budget

Dr Singh also assailed the tendency of the government to use the surplus funds available with some of the well-performing public sector units like NTPC for funding the budget. "If this is the path one wants to take, I don't know what to say," he said, stating that the approach should be 'honest and credible'.

Commenting on the system adopted by Andhra Pradesh where things appeared rosy because of the 'highly leveraged economy', he said the real test would come in three to four years when the debt servicing phase begins.

Mid-year review by National Institute of Public Finance and Policy

On Friday, giving a preview of his mid-year review of the Indian economy, Dr Ashok Lahiri, director, National Institute of Public Finance and Policy, said the economic situation appeared to be good because of the low inflation rate and reasonable amount of foreign exchange reserves.

Dr Lahiri said the quarterly growth rate of the economy was 5.5 per cent compared to 3.5 per cent during the corresponding period in 1998-99.

Diesel price: the worst is over

On the increase in diesel price, Dr Lahiri said, the worst appears to be over. The inflation is going to remain low, according to the government data on 17 categories including fiscal, financial and external factors of the economy.

The political scene also appears to have overcome uncertainty and there was no threat of any immediate election again. The Pokhran and Kargil fallouts also appear to be over and the 'guns were quiet' on the Line of Control.

However, the financial implications on the nation would not be known in the next budget.

Sectoral contributions to GDP: agriculture tops

Dr Lahiri said studies have shown that agriculture contributed 27.1 per cent to the GDP. The rainfall had been normal during the first half excepting Orissa and foodgrain production was up only by 1.5 per cent. There was a stagnation in the food output which was the worrying aspect. The oilseeds, jute, mesta and cotton may remain depressed due to various prevailing conditions.

The export figures touched $ 17 million accounting for 7.4 per cent while the imports grew by 5.6 per cent. The import of petroleum goods jumped in the first half of the current fiscal year from $ 2.91 billion to $ 4.45 billion. The money supply (M3) had decelarated between June and September 1999 to 17.21 per cent from 18.11 per cent.

He said the fiscal deficit of states had increased following the implementation of the Fifth Pay Commission. The interest payment figures were Rs 880 billion accounting for 65 per cent of Rs 1.32 trillion.

Unless the Centre brought down the deficit figures, it would have no moral authority to preach the states to bring down the deficit.

The revenue deficit figures were indicative of the efforts to contain but the strain of politics of coalition was showing on the figures.

Subsidies and the politics of economy

The P V Narasimha Rao government had brought down the revenue deficit in the initial two years but could not do the same for the next three years. During the two years of United Front government, the figures went out of control. The scene was no different during the earlier 13-month-old BJP government.

He did not agree with the suggestion that the subsidy given on fertilisers was not anywhere comparable to the increased salaries to the government staff. However, any reduction could be done by a government which was sure of facing elections at least after three to four years by when the action would start showing on the economy. Any reduction would certainly evince angry shouts but one had to be prepared for that, he said.

The current juncture provides a great opportunity for launching second generation of reforms which should not be incremental in nature but bolder than those initiated in 1991, Dr Lahiri's study said.

On the political scenario, the paper says the splendid growth and Balance of Payments response to the first generation reform initiative have not only been commended universally but have also resulted in political consensus for the reforms. However, despite the consensus, reforms are stalled in the middle and remain incomplete. The fiscal deficit has to be reduced drastically over the next four years to wipe out the revenue deficit.

Expenditure Commission should be set up

The paper suggests setting up of an Expenditure Commission headed by an eminent economist to look into expenditure management. It also deals with taxes, expenditure and governance.

The prices of several items, including petroleum products, continued to be controlled and onion prices were brought under the Essential Commodities Act and restrictions imposed on exports. ''Such temptations to invoke price and export controls should be avoided,'' the paper says, adding that the decision has been taken to introduce complete decontrol in hydrocarbon sector by 2002.

The issue of deregulating fertiliser prices should be examined afresh, the paper suggests.

Divestment must be a structural reform measure

Regarding divestment in public sector units, the paper says it should be seen as a structural reform measure to augment the productivity of physical and human resources locked up in these enterprises. This in turn must be a measure to mobilise revenues. The equity holding should be below 50 per cent in these enterprises.

The legislations on bankrupcy, foreclosure, debt recovery and mergers as promised by the president should be enacted as soon as possible, it suggests.

WTO: Don't seek special treatment, highlight adverse policies

The paper says India should proudly announce at the Seattle Summit what it had done to fulfil the WTO commitments and argue for duty reduction.

Provisions regarding special and differential treatment clauses in favour of developing countries still remain, it says. India instead of asking for special treatment, should focus on implementation issues such as frequent unjustified use of anti-dumping and contervailing measures and adoption of unrealistically high standards like labour and environment that effectively constituted technical barriers to trade.

''TRIPS provides for higher level of protection for certain geographical indicators such as wines and spirits, but does it offer intellectual property rights on our own products such as basmati rice, Darjeeling tea and Alleppey cardamom?'' it says.

UNI

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