Tuesday, February 29, 2000, Chandigarh, India
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High fiscal deficit foreseen NEW DELHI, Feb 28 The Economic Survey for 1999-2000 today presented a rosy picture of the economy with the growth expected at 5.9 per cent, but cautioned that the gains could be frittered away if the government fails to take hard decisions to contain the increasing fiscal deficit. The governments report card on the progress of the economy during 1999-2000, tabled in Parliament today, said the year was marked by industrial recovery, growth in the manufacturing and construction sector, drop in inflation rate, growing exports and increasing foreign exchange reserves. The bad news is the gross fiscal deficit of the Centre and state governments, which reflects the net borrowing requirements of the government, has climbed back up to 8.5 per cent in 1998-99 (revised estimates) and is expected to rise further in the present year. In this regard, the Survey has prescribed a common strategy, including hard decisions on several fronts, for both the Centre and the states to overcome the daunting challenge. Describing effective management of public finances as the central challenge facing all levels of government in India, the Survey said the challenge has become more daunting due to the sharp increase in government wage bills after the implementation of the Fifth Pay Commission recommendations. Fiscal and revenue deficits impacts on virtually every important dimension of macro-economic performance, which ranges from low savings and investment, high real interest rates and reduced growth, to adverse pressure on inflation, financial markets and the external sector. Giving an indication of the hard decisions that government leaders, including the Prime Minister, Mr Atal Behari Vajpayee have been talking of in recent months, the Survey listed them as follows: A redefinition and narrowing of government responsibilities to those functions that only government can discharge effectively, with a view to down-sizing the government; Systematic efforts to reduce subsidies by targeting them to the poorest segments of society; A vigorous drive to divest commercial undertakings such as power utilities and transport undertakings; A concerted programme to deploy user charges for economic services rendered by government; Systematic induction of information technology tools and modern management practices to enhance the efficiency of governance; Resource generation through transparent sale of under-utilised public properties such as land; and A determined political commitment to truly effective expenditure management. On the economic performance, the Survey said apart from industrial recovery, which showed a 6.2 per cent growth in April-December 1999 as compared to only 3.7 per cent in the same period of 1998, the growth of Gross Domestic Product (GDP) from manufacturing would almost double to 7 per cent in 1999-2000 from 3.6 per cent in 1998-99. The growth in GDP from the construction sector is expected to accelerate to 9 per cent from 5.7 per cent in 1998-99. The performance of infrastructure sectors also improved markedly.The inflation rate dropped to international levels of 2 per cent to 3 per cent for the first time in decades. The balance of payments survived the twin shocks of the East Asian crisis and the post-Pokhran sanctions with a low current account deficit and sufficient capital inflows. This was demonstrated by the continuing rise in foreign exchange reserves by over $ 2.4 billion during the year until the end of January 2000 coupled with a relatively stable exchange rate. Exports, which grew by 12.9 per cent in April-December 1999 in dollar value, has improved on par with the better performing emerging economies. Software exports, which are not captured in customs data, also continued to grow at over 50 per cent during April-September 1999. Despite a 57.8 per cent growth in the dollar value of oil imports in April-December 1999, the overall import growth remained at a manageable 9 per cent. During April-September 1999, the current account deficit was higher than in the first half of 1998-99 and is expected to end the year about 1.6 per cent to 1.8 per cent of the GDP. During the same period net capital flows have grown by over one-third, which suggests that the increase in the current account deficit would be financed quite comfortably. Foreign direct investment flows, however, continue to be lower, and this is a source of serious concern, particularly given the medium term target of $ 10 billion of FDI inflows. An expansion of the automatic route coupled with further liberalisation should help reverse this trend next year. External commercial borrowings inflows also remain sluggish, but this is mainly due to weak domestic demand and easy liquidity available for corporations in the domestic market. There was a sharp upturn in the GDP growth in 1998-99, which reversed the deceleration in growth seen in 1997-98. The GDP (at factor cost) growth accelerated to 6.8 per cent in 1998-99 from 5 per cent in 1997-98. The primary supply side factor for the recovery was agriculture and allied sectors, which contributed 1.9 per cent points to the overall growth rate of 6.8 per cent in 1998-99. As in the previous year the GDP from public administration and defence contributed 0.7 per cent point to the overall GDP growth rate and this was primarily because of the wage increase for government employees. On the demand side, private consumption recovered in 1998-99 from its slump in 1997-98, with real consumption growth doubling from 2.6 per cent to 5.1 per cent. Recovery in agricultural income clearly contributed to this growth as indicated by the lower saving rate in terms of household saving in physical assets. Perhaps the windfall income of government servants, which was initially saved also started getting spent. Increased government consumption expenditures also provided stimulus to demand. A sharp slump in investment, however, had a deflationary impact and countered part of this stimulus. Total investment at 1993-94 prices declined by about half a per cent in 1998-99 after increasing by over 13 per cent the year before. Gross domestic saving declined sharply in 1998-99 to 22.3 per cent of the GDP. The 2.4 per cent points of the GDP decline in the saving rate resulted from a 1.4 per cent point decline in public saving and a 1 per cent point decline in household saving in physical form (direct investment). Though household financial saving increased as a proportion of the GDP, the overall private saving rate declined by 1 per cent of the GDP. Real gross domestic
capital formation in 1997-98 at 26.9 per cent of the GDP
(constant price) was only marginally less than the
previous peak rate. It, however, declined in 1998-99 to
25.1 per cent of the GDP, marginally less than the
five-year average. About half of this decline was due to
a fall in household investment, as it reverted back to
its earlier trend after a sharp rise in the previous
year. Gross fixed capital formation declined by only 0.3
per cent point to 23 per cent of the GDP (constant price)
in 1998-99. |
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