Confident of recovery soon, the FM charges ahead with reforms
COME September, the blues will lift and the economy will get on to a revival phase. Sosays finance minister Yashwant Sinha. True to his words, the government is going aheadwith the second phase of economic reforms in top gear. Already, economic peripherals havestarted showing signs of a recovery. With the monsoons being better than expected andindications of the business cycle turning up, Sinhas predictions may well come trueby the end of the year.
According to the governments own estimates, most of the sectorsare showing promise. Growth in industrial production in the first quarter of 1998-99 hasrisen to 5.4 per cent compared to 3.7 per cent in 1997-98, agricultural production hasbeen extremely good, thanks to a good monsoon, and is all set not only to cross itstargets but also to set up a comfortable buffer, and direct tax collections have grown41.1 per cent in April-June 1998 with corporate receipts increasing by over 120 per cent.
The government asserts that there was never a recession in the sense ithas been touted so far. Says Sinha: "What we are seeing is just a slowdown and not arecession as it being widely perceived. The same conditions are visible throughout theworld. There is a slowdown in the world economy and India cannot be an exception. On thecontrary, we are doing rather well given the limitations." Says Mohan Guruswamy,advisor to the Finance Ministry: "The slowdown and despair is being felt morestrongly in India because there is a general mood of pessimism in the economy which istotally unwarranted. Investor confidence on the system is totally lost."
Which, the government feels, is unfair because most of the problems havebeen inherited by the ruling BJP coalition. Says Sinha: "The economy was not in anexcellent shape when I took over. There were problems everywhere." And he and histeam had to start quite from scratch. Says Guruswamy: "We inherited a legacy ofincompetence from our predecessors. Since the days of Manmohan Singh, individual investorconfidence, which is the basis of any market and economy, has been totally lost and thisis what we seek to revive first." To correct this, the finance minister and his teamis conducting extensive road-shows all over the country to mobilise opinion from allsectors. In the last 10 days or so, Sinha and his team have gone through more than 20roadshows before the chattering classes and industry.
But why is September being cited as the turning point? Guruswamy feelsthat with economic peripherals moving upward, the time was just right to make structuralreadjustments in the economy and improve productivity. It was also a good time to pushthrough bold growth initiatives. Experts also point out that the winter months are alwaysgood for the economy when the manufacturing sector growth is at its highest. "Theupswing picks up from September and stays vibrant till March. This is the right time toembark upon bold strategies and take risks."
Economists on the other hand, feel that even with the less thansatisfactory growth rates, India was better off than most other countries in Asia. Sayseconomist S.L. Rao, who has been recently appointed Electricity Tariff Commission chairmanand also member of the Economic Advisory Council to the prime minister: "While mostof the countries in Asia, with the possible exception of China and Taiwan, will recordnegative growth in this fiscal, India is thinking in terms of a 5 to 5. 5 per cent growth.Even if we fall short of this target, we will fare better than the rest of Asia. EvenChina and Taiwan are expected to see their growth shrink by 35-40 per cent". Growthof the world economy too is expected to fall by at least 50 per cent from its currentlevel of 4 per cent in the current year.
Sinha feels that India with its slow pace of growth was in an advantageousposition vis-a-vis other countries which found it difficult to sustain their higher rateof growth. "This helps us fight crises and absorb shocks better than others and thisalso clicks well with foreign investors who look for relative stability rather thanextreme highs and hopeless lows." Experts too agree with this viewpoint. Says Rao:"India with a relatively low exports to GDP ratio of 8 percent was unaffected in theAsian turmoil while countries like Thailand with a ratio of 35 per cent and China with 25per cent are in deep trouble now."
Judging the mood of revival, the BJP government has already lined up animpressive fare for the coming months which is expected to take the economy out of itspresent miserable state. The measures planned from this month have been spread overdifferent areas: public sector expenditure, clearance of private sector projects,including fast-track projects, the pending disinvestment, finance sector restructuringincluding tax reforms and insurance sector reforms, review of foreign investment norms toincrease investment flow and company law reform.
For the government, the process of reviving the economy began with the Union Budget.The coming months will only see the implementation of the revival proposals. One of theareas where the government is doing fast work is in clearance of pending projects. Says atop official in the Finance Ministry: "We are taking care of problems right fromtheir roots. We will clear cases from where they are stuck and see that very soon nothingremains pending or gets held up. There is clear instruction from the government in thisregard as about Rs 85,000 crore worth of projects are bogged down in delays andhold-ups."
THE main engine of Sinhas September revolution will be the kicking off of themuch-delayed disinvestment process. The nitty-gritty of this exercise has already beenstudied and the approach modified with a more outward looking, market-oriented strategy.The government aims at netting Rs 5,000 crore through this exercise. If the ResurgentIndia Bond (RIB) experience is any indication, the coming months could well bring morecheer for the government.
At the same time, a fast-track strategy for a rather radical privatisationof public sector enterprises (PSEs) through a special purpose vehicle has been scripted bythe government under the guidance of the new finance secretary, Vijay Kelkar. The strategysuggests the privatisation route for not only ailing PSEs but also blue chips andnavaratnas.
Earlier last week, in a serious attempt to tackle the vexing problem oftax arrears in cases locked up in various stages of dispute, the government launched theKar Vivad Samadhan scheme. At present, over Rs 30,000 crore worth of taxes in about 6.5lakh cases are held up in different stages of dispute and litigation. The scheme attemptsat getting out of this impasse by offering incentives in the form of payment ofoutstanding tax arrears at reduced rates, waiver of interest and penalty as well asimmunity from prosecution.
While this was the first step towards finance sector reforms, income tax reforms,changes in excise rules, a favourable review of foreign investment norms to increase thenet inflow and bringing in the insurance legislation proposing a 26 per cent foreign stakein Indian companies will follow shortly. Also in the wings are corporate legislationsincluding the companies bill and a measured intervention in the foreign exchange market.
The government has also begun the process of increasing public sector investment, thedecline in which had led to a recession in a lot of supplementary industries. Says Sinha:"We have promised to increase public sector expenditure in the budget by 58 per centand have taken the first step. The coming months will see us go further to increase demandin the economy. We are speedily clearing fast-track projects."
Indeed, in the last few weeks alone, the government has pushed over 14,000 MW worth ofprojects in the power sector and signed counter-guarantees for three fast-track projectswith three more almost ready for signing. It has cleared pending decisions regardingprojects and proposals in telecom, housing and construction and social sectors. "Weare basically trying to generate hope and clear the mood of despondence that has settledin the mind of Indians," says Sinha.
And slowdown or not, Indias chances of staging a smart recoveryare extremely favourable as, despite all its troubles and problems, it is being held asone of the most promising markets of the world. Says a top official from internationalbrokerage house and foreign institutional investor DSP Merrill Lynch: "The eyes ofthe entire world is on India. It is considered the most happening economy in the worldnow. While the global economy is facing a downtrend and Asia is in turmoil, all theworlds interest is pegged on India and not on Korea, Taiwan or Singapore."Sometimes, it takes only a small push, an insignificant policy announcement to revive theinvestment climate and put the clock ahead. And, with Sinha and his team intending to firefrom several barrels, the elusive recovery may be finally here to stay.