ECONOMIC SURVEY 1998-99 Macroeconomic Overview
| Production | Money and Prices "The GDP growth rate, which decelerated significantly to 5.0 per cent in 1997-98 from 7.8 per cent in 1996-97, recovered to an estimated growth of 5.8 per cent in 1998-99. The recovery would have been firmer but for the East Asian crisis and its effect on world import demand and on international capital markets." says the Economic Survey for 1998-99 which was placed in both Houses of Parliament today (February 25, 1999). 2. It further states that the "economic developments in India in 1998-99 have to be viewed against the backdrop of an exceptionally turbulent and unfavorable international economic environment, unusual volatility in capital and forex markets of industrial countries and continuing drought in capital flows to developing countries". 3. The recovery in 1998-99 was led by the rebound in ‘agriculture and allied sectors’, which is projected to grow by 5.3 per cent. Trade, hotels, transport and communications’ was the only other category where growth accelerated from 5.7 per cent in 1997-98 to 6.8 per cent in 1998-99. The growth of GDP from manufacturing has slipped to 5.7 per cent, that from ‘electricity, gas and water supply’ to 6.3 per cent, and mining to 0.1 per cent. 4. Total gross domestic savings declined to 23.1 per cent of GDP in 1997-98 from 24.4 per cent of GDP in 1996-97. Public saving declined by 0.5 per cent and Household physical saving by 1.0 per cent of GDP. 5. Real Gross Domestic Capital Formation dropped marginally from 26 per cent of GDP (constant price) in 1996-97 to 25.6 per cent of GDP in 1997-98. However, Corporate fixed investment increased from 7.9 per cent of GDP in 1995-96 to 8.3 per cent of GDP in 1996-97 and further to 9 per cent of GDP in 1997-98. This suggests that Indian corporate industry is responding to the challenge of domestic and global competition. 6. The overall prospects of food grain output for 1998-99 are quite good mainly due to Rabi crops sown in November-December 1998. Rabi foodgrain output is likely to be 96.5 million tons, which would be higher than Rabi 1997-98 by 5.2 million tons. The 1998-99 food grain output is expected to be about 195.3 million tons. 7. As measured by the Index of Industrial Production (IIP) industrial growth rate for April-December 1998 was only 3.5 per cent, down from a 6.7 per cent for April-December 1997. The mining sector witnessed the greatest deceleration in growth, from 5.5 per cent for the first nine months of 1997-98 to 1.1 per cent in 1998-99 (same months). Manufacturing sector growth also fell from 6.9 per cent for the same months of 1997 to 3.7 per cent in 1998. Electricity growth on the other hand, improved from 6 per cent in 1997 to 6.6 per cent in 1998 over the same months. 8. The greatest deceleration in 1998 was in basic goods, from 6.8 per cent growth in April-December 1997 to 1.4 per cent in 1998. The slowdown in mining, basic and intermediate goods is at least partly a reflection of the decline in global prices. The continuing slowdown in the manufacture of consumer goods suggests that an autonomous slowdown in the growth of private consumption has contributed to slower growth of aggregate demand. The decline in agriculture production during the previous year, the decline in asset prices, as reflected in stock prices and real estate, and an increase in uncertainty, are some of the factors which affected consumption. 9. The only industrial sub-sector, which bucked the trend of declining growth rates, was capital goods. The growth rate of 9.8 per cent for April-December 1998 was significantly higher than the fairly respectable growth of 6.7 per cent in the corresponding period of 1997. 10. The import of capital goods (machine tools, mechanical and electrical machinery, transport equipment and project goods) in US $ value also increased substantially during April-November 1998. The growth rate of 7 per cent represents a large turn around from the 16.6 per cent fall in the corresponding period of 1997-98. This was despite a decline in foreign direct investment, and net FII outflows during 1998-99. On balance, total domestic investment has probably grown at a faster rate during the first eight months of 1998-99 than in the corresponding months of 1997-98. 11. The Government initiated several reforms for providing a stimulus to industrial growth and to impart dynamism to the overall growth process. 12. Infrastructure performance during April-December 1998 has declined as compared to the corresponding period of 1997. Growth of six infrastructure and core industries (electricity generation, coal, steel, crude oil, refinery throughput and cement) decelerated to 2 per cent during April-December, 1998 from 4.1 per cent growth in April-December 1997. Crude oil and steel displayed negative growth rates. While growth rates of coal, refinery throughput and cement decelerated, that of electricity generation accelerated in April-December 1998. 13. Inflation rose sharply during 1998-99, mainly because of an exceptional spurt in prices of a handful of agricultural commodities, the pressure from this source has abated now. The point-to-point annual rate of inflation in the WPI rose during 1998-99 to a peak of 8.8 per cent on September 26. It decelerated thereafter to 4.6 per cent (provisional) on January 30, 1999. 14. Despite the steep, though temporary, flare up in the overall inflation rate during 1998-99, the underlying inflation rate remained modest. This is indicated by the subdued trends in wholesale prices of manufacturers (accounting for 57 per cent weight in the WPI) which has risen by only 3.4 per cent between end-March 1998 and, January 30, 1999. Fuel and power prices have actually declined over the same period. This contrasts with a rise of 10.2 per cent in the wholesale price index of primary articles over the same period. 15. The year-on-year monetary (M3) growth at 19.8 per cent as of January 15, 1999 exceeded the corresponding growth in 1997-98 by 2.9 percentage points. The rate of expansion in reserve money in the current financial year till January 15, 1999 was 10.7 per cent as against 4.1 per cent in the corresponding period of 1997-98. This reflected the sharp increase in the growth of Net RBI credit to the Government (NRCG) from 2.5 per cent in 1997-98 to 13.4 per cent in 1998-99. Thus, prima-facie it could be argued that monetary policy accommodated the rise in inflation. The presence of excess capacity in the economy as well as the competitive pressure from outside has, however, ensured that the underlying inflation did not rise. It is only sub-sectors that are shielded from competition by internal controls or quantitative restrictions on imports that have seen large increase in price. There was a rising trend in the cut-off yield of both 91-day and 364-day Treasury Bills during 1998, which suggests that the downward pressure on real interest rates arising from the comfortable liquidity in the system during the first three quarters, may not last. 16. Private credit growth remained low during 1998-99, reflecting primarily the relatively low effective demand for funds from the corporate sector. Till January 15, 1999 in the current financial year, non-food credit expanded by 6.8 per cent as against 7.1 per cent in the corresponding period of 1997-98. The total flow of funds comprising non-food credit and investment in debt/equity instruments expanded by 9.7 per cent till January 15, 1999 as against 11.5 per cent in the corresponding period of 1997-98. 17. Among the liberalization measures announced in April 1998 were, (a) interest rates on loans up to Rs. 2 lakh were set so as not to exceed PLR applicable to prime borrowers of over Rs. 2 lakh. (b) All advances against term deposits were set at interest rates equal to or less than PLR, and (c) the minimum maturity period of term deposits was reduced from 30 to 15 days. 18. The budget for 1998-99 was formulated in the backdrop of serious fiscal slippage and a deceleration in economic growth. Its objective was, to (a) restore the momentum of industrial growth, (b) ensure macroeconomic stability, (c) raise investment, particularly in infrastructure, (d) provide impetus to social sector development (e) reverse the decline in agriculture production, and (f) calibrate the pace and character of integration with the world economy. The budget announced a modest reduction in the gross fiscal deficit (GFD) from 6.1 per cent of gross domestic product (GDP) in 1997-98 (RE) to 5.6 per cent of GDP in 1998-99 (BE). Consequent to the release of new series of national accounts, the fiscal deficit as a proportion of GDP at current market prices is now placed at 5.5 per cent and 5.1 per cent for 1997-98 (RE) and 1998-99 (BE) respectively. The Revenue deficit, which indicates the extent of borrowing required to finance current expenditure, was budgeted at Rs.48068 crore (2.7 per cent of GDP) for 1998-99 compared with Rs. 43686 crore (2.8 per cent of GDP) for 1997-98 (RE). The primary deficit, which is an indicator of current fiscal operations of the Central Government, was estimated at Rs. 16025 crore (0.9 per cent of GDP) for 1998-99 compared with Rs. 20645 crore (1.3 per cent of GDP) attained in 1997-98 (RE). 19. The Central Government finances during the current year continue to be under stress. The fiscal deficit in April-December, 1998 was exacerbated on account of a higher growth in total expenditure at 26 per cent compared with a growth of only 4.7 per cent in total revenue receipts. Thus, preliminary estimates indicate that the fiscal deficit was higher by 77.1 per cent in April-December, 1998 over that in April-December, 1997, and accounted for about 80.7 per cent of the budgeted fiscal deficit for 1998-99. With continuing shortfalls in collections of indirect taxes due to sluggish growth in industrial production and imports, it is unlikely that the year end fiscal deficit would be contained within the budgeted amount. 20. A number of measures were taken to strengthen the infrastructure and rural sectors, and to enhance agricultural productivity in a sustainable manner. The Infrastructure Development Finance Company (IDFC) was designated an all India public financial institution with all attendant fiscal incentives, to enhance long-term finance for infrastructure investment in the private sector. The effort to simplify and widen the personal income tax continued. With a view to simplify the tax return, a one-page tax return called "Saral" was introduced for all non-corporate taxpayers. 21. There has been slow but steady improvement in the performance of public sector banks. The ratio of Non Performing Assets to total advances in respect of public sector banks declined from 17.8 per cent in end 1996-97 to 16.0 per cent in end 1997-98. The ratio of net Non Performing Assets to net advances also declined from 9.2 per cent to 8.2 per cent in 1997-98.Based on the recommendations of the Narasimham Committee (II) on Banking Sector Reforms, the Reserve Bank announced a number of decisions as part of its mid-term review of the monetary and credit policy released on October 30, 1998. These related to haste introduction of risk weight for Government/Approved Securities, risk weight for Government guaranteed advances, general provision for standards assets, higher Capital to Risk-Weighted Assets Ratio (CRAR, 9 per cent) for banks, etc. Based on the recommendations of the Task Force on Non-Banking Finance Companies (NBFCs), deposit acceptance norms have been rationalized by the RBI. 22. Sanctions and Disbursements by All India Financial Institutions continued their strong growth in 1998- 99. During April-December 1998 Sanctions grew by 36.9 per cent and Disbursements grew by 12.5 per cent. This growth was consistent with the improved growth of production of capital goods. 23. Capital markets remained subdued during most of the year. Rs. 3929 crone was raised from the Primary Market during April-December, 1998 as against Rs.3093 crone in the corresponding period of 1997-98. The bulk of the capital raised (nearly eighty per cent) was in the form of bonds, with very little in the form of equity issues. The Sensex, which had risen at the beginning of the year from 3893 on March 31,1998 to over 4200 in April, declined thereafter to 2934 by end-August 1998. It crossed the 3000 mark in September 1998 but declined to 2878 on October 5, 1998, and remained below 3,000 for nearly three months. The last quarter of 1998-99 has, however, seen a revival, with the Sensex crossing 3400 in January 1999. This is perhaps reflective of the declining level of uncertainty and improved risk perceptions. 24. The East Asian crisis, which continued to deepen and spread in 1998, led to tremendous volatility and uncertainty in global financial markets. In spite of a turbulent international environment, India’s balance of payments has remained moderately comfortable, with some reserve accumulation. The current account deficit widened to 1.6 per cent of GDP or U.S.$ 6.5 billion in 1997-98. In 1998-99, it is estimated to fall, as a per cent of GDP, below the level in 1997-98. 25. The trade deficit, on a BOP basis, increased from 3.7 per cent of GDP in 1996-97 to 3.9 per cent in 1997-98, despite the sharp deceleration in import growth. This is attributable to deceleration in export growth, which continued for the third year in succession in 1998-99. Exports declined by 2.9 per cent during April-December 1998, compared to a 3.3 per cent growth in the corresponding period of 1997 (DGCI&S data). This data does not include software exports, which are shown under invisibles. 26. Total imports, on BOP basis, increased by only 4.4 per cent to US$ 51.1 billion in 1997-98 compared to 12.1 per cent growth in 1996-97. This marked deceleration was due to several factors, including weak domestic demand, lower industrial activity and lower unit values of imports. There has been a further deceleration of imports in the current financial year. Imports during April-December, 1998 increased by 7.1 per cent compared to 7.4 per cent in the corresponding period of 1997-98 (DGCI&S data). This is largely due to a decrease in the dollar value of POL imports by about 26.3 per cent because of continued softening of prices. The increase of 15.7 per cent in non-POL imports over the same period is mainly a result of a shift in imports of gold and silver from baggage channel to the DGCI&S channel. Non-POL imports, net of gold and silver have grown by only 6.3 per cent compared to 11.9 per cent over the same two periods. 27. The capital account in the balance of payments, which had shown an impressive surplus of U.S. $ 10.4 billion in 1997-98, is likely to be lower in 1998-99. Total net capital inflows in 1998-99 are expected to be substantially lower than the levels in 1997-98, if the exceptional inflows off $4.2 billion under Resurgent India Bonds (RIBs) are excluded. Foreign direct investment (FDI), which had increased by 18.6 per cent in 1997-98, has fallen by 38 per cent in April-December 1998. Portfolio investment has continued to decline from U.S. $ 3.3 billion in 1996-97 to U.S. $ 1.8 billion in 1997-98, to an outflow of $ 0.7 billion in April-December 1998. The significant decline in portfolio investment was partly a result of contagion from the East Asian crisis that affected all emerging markets. 28. Gross disbursements during April-September 1998 was lower at US $ 830 million compared to US $ 1066 million during the corresponding period of 1997. External Commercial Borrowing (ECB) approvals up to 23.12.98 in 1998-99 have been placed at US $ 3.8 billion compared to U.S. $ 8.7 billion in 1997-98. Disbursements have fallen even more sharply from $ 4 billion in April-September 1997-98 to US $ 1.6 billion in the first half of 1998-99. This is due to the relative unattractiveness of ECB from the perspective of borrowers. 29. Total foreign exchange reserves (including gold and SDRs) at the end of January 1999 amounted to U.S. $ 30.4 billion, which provides cover for about 7 months of imports in 1998-99. 30. After an 18-month period of stability, the exchange rate of the Rupee against the U.S. dollar came under downward pressure in August 1997, arising mainly from the East Asian crisis. At the end of January 1999, the exchange rate of the Rupee vis-à-vis the U.S. dollar was Rs. 42.50. The movements in the exchange rate have helped to largely correct the relative appreciation of the Rupee in real terms, which will help to offset the competitive disadvantages arising from the extensive depreciation of the East Asian currencies, and is expected to revive our exports and contain import growth. 31. India’s stock of external debt at end-September 1998 stood at U.S. $ 95.2 billion as against U.S. $ 93.9 billion at end-March 1998. The debt service payments, as a ratio of current receipts, continued to improve over the years declining from 30.2 per cent in 1991-92 to 19.5 per cent in 1997-98. The share of short-term debt to total debt declined from 7.2 per cent at end-March 1997 to 5.4 per cent at end-March 1998 and further to 3.7 per cent at end-September 1998. The share of concessional debt has declined from 44.7 per cent in 1996 to 39.3 per cent at end-March 1998 and further to 37.7 per cent at the end of September 1998. 32. Several anti-poverty measures have been in operation for decades focussing on the poor as the target group. As a ratio to GDP at market prices these expenditures increased to a record high of 1.91 per cent in 1998-99 (BE) as compared to 1.33 per cent in 1991-92 and 1.75 per cent in 1997-98 (RE). The Central Plan allocation for social sectors and programs show highest growth of about 36 per cent for family welfare and Women and Child Development in 1998-99(BE) over 1997-98 (BE). The outlay for health has gone up by about 25 per cent in 1998-99(BE) over 1997-98 (BE). 33. A country’s environmental problems vary with its stage of development, structure of its economy, production technologies in use and its environmental policies. While some problems may be associated with the lack of economic development (e.g. inadequate sanitation and access to clean drinking water), others are exacerbated by the growth of economic activity (e.g. air and water pollution). Environmental changes may be driven by many factors including economic growth, population growth, urbanization, intensification of agriculture, rising energy use and transportation. Poverty remains at the root of several environmental problems. 34. Large-scale industrialization, spread of transport, communication and other modern infrastructure combined with the pressure of population growth has added to the difficulties of preserving clean environment and healthy natural resource base. These have been exerting pressure on environment as witnessed in growing evidence of air and water pollution and land degradation. For instance Delhi is now classified as the fourth most polluted city in the world, with a Suspended Particulate Matter (SPM) of 145.3 to 929.8 microgrammes/m3 as against a the National ambient air quality standard of 70 to 360 microgrammes/m3. Organic and bacterial pollution continue to be the predominant source of pollution in our aquatic reserves. The forest cover and globally recognized bio-diversity is also under threat. 35. Such degradation imposes a cost on the society, with the burden of such costs being disproportionately high for the poor who live and depend on such natural ecological systems. Such costs need to be explicitly accounted for in economic policy and planning. The challenge of sustainable development remains formidable and requires integration of country’s quest for economic development with its environmental concerns. Choice of policies and investment has to be such which encourage cleaner production/ consumption and practices that minimize the environmental impact. 36. The most intractable and long-standing issue confronting us is that of the fiscal prudence. Quite clearly, fiscal consolidation is absolutely necessary for containing inflation, reducing interest rates, promoting investment and growth, and fostering reasonable stability in the financial system and the foreign exchange market. 37. In a broader qualitative sense, sustainability also depends on the quality of the government expenditure and the nature of the tax system underpinning the fiscal system. The low priority expenditures and non-targeted subsidies need to be identified and eliminated. This is also essential for freeing up funds for completing the unfinished tasks of universal primary education, effective public health systems and modern water and sewage systems for the entire population. The impact of the Fifth Pay Commission and its aftermath on revenue deficits of Center, States and local bodies lends urgency to the need to downsize government. The time has perhaps come to reconsider the issue of constitutional limits on the deficit as well as to take up the challenge of reengineering government. 38. The task of reforming the tax system must also be carried forward and completed. But such reforms must be accompanied by determined efforts to augment revenue mobilization through base broadening, improved administration and other means. The decline in the tax to GDP ratio of recent years must be reversed. 39. The commendable but gargantuan task of decontrol and de-bureaucratization, which every government in the nineties has set for itself, remains unfinished. Investment controls are one of the most pernicious legacy of the control era and remain in several infrastructure service sectors. The need to replace all quantitative restrictions by fiscal measures was recognized even in the eighties, yet import and export controls remain widespread in certain sectors like agriculture. Though reform of the foreign exchange system has been one of the prominent areas of reform, the operation of exchange controls still requires improvement, particularly for exporters and knowledge-based industries. Similarly, though some of the well-known financial sector controls have been removed, many controls remain embedded in the laws, rules, regulations, norms and procedures. 40. The very uncertain global environment during 1998 has brought external issues back into focus during 1998-99. As downside risk remains prominent in all the forecasts of the world economy for 1999, the prominence of external issues in our own policy making is likely to continue in the coming year. The deceleration in the growth of exports over the last three years has again raised the need for a more liberal and flexible policy for export production. 41. The increased opportunity in the area of software and other service exports and knowledge-based industries has thrown up additional areas for policy reform and procedural simplification. 42. The primary responsibility for social sectors, agriculture and rural development is generally assigned to the States under the Constitution. These underlines the importance of state level reforms. These include fiscal reforms, decontrol and de-licensing particularly with respect to transport, storage and processing of agricultural goods, reform of infrastructure sectors like electricity, canals and road transport and decentralization and involvement of local bodies, including NGOs. Institutional reforms such as those related to size and quality of government, freedom of information, economic laws and the legal system require involvement of the Central and State Governments as well as the judiciary. 43. These reforms have to be designed to set in motion a process of self-sustained, employment promoting growth. Democratic participation and empowerment of the people through education, public health improvement and information/knowledge is an essential element of such growth. Government administration and Public institutions will need to be transformed to recognize and appreciate the centrality of efficient investment (physical, human or knowledge capital) in any self-sustaining development process. 44. The award of the Nobel Prize in Economics to Prof. Amartya Sen has again brought home to us that growth and development are ultimately about the entitlements of people. Universal literacy and compulsory primary education are necessary not only for sustaining productive employment and economic growth, but also for making every individual a full participant in the democratic life of the nation. The provision of public goods and basic amenities like water, sewage and sanitation must extend not just to the middle class but also to the poorest of the poor. Research & monitoring and control of contagious diseases and epidemics may not be glamorous activities but often have far reaching effect on the poor. Similarly, strengthening of the norms of civil society and elimination of violence and corruption will bring substantial benefits for the poor. It is critically important to refocus government priorities to those areas, which are the basic responsibility of government, and to withdraw from areas where private initiatives can often achieve the goals more efficiently. |