Daunting Challenges Ahead – Indian Economy

With P.V. Narsimha Rao assuming office as the ninth premier of the country, quite a few record-of-sorts have been created. Never before has any citizen hailing from the south of Vindhyas made it to this coveted post.

Also, this is the first time that a non-MP has been sworn in as Prime Minister, giving rise to many a debate on the constitutional validity of the same. But most important, this would probably be the first time in the land of the largest functioning democracy on this planet that a newly elected government would not enjoy the euphoria of any ‘honey-moon’ period of sweet vibes with all the sundry, to speak of. The government was expected to be, and has, seemingly got down straight to business.

Though the grass does look green from here for those basking in the glory of power, not many would be ready to trade places with Narasimha Rao and his men in the prevailing circumstances. A plethora of problems and virtually no solutions in sight is the scenario on almost all the fronts. However, the situation is most bleak and grim on the economic front. With depleting foreign exchange reserves, the spiral rise of inflation, alarming balanced-of-payments position, seemingly insurmountable debt burden and yawning budget and fiscal deficit; the country is faced with problems unprecedented in the 44 years since independence.

THE PRESENT

Unlike the mythological Abhimanyu taking all at once, it would be better and more fruitful to ponder separately over the major contributories to the catastrophe we face today, on the economic front.

Foreign exchange reserves: While in June 89, our foreign exchange (also called forex) reserves stood at Rs. 6500 cr in June 90 they had dropped down to Rs. 5800 cr and by January 91 forex reserves were barely good for 10 days lingering only at Rs. 1500 cr. Frantic appeals were made, panic buttons pressed and after a lot of pleading, the International Monetary Fund (IMF) bailed us out temporarily with a loan of 1.78 billion US dollars (Rs 3275 cr. Approx). This loan consisted of two parts. The first, of 0.77 billion US dollars given under ‘CCFF’ scheme at 9%interest to be repaid completely within five years. The second part of 1.01 billion US dollars was given as for import of petroleum products as emergency relief arising due to the Gulf crisis.

But this relief was very sort lived. By beginning of June 91, we were again hand-to-mouth down to Rs. 2500 cr forex reserves, when the government resorted to swapping 20 tonnes of gold seized from smugglers with the Union Bank of Switzerland for around Rs 500 cr hard currency. The government has an option to re-acquire this gold after six months at the then prevalent prices or repay the amount with 6.3 % interest. Though this move of the caretaker government has been lambasted and questioned by many, some arrangements do exist in favour of this action. Firstly, the gold pledged (and not sold, as misunderstood by some) is not out of the official monetary gold reserves but the seizures made of smuggled gold. Secondly, it was imperative for the government to acquire forex almost immediately else India would have defaulted for the first time in history in interest payment abroad. Also, assuming that the country does not re-acquire the gold, to have managed hard currency loans at just 6.3 % interest is a very good bargain. Of course, many people have equated this action as signifying to the world of the nation’s bankruptcy. No doubt, such an action is justified only in the extreme circumstances but let us not harbour any false pretensions of the country’s present economic position either.

Trade deficit: One of the major reasons for the dwindling forex reserves is the ever-increasing trade deficit between total imports and exports made by the country. For the Seventh Plan, the annualized average of trade deficit was Rs 8252/- crore. As per the data released by the Ministry of Commerce, the country’s trade deficit in the period April-October ’90 stood at Rs. 5334 cr. (Increase of 31.6%) whereas the April-September ’90 period trade deficit was Rs 4233 cr. , it increased in the April-October ’90 period to Rs. 5334 cr and then spiraled to Rs 7193 cr in the April-November ’90 period-mainly due to the Gulf crisis which was almost equal to the annual trade deficit in the year 1988-89.

Out of India’s total annual exports, agro based products (12%), minerals and ore (98.2%), readymade garments (10.3%) gems and jewellery (21.7%) and leather goods (7.3%) contribute the main earnings. Whereas, out of total imports, petroleum products (15.5%), capital goods (24.6%) and chemicals (6.9%) take away a majority of the hard currency.

Rupee-value devaluation: With casual and quite irresponsible statements like ‘empty coffers of the country’ and ‘national bankruptcy’ being made by men at the helm, it is but natural that the Indian currency and its credit worthiness have witnessed a constant downslide. In fact, one of the two international credit rating agencies namely Standard Poor’s and Moody’s have both degraded India from the stable ‘investment’ grade to uncertain ‘speculation’ grade recently. Only a glimpse of the slide of value of the rupee vis-à-vis the US dollar and pound sterling will tell the remaining story. The official exchange rate (unofficial rates are even higher) of the US dollar and pound sterling have both shown an increase of over 32% in the past four years.

Budget deficit: In simplified terms, the shortfall of the revenues expected over the expenditure proposed during the year is the budget deficit. For the year 1990-91, the budget deficit at the time of presentation of the budget was estimated at Rs. 7206 cr. But actual deficit exceeded Rs 14000 cr. Similarly the total budget deficit for the seventh plan had been envisaged at Rs 14000 cr. But trends reveal that it will exceed expectation by 27% at Rs 37946 cr. The overall budget deficit has increased from Rs 5315 cr in 1985-86 to Rs 10592 cr in 1989-90. Not only this, a very deplorable practice of meeting revenue expenditure out of capital receipts has been started, thereby diverting funds required for essential developmental activities like employment generation, poverty eradication to mundane wage and administration expenses.

External debt: According to the debt figures published by the world Bank in 1990-91, India’s total foreign debt at the end of 1989 stood at 62.52 billion dollars (Rs 1,13,150 cr) out of which 56.25 billion dollars were long term debt, 4.79 billion dollars was short term debts and 1.57 billion dollars were loans from the IMF notably the total external debt has increased threefold in the past nine years.

With this, the debt-service ration of the country is also coming under great strain, leading to a vicious cycle of debt-trap with the country borrowing from abroad mainly to repay previous loans and interest. This practice leads to a catastrophic situation where the fresh borrowing fall short even of the interest liabilities, let alone the repayment of the principal amount. At present, India is the fourth largest ‘indebted’ nation in the world.

THE PAST
Having read all the shocking statistics above, one question is bound to surface ‘how did we end up in such a mess?’ The answer, though not very simple, does make startling revelations. Undoubtedly, severe droughts and the recent Gulf crisis dealth very severe blows to the exchequer but the basic economic set up of the country had the resilience to overcome these crises. However, it was the partisan, short term vote catching populist measures of political parties and governments which have brought us to the nadir where we are now. Sadly, no party or government can be exonerated from this charge, the only concession that one may make is the degree of ‘damage’ done.
The expenditure on defence has been going up every year, now touching Rs 16000 crore.

The gulf crisis hit India very badly, and in more ways than one. Firstly, the oil import bill shot up dramatically but nothing much could have been done to curtail it. Secondly the mass exodus of Indians from Gulf countries back to India was a very costly and unexpected affair. Not only this, but a very significant share of remittances from abroad by NRI’s was from these every people which also stopped abruptly.

While liberalization of the economy and case of imports was much needed, but the Govt. should have laid equal emphasis on export promotion. For a developing nation like India, import substitution can not go beyond a certain extent without hampering developmental capital goods supply.
Rs 99,315 crore has been employed as capital in 244 public sector enterprises (PSE’s) which made a total annual profit of only Rs. 3500 crore approx. Only 31 out of these units, operating in monopolistic sectors like transport, oil and petroleum, automobiles had a profit of Rs 3331 crore, which shows what a drain the remaining units are on the economy.

THE FUTURE
Is there any ray of hope, or are we doomed like the banana-republics of South America? In these times of despair, let us remember the inspiring words of Netaji Bose. The darkest hour is always before the dawn. The country can pull out, but only if the government is wiling to sacrifice popular gimmicks at the altar of real measures. Stern steps are required to correct this malaise. Even then, overnight metamorphosis is impossible. What has been going down for so long will definitely take some time to curb further fall and still longer to begin the ardous climb uphill.

The first tasks on hand of the Govt. would be present a full judicious budget and then avail of the IMF upper tranche loan upto 75% of India’s SDR (special drawing rights) of 2.2 bn US dollars. Of course, the conditions to be imposed by the IMF are largely going to be those which any government would have to adopt, even otherwise.

These include a total freexe on any increase in wages of allowances, to limit non-plan expenditure, heavy cut-back in subsidies, floating of shares of profitable PSE’s to the general public reducing the fiscal deficit to 6.5% of GDP, further liberalization of the license- quota permit system to enable industrial development and eased scope of foreign investment and international trade.

The task is mammoth and daunting, but let us hope that like previous instances of grave national difficulties, citizens and political parties of all hues and shades would set aside differences, unite and be ready to make sacrifices to redeem the lost prestige of our mother land.