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Economic Survey for 1997-98
Economic survey for 1997-98
The economic survey for 1997-98 calls for stepping up foreign investment, restoring
confidence in the capital market and reversing the sharp slowdown in the GDP and
export growth accompanied by a marked deceleration in industrial growth. At the
same time, it says that the rising fiscal deficit and infrastructure problems are
areas of serious concern. The survey tabled in Parliament on Thursday says fresh
initiatives are necessary to do away with the ‘inspector raj’ and reduce the role of
controls in industry, agriculture, trade, infrastructure, finance and social services in
order to unleash the productive energies and capacities of economic agents.
According to the survey, the climate of industrial investment and growth can be
greatly enhanced through bold policy initiatives.
It calls for further measures at bringing back small investors to the capital market
by raising the transparency and accountability of listed companies as well as that
of capital market intermediaries. It suggests greater procedural simplifications in
the area of foreign direct investment (FDI). There remains considerable potential for
higher FDI flows. However, India needs to maintain a positive stance towards FDI in
order to strengthen the balance of payments and to garner more foreign savings to
support the investment needs of the economy. Giving its comments on the fact
that some industrialised countries have acted negatively in the field of economic
relations following the nuclear tests by India, the survey says it becomes more
urgent to implement the policy decisions necessary to ensure macro-economic
stability and rapid sustainable economic growth.
The survey says the share of FDI in total flows must be progressively raised as it is
the most stable form of capital flow. FDI also has an additional benefit of
introducing new technology, techniques and practices into the economy. It notes
that external commercial borrowings, foreign institutional investment and FDI
norms and procedures have been substantially liberalised in the past few years to
facilitate the flow of funds for production and investment. The survey says it is
essential to maintain a market-responsive exchange rate determined by
fundamental demand and supply factors, while containing excessive short-term
volatility. The recent market movement in the rupee-dollar rate, however, corrects a
part of the appreciation in the real effective exchange rate which has occurred over
the last two years. The survey says the ongoing economic reforms should be
reappraised and revitalised.
The eradication of poverty and unemployment must be the abiding goal of
development policies and programmes. The achievement of this goal will require
sustained and rapid economic growth combined with functioning public
programmes for social services, rural development and employment generation to
provide an effective safety net for all those millions at the margin of the growth
process. The survey calls for putting the economy on a higher growth path of the
order of seven to eight per cent per annum. This would necessitate raising the
savings rate to about 30 per cent of the GDP through a reduction in government
dissaving, an improvement in the performance of non-traded infrastructure (energy,
transport and communications) and restoring the export growth to reasonable
The survey notes that the financial crisis in South-east Asia has re-emphasised the
significant challenges and risks involved in moving to free international capital
markets. The lessons of the crisis demonstrates that capital account liberalisation
should be carried out in a phased and deliberate way so as to minimise the risks of
disruption during a period in which all participants learn to deal with new challenges
and uncertainties. The survey says the time has come to remove numerous
controls and impediments to the setting up and functioning of the derivative
markets in India.
Similarly, constraints on hedging of exposure on international markets must be
phased out, as this has the additional benefit of providing a hedge against
systemic risk. Modern, well-regulated, forward and future markets are essential for
efficient management of risk. Without such markets, Indian firms and institutions
are handicapped vis-a-vis their competitors across the world. Unhedging foreign
exchange exposure, if widespread, can also snowball into system failure through a
vicious cycle of technical bankruptcy.
The economic survey says inefficient state taxes can limit the benefit accruing
from reform of central taxes. Measures need to be taken to induce banks to step
up delivery of non-food credit to medium and small industrial units. The banking
system has to be reformed so that interest rates come down to competitive
pressures, greater efficiency and lower implicit taxation of the banking sector.
Access of companies to debt markets also needs to be improved by deepening
and widening these markets. It calls for measures to restore confidence in the
capital market to make it a stronger instrument for mobilising funds.
Efforts must continue to modernise and improve the regulatory and payments
system to get them on par with developed countries. To keep prices under check,
the survey says, the financial year 1998-99 would require special efforts at supply
management in order to offset the possible shortfall in food grains, sugar and
cotton prices. The survey says four to six per cent inflation rate could be regarded
as an acceptable level of inflation for India at present. In 1997-98 the annual rate of
increase in prices was confined to this range.
Barring 1996-97 when food grains output peaked at 199.3 million tonnes, the
growth in food grains output during 90’s has been just about 1.73 per cent per
annum. The yield rates have reached a plateau in major wheat and rice growing
areas. Hence attention would have to shift to those regions where production is
well below average. Eastern Uttar Pradesh, Bihar and Orissa could be target areas
where higher investments in rural infrastructure by way of improved water
conservation and delivery systems, fertiliser use and credit availability should
receive special focus. The survey says the pace of industrial growth and investment
has slackened markedly since the middle of 1996-97 for a variety of reasons.
Some of the factors are cyclical and can be expected to correct themselves.
Others are the result of some of the policies followed in the past.
On the policy side, therefore, measures should embrace a broad array and include
steps to boost export growth, revive the primary capital market, encourage higher
private and public investment, relieve infrastructure bottlenecks and boost demand
for core industrial sectors, and fiscal and monetary policies aimed at moderating
real rates of interest and ensuring adequate availability of productive capital to
industry. Economic reforms play a vital role not only by directly stimulating higher
productivity and efficiency, but also by keeping confidence high and boosting
investment intentions of entrepreneurs. Reform of inappropriate policies,
unproductive government programmes and inefficient public organisations and
projects can generate hope and confidence in a more productive future.
The survey says with the revival of economic growth, the demand for key
infrastructure services such as power, telecom, railways, roads and ports, will
press harder against existing supply constraints. The strategy to relieve
infrastructure bottlenecks must encompass both creation of additional capacity in
various sectors as well as initiatives to induce much higher capacity utilisation. The
strategy must also encourage both private and public provision of infrastructure
services in a competitive environment and with an appropriate and transparent
regulatory framework, this broad approach calls for an acceleration of
sector-specific reforms to tackle existing lacunae in the design and implementation
To illustrate, the survey says, low capacity utilisation and high transmission and
distribution losses, unrealistic tariff policies and non-commercial approaches of
state electricity boards constrain both the levels of generation and distribution from
the existing power network as well as the flow of fresh investment into this sector,
the railways and postal services continue to suffer from substantial operational
losses in their provision of subsidised service. In the case of railways, the heavy
cross-subsidy of passenger traffic by freight traffic has led to a situation where
India's comparative advantage in key sectors such as coal and steel has been
severely eroded. Indian ports suffer from problems of outdated organisational
modes and low productivity of labour and equipment in comparison to many other
Asian ports. The level of investment in new roads and the quality of maintenance of
existing networks is far below the requirement. All these issues and problems need
to be tackled urgently.
The survey says the shortcomings of social sectors -- such as education, health,
water supply, sanitation and housing -- in relation to both the country's aspirations
as well as performance levels achieved by other Asian countries, becomes
increasingly stark and unacceptable. The constitutional provision of making primary
education free and compulsory up to the fifth standard should be implemented as
soon as feasible. The provision of free education for girls will not only empower
women but also help in controlling population growth and improving the quality of
life of children.
The achievement of ‘health for all’ requires greater focus on epidemic diseases and
better water supply, sewage and sanitation systems. Government must clearly
play a leading role in ensuring universal provision of basic minimum services.
However, policies should be designed to encourage private provision of services as
well. It is noteworthy, the survey says, Kerala's often commended achievements in
the field of education and literacy are substantially dependent on the long history of
private schools at all levels.
The survey says Indian industry is presently passing through a difficult phase.
Industrial growth, which decelerated to 7.1 per cent in 1996-97 has further declined
in 1997-98. The manufacturing sector is performing poorly leading to further
deterioration in industrial growth. Better performance of mining and electricity
generation in 1997-98 have not been able to bring about a turn around. Certain
factors inhibiting industrial growth in 1996-97, were seen to persist in 1997-98, as
well. Notable among these are the subdued conditions in the primary and capital
markets, slow export growth and a somewhat uncertain economic environment.
However, the quantum of assistance sanctioned by all India financial institutions
(AIFIs) during 1997-98, there has been a significant increase in the sanction of
assistance by AIFIs. It is expected that materialisation of these sanctions will lead
to much greater flow of funds into the industry in the coming period. With
manufacturing sector performing below expectations and excess capacity having
been built in certain key segments of industry (such as cement and automobiles),
overall industrial growth in 1997-98 is expected to be lower than the previous year.
The survey says capital account convertibility presupposes a sound banking
system capable of handling risks inherent in gloabilisation. Further steps aimed at
developing the domestic debt market should be designed to facilitate the flow of
contractual savings for infrastructure financing. The survey says gloomy trends in
primary capital market continued throughout 1997-98. Though the measures
designed to improve the performance of the financial sector have facilitated
resource mobilisation through a variety of instruments, there has been a steady
decline in resource mobilisation from primary market which was only Rs 4,570
crore as against Rs 14,276 crore and Rs 20,804 crore in 1996-97 and 1995-96
respectively. This reflects erosion of confidence, especially of retail investors. It
observes that poor quality issues in the past deprived many retail investors of their
Most retail investors have, therefore, avoided the capital market. This has adversely
affected the ability of private sector companies to raise capital. With the stringent
eligibility criteria for new issues prescribed by the securities and exchange board of
India (SEBI), the quality of issues should conform to investors expectations.
However, given the loss of confidence of the Indian retail investor in the primary
market, there is a need to look at investors' perceptions. The access of investors to
corporate information is limited and their confidence in available information is
weak. This problem is more serious in the case of retail investors. This calls for
further study by the regulatory authority and research institutions.
The survey says the secondary market is influenced by foreign institutional
investors (FIIs). The recent South Asian experience and the response of FIIs to the
depreciation of the rupee by FIIs net sales in the recent past, points to the
vulnerability of the secondary market to FIIs behaviour. It is therefore necessary to
regain the confidence of domestic investors, including retail investors. Deliver
based investment which may be considered as true business investment, has
suffered due to problems connected with bad deliveries, taken and stolen securities
and intermediaries. The decision by SEBI to introduce demat trading in a phased
manner augurs well for delivery-based business and can, therefore, be expected to
boost investor confidence in a big way.
Overall economic growth of GDP has decelerated significantly to five per cent in
1997-98 from 7.5 per cent in 1996-97. The drop in GDP growth in 1997-98 is
attributable mainly to a sharp fall in the growth rate in agriculture and a
deceleration in the growth of industry. The service sector posted a robust growth of
8.9 per cent in 1997-98. At a more fundamental level, the slowdown in growth can
be traced to a combination of underlying supply factors and temporary demand
factors. Agricultural production in 1997-98 is likely to be lower than last year's
record output, especially of foodgrains and commercial crops. Food grain output
will, however, be higher than in 1995-96. The food grains production in 1997-98 is
expected to be 194.1 million tonnes compared with 199.3 million tonnes in
1996-97, representing a decline of 2.6 per cent. Of this rice will constitute 83.5
million tonnes, wheat 66.4 million tonnes and coarse cereals and pulses (together)
44.2 million tonnes.
Production of wheat, coarse cereals and pulses is expected to decline by 4.2 per
cent, 9.1 per cent and 9.5 per cent respectively. One reason for the setback is late
wheat sowing due to inclement weather during the rabi season. Among the food
grains only rice is expected to post a positive growth of 2.7 per cent during
1997-98. Annual growth rate of food grains production in the 90’s has been 1.73 per
cent -- lower than in earlier years. In case of commercial crops the production of
oilseeds, sugarcane and cotton is expected to decline by 5.1 per cent, 6.2 per
cent and 19.9 per cent respectively in 1997-98.
The non-traded infrastructure services sector comprising electricity, gas and water,
other transport and communication, is expected to maintain a higher growth than
the overall growth rate of GDP. It grew by 7.9 per cent in 1996-97 and is estimated
to have grown by 7.5 per cent in 1997-98. The process of fiscal consolidation
received a setback during 1997-98 with the central government fiscal deficit (revised
estimates) reaching 6.1 per cent of GDP as against the budget target of 4.5 per
cent. The primary deficit was also 1.7 per cent points of GDP higher than
budgeted. The deterioration in the fiscal deficit was due primarily to a tax revenue
shortfall of Rs 14,236 crore (net to centre) and a shortfall of Rs 3,894 crore in
disinvestment receipts. Both customs and excise revenues were well below the
budget estimates, the former on account of both lower volume and unit price of
imports, and the latter because of unexpected low industrial growth.
The survey says, the continued sluggishness in export growth for the second year
in succession in 1997-98 was a cause of concern. Export growth in US dollar
terms decelerated to 5.3 per cent in 1996-97 and to 2.6 per cent (provisional) in
1997-98, after three successive years of increase, ranging from 18 to 21 per cent
per annum. The slowdown in export performance reflects a range of factors of
domestic and foreign origins. The two most important factors were probably the
sharp decline in the growth of value (US dollar) of world trade in 1996 and 1997,
and the appreciation of rupee vis-a-vis the currencies of India's major trading
partners and competitors.
The real effective exchange rate of the rupee has shown a gradual appreciating the
trend over the last few years, because of the appreciation of the of US dollar
against other major currencies and low international inflation rates relative to India.
The dramatic depreciation of some South Asian currencies during 1997 has also
been a contributory factor to export sluggishness. Other external factors included
the decline in export prices of some major items of manufactured goods, and
tighter requirements of quality, standards, testing and labelling in the major trading
partner countries for some major items of India's exports. Other domestic factors
are the slowdown in growth of power, tighter supply conditions in the domestic
market for agricultural items, especially rice and wheat, tightening of domestic
environmental regulations, and infrastructure bottlenecks.
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