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The subsidy factor
The Reserve Bank of India's outlook for the current fiscal year, contained in its "Report on Currency and Finance, 1996-97," is on the whole optimistic. It says that while the performance of the industrial sector has been a cause for concern, the improvement in the performance of infrastructure industries and possible increases in export demand augur well for bringing about a rise in manufacturing production in the coming months. It says that since October there has been a sharp increase in overall flow of resources to the commercial sector. It is only in the area of fiscal pressures that the RBI has expressed alarm, and it has recommended that reduction of subsidies is of critical importance. But is the RBI's optimism justified? Exports may have improved in November, but the overall trend is unlikely to be robust. The IMF has warned about the global slowdown resulting from the Asian crisis, and even though it may have erred on the side of pessimism, there is no doubt that the countries affected by the
crisis constituted one of the fastest growing regions in the world, and the slowdown in the region will affect world demand. The world can look forward to excess capacity and weak commodity prices in 1998. This does not augur well for any immediate revival in Indian industry, least of all an export-led revival. Similarly, while it is true that corporate credit offtake is picking up, we need to know how much of this is due to demand from the oil companies, whose cash flows are under strain. Furthermore, credit demand will also increase due to lower domestic interest rates and higher rates for ECBs as a consequence of the risk perceived in Asian paper. So far as government finances are concerned, the RBI has itself pointed out that the revenue deficit is around 75 per cent more than last year, and the situation may deteriorate further before the end of the year. There are signs that the Indian economy is now moving into the second phase of reform, when the soft options available during the earlier phase
will not work. As Fredie Mehta pointed out in this paper some time back, part of the reason for the current slowdown in the economy is increased competition. This is irreversible. The only way to move the economy onto a higher growth path is to effect structural changes, such as government downsizing, legislative reforms and large scale privatisation. It is in this context that the RBI's identifying the pruning of subsidies as being critical to the process is absolutely correct.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
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