Pessimistic outlook

Claude Smadja is overly pessimistic in saying that "after seven years of economic reform India is almost back to where it stood in 1991 with respect to the budget problem". The managing director of World Economic Forum has not got his facts right. The crisis of 1991 came in the wake of sustained high annual fiscal deficits over a fairly long spell. That is not the case now, though the containment of the fiscal deficit has proved tough, and there have been slippages from the target. Smadja seems to believe that the fiscal deficit this year will be closer to seven per cent than six per cent, but he could prove wrong. He takes the current estimates of the growth of GDP (as a proportion of which the fiscal deficit is measured) this year as given. He points to the disappointing growth of agriculture. However, there is evidence that the states have deliberately exaggerated crop loss in kharif to get liberal central assistance. Agricultural growth seems slated to exceed three per cent this year; similarly,industrial growth, despite the slack in the corporate sector, is likely to get a boost from the (unregistered) small scale sector. The short point is that GDP growth will be better than reckoned by Smadja, and the fiscal deficit less than feared by him.F 1The prediction that India "risks a severe budget crisis" by the year-end does not quite gel with Smadja's analysis of the travails of the Indian economy. He recognises the cyclical decline in industry: the huge expansion of production capacity in almost every sector of industry in the early years of reform, he rightly points out, has not been matched by an expansion in demand. Smadja also acknowledges that the slack in revenue growth, from indirect taxes in particular, is the result of the cyclical downturn. The situation is thus hardly one that warrants a cut-back in the fiscal deficit; a squeeze would certainly deepen the recession and hasten the "budget crisis". Nor can the government expand the deficit to pull the economy out of the recession. Thatwould risk high inflation. The best it can do is to hold the fiscal deficit around six per cent of GDP, and wait for the recession to bottom out. The deficit can be capped once GDP growth picks up. Smadja's reckoning that the export slow down has hurt domestic industry is correct, but his assumption that exports represent 40 per cent of Indian industrial production is incorrect; 12 per cent would be a realistic proportion. (Industrial production measures value addition but exports are measured in terms of value of output.) Smadja does not, however, go into how export growth can be boosted to 15 per cent a year in dollar terms.

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