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Sub-optimal groove
The new government has been confronted with a discouraging economic scenario by NCAER. The issue is not the cautious GDP growth forecast (5.9 per cent) by it for this fiscal (5.7 per cent last year). Agricultural growth is put at 3 per cent on top of last year's 6 per cent; construction is projected to grow by 6.6 per cent (2.6 per cent last year) and services by 8 per cent (7.2 per cent). But the prospect is blighted by NCAER's reckoning that the industrial recovery, reflected in the rise in industrial production by 6.3 per cent in April-July this year (up from 3.9 per cent in the corresponding period last year) "may be short-lived". It forecasts industrial growth at 5.7 per cent this year against last year's 4.3 per cent. If industrial production rises more than what NCAER projects, the GDP growth will rise to 6 per cent plus. But that does not seem likely. As pointed out by NCAER, the absence of primary issues by manufacturing companies, despite the boom in the capital market, "does not augur well forindustrial investment".Industrial growth driven by accelerating consumer demand is fast reaching the limit; to rise higher, it needs to be fuelled by investment demand. Private investment is weak; and NCAER expects public investment to grow by no more than 8 per cent (nominal) this year; discounted for inflation (estimated by NCAER at 6.8 per cent), real public investment will be up by just 1 per cent. Logic requires public investment to rise sharply in times of flagging private investment. But, says NCAER, expenditure over-runs on account of Kargil will be Rs 2,000 crore; tax collections (customs and excise) will fall short of the budget target even as the fertiliser subsidy will overshoot the budget provision; and disinvestment will be a half of the projected Rs 10,000 crore. All this spells a burgeoning fiscal deficit with a consequent squeeze on anaemic public investment: sub-optimal industrial investment is on the cards. The new government's mid-year review cannot substantially alter the bleakassessment. If it ducks the unpopularity attracted by the 40 per cent diesel price hike, it will have to defer raising prices of LPG and kerosene (and let the subsidy on these burgeon). Political compulsions will also force it to leave the Kargil expenditure uncovered. Four-fifths of the gross borrowing targeted this fiscal has been raised (and spent). The fiscal deficit is bound to rise. And if banks' CRR is brought down, lending interest rates will not necessarily ease: rising government borrowings will absorb the new liquidity. There is no quick fix. The way out is to attract mega foreign direct investment. But the required policy pragmatism will take time to be effective. Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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