E-Paper
Catch an elephant by its ears
The transformation of the Indian economy from a heavily controlled and State-dominated structure into a market-driven, consumer-oriented and dynamic economic regime is a historic experience.
The transformation of the Indian economy from a heavily controlled and State-dominated structure into a market-driven, consumer-oriented and dynamic economic regime is a historic experience. The world is watching the progress and the pace of this transformation with great interest.
Consequent to the 1991 reforms, overall performance has been promising. The growth rate has risen significantly from the earlier average of 5 per cent to nearly 8 per cent today. The savings rate has registered an impressive growth from 23.5 per cent in 2001 to 28.1 per cent in 2003-04. The capital market is buoyant, public offerings in 2005 crossed Rs 20,700 crore and mutual funds have grown fast to become the most prominent sector for raising resources. In this new environment of economic freedom, private sector has emerged as the prime mover of growth.
On the external front exports are rising fast. Contribution of trade has increased from 15 per cent of GDP in 1991 to 30 per cent. Forex reserves have shown marked improvement rising from $ 1.1 billion in 1991 to $ 137 billion. India is now rated as an attractive destination and foreign investment is flowing at an increasing pace. Total commitments for FDI in 2005 alone have exceeded $ 30 billion while actual inflow has reached $ 6.5 billion. FII has emerged as a major investor in the capital market contributing to a total of $ 40 billion so far. Based on the assumption that the Indian economy will continue to grow at 8 per cent for the next decade, the Carnegie report presented to the US president in July 2005 predicted that by 2015, India will be the fourth biggest economy (after the US, the EU and China) in the world.
Yet, the growth achieved so far has mostly been confined to industrial and urban sectors, including services. Infrastructure, agriculture and the rural economy have been left behind. Deficiencies in infrastructure have become more acute and the economy has already started showing some signs of strain.
On the front of basic infrastructure, existing power generation of 125,000 MW is inadequate and falls short by as much as 47 per cent. Shortage of roads is now a major bottleneck. Port facilities, too, are inadequate. In 2003, India spent $ 21 billion on infrastructure, amounting to only 3.5 per cent of the GDP. By any standard, this must be raised to at least $ 100 billion.
Growth in agriculture has declined to an average of 2 per cent, ending with only 1.1 per cent in 2004-05. Agriculture is the prime sector of the economy, contributing 21 per cent to India's GDP and supporting 50 per cent of India's population. Apart from slowing down overall growth, the neglect of this sector has immensely contributed to growing disparities and increasing unemployment. Living conditions in rural India continue to be pathetic with 220 million Indians still living below the poverty line and half of India's children under-nourished.
Deficiencies in infrastructure in the urban and the rural sectors have been repeatedly identified and evaluated by different agencies including the Planning Commission. In the energy sector, the Planning Commission has contemplated a target of 650,000 MW by 2026-27. Five additional projects of 4,000 MW each are proposed to be finalised at a cost of Rs 75,000 crore.
Progress in the programme of road construction is very poor. A total of 5,846 km of the Golden Quadrilateral will finally be completed this year. But progress in respect of all other projects is limping. Implementing the programme of highways construction will alone need an investment of Rs 175,000 crore.
The condition of rural infrastructure is far more alarming. Productivity of foodgrains is very low. Half of our cultivable land is still unirrigated, 30-40 per cent of the production of our fruits and vegetables is destroyed for want of adequate transport and storage. With a view to improve upon major deficiencies in the rural sector, the Bharat Nirman programme was inaugurated by the prime minister recently. This will hopefully create additional 10 million hectares of irrigation facilities, electrify 100,000 villages, construct rural roads and housing and provide drinking water. The programme is proposed to be completed by 2009 and will need an investment of Rs 175,000 crore.
In mobilising the resources needed for investment on such a massive scale, the role of foreign investment will be significant and should be encouraged. Nevertheless, the main thrust has to come from domestic resources which, so far, has been miserably inadequate. Fiscal management of our economy has been very poor. At our stage of development, a revenue deficit of as high as 2.7 per cent is just not sustainable. At this level, total revenue receipts of the central government are able to cover only 79 per cent of total revenue expenditure, leaving the balance 21 per cent to be financed by additional borrowing. The process goes on year after year, the burden of interest payment keeps on increasing and investment suffers. This vicious circle must be broken. Precisely with this objective in view, the Fiscal Responsibility and Budget Management (FRBM) Act was introduced to eliminate revenue deficit by 2007-08. It must be implemented.
There are a number of areas where government expenses are glaring wasteful. A major part of subsidies are wrongly directed that don't reach the beneficiaries. Free power and water do not benefit poor farmers. Subsidies under the Public Distribution System are freely misused. Oversize of the government is another glaring problem. There is a total of 1.9 crore government employees — one for every 50 citizens! — incurring Rs 70,000 crore every year.
A large number of projects end up with long delays incurring enormous cost overruns. A very recent survey conducted in the energy sector indicated a cost overrun of Rs 5,500 crore in this sector alone. Losses incurred by several PSUs are a major drain on our resources.
State electricity boards operate at 68 per cent plant load factor (PLF), as against 78 per cent achieved by the central sector. This results in a whopping loss of 10 per cent. Farmers incur heavy losses every year due to droughts in some districts and floods in some others. All such losses can best be eliminated by instituting a mechanism of close coordination between the Centre and the states and between the states themselves.
Apart from infrastructure and fiscal management, other areas where reforms are imminent are labour laws and judiciary. The bureaucracy must also reform. Obsolete red-tape and 'badly designed procedures' need to be replaced by new regulations facilitative of growth.
Reforms and policy modifications needed to sustain and accelerate our growth have been recommended and placed before the government from time to time. But decisions are delayed and implementation is too slow. If growth has to accelerate, we have to act and act fast. Given these reforms, India can achieve a steady growth rate of 10 per cent. The world is anxious to invest in our development and the next decade will be crucial for India to emerge as economic power house of the 21st century.
