The Hindu : End of a make-believe world

Online edition of India's National Newspaper
Tuesday, Aug 13, 2002

Business

Business

End of a make-believe world

By Prem Shankar Jha

The drought that has struck Punjab, Haryana, Rajasthan, Andhra Pradesh and Karnataka as well as scores of districts in other parts of the country has exposed the rottenness at the core of policy making in the country. First, how could the meteorological department have got its prediction so completely wrong? For well over a decade the model it developed in the 1980s for forecasting the monsoons has proved extraordinarily accurate. How then could it have gone so far wrong as to forecast a normal monsoon when 324 out of 546 districts have received deficient rains? One could have written this off as an example of the hazards inherent in all forecasting, had it not been for the fact that in recent years the Government has been pressing the meteorological office to delay the release of its forecasts or, worse, to `reexamine' them, whenever the initial prognostication has been poor. The reason it has given, that a poor forecast would set off speculative purchases that would play havoc with prices is not entirely convincing, because the Government has a growing mountain of food stocks which it can, and does periodically, release in the market to offset speculative increases in price.

Second, the drought exposes the innate absurdity and attendant dangers of the practice that has mushroomed since 1996 of predicting the growth of GDP during the current year within one or two months of its beginning, before the south-west monsoons have not even arrived. Since these predictions have inevitably been rosy, every government after 1996 has seized upon them to pat itself on the back for its economic performance. This has made it extremely difficult for anyone to even suggest that the economy is not in good health and may be moving towards a crisis. In the last four years of BJP rule it has prevented the Government from even examining the warning given by some economists and strongly endorsed by the Reserve Bank of India's Currency and Finance Report last year that the economy is in the grip of a structural stagnation that makes a revival of industry and investment almost impossible.

This year the RBI and the Ministry of Finance announced that GDP would grow by 6 to 6.5 per cent, before the end of June, that is, only two months into the fiscal year. From that point onwards, the Prime Minister, Atal Behari Vajpayee, the then Finance Minister, Yashwant Sinha, and his successor, Jaswant Singh, took this growth for granted. The Prime Minister opened his meetings with the Industry and Trade advisory Council, and his economic advisory council early last month with the statement that the economy would grow by 6 per cent this year. Since this was a satisfactory growth rate, the purpose of the meetings was to introduce Mr. Singh, the new Finance Minister, and discuss how certain nagging but not urgent problems such as the weakness of demand and the high fiscal deficit could be tackled. The Prime Minister's remarks set the tone for the two meetings which then degenerated into a display of complacency punctuated by suggestions for marginal improvements in the existing policies. The drought has knocked the bottom out of this complacency. According to the government's forecasts, agriculture was to grow at 4.5 per cent, industry at 5.5 per cent and the services sector at around 7.5 per cent to yield the predicted rate of growth. Now agricultural growth is going to be negative even if the winter rains and consequently the rabi (spring) harvest are normal. Industry's growth in the first three months of the year was 4 per cent. The acceleration that is needed to achieve 5.5 per cent overall growth, was not in sight even before the drought. Now the decline in rural demand resulting from a poor harvest will make sure that industrial growth will not pick up.

As far as the GDP is concerned, the decline in agriculture will offset all or most of what little growth will take place in industry. Even if we accept the dubious statistics that the central Statistical Organisation has been dishing out on service sector growth, and assume that this will be in the neighbourhood of 6 per cent, the overall growth of GDP will not exceed 3.5 per cent this year.

What is far more disturbing, this magnitude and type of growth will not generate any significant number of jobs in the organised sector. In the last four years the service sector has grown by 7 to 9 per cent a year, but overall job growth in the organised sector has been zero. In the last two years as industrial growth weakened to an all time low, job growth in this sector turned negative — shrinking by 0.15 per cent in 2000 and by 0.38 per cent in 2001. The conclusion is inescapable: only industry and agriculture are capable of generating new jobs in any significant numbers.

The truly curious feature of the Government's policies is that while it was only too keen to make rosy forecasts of growth an excuse for avoiding hard economic decisions, it has so far shown no inclination to make the collapse of these forecasts a reason to reassess the state of the economy and forge a new strategy for recovery. The Home Minister, L. K. Advani, is to head a taskforce on drought but no one is heading a taskforce on the effect that the drought will have on the economy and on employment as a whole.

The job is, of course, the Finance Minister's, but Mr. Singh's recent announcement that he is reducing some taxes on dividends and taxes deducted at source to stimulate consumer demand is laughable. The contraction in rural demand that is going to take place in the next few months will be 10,000 times as large as the increase in spending power of the small section of the middle class that will benefit from these concessions.

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