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Portrait of a defeated government

Ashok V Desai

The economic figures are nowadays known to everyone, and the Economic Survey could not be expected to carry any news.

What it does generally carry is up-to-date figures on public finances. They tell us that the centre's revenue in the first three quarters of this financial year was Rs 10 million, or .0001 per cent less than last year, against a projected growth of Rs 407 billion.

But that was no cause for sleepless nights in the north block; to replace the revenues that did not come in, the government increased its "capital receipts" - mostly borrowings - by Rs 289 billion. Of this, it spent Rs 31 billion on investments, and blew the rest up in "revenue expenditure" - or consumption.

There is still the current quarter; the government will catch up on its unproductive expenditure plans by borrowing more.

Where did the government find willing lenders for almost Rs 300 billion? The commercial banks lent it Rs 206 billion; and the Reserve Bank issued fresh currency worth Rs 43 billion. The government recovered loans worth Rs 45 billion, probably from its own companies.

The banks actually pulled in less money than last year; their deposits rose by Rs 1.24 trillion in this financial year till 12 January, against Rs 1.35 trillion last year. But they had no difficulty in finding money for the government; their loans to it went up by Rs 706 billion this year against Rs 499 billion last year. They found the money by lending less to business - Rs 641 billion against Rs 740 billion last year.

And the interest they earned on loans to the government went down considerably. The interest the government paid on 1-year treasury bills fell from 10.01 per cent to 7.13 per cent; most other rates charged to the government fell by about 2-3 per cent. Whereas the lowest rates banks charged to business - the prime lending rates - remained stuck at 11.5 per cent.

To forgo 11.5 per cent from business and give it to the government at 9 per cent is very noble of the banks; just look at the sacrifice they make for the government. Except that the sacrifice is not quite theirs; they reduced the rates they paid depositors from 8.5-10 per cent to 7.5-8.5 per cent. In other words, the banks were being generous at the expense of the common depositor.

Thus, the banks have been discriminating against producers, who pay very high interest rates, and in favour of the government, which blows up the borrowings on interest, the real army, the army of babus, and subsidies; the government has taken advantage of the banks' good opinion and begun to pay even lower interest rates.

As if that is not enough, a campaign is on to reduce the interest on small savings further. The Economic Survey records with pride the progress achieved in beating down interest on small savings, and on narrowing the definition of small savers.

In truth, savers are getting less interest because the government pre-empts their savings and puts them to uses in which they earn nothing.

The Economic Survey is an arithmetical survey; the style throughout is to give a table and then to repeat some of its figures in text, to the effect that this went up and that went down.

There is an abrupt break from this style in the latter part of the chapter on capital and money markets; suddenly the schizophrenic who wrote the Economic Survey stops reading figures and starts drawing inferences from them.

I had thought I would find the answer here to the question: how does the banks' discrimination hurt producers? The closest I got was a table that showed that the smaller a firm, the more it borrowed.

But all too soon the inspiration fades. When one gets to the industrial chapter and looks for an explanation of the industrial catastrophe, one gets a catalogue of structural and cyclical factors.

It is followed by the remedial measures taken by the government: for instance, allowing 100 per cent foreign investment in B2B commerce, non-banking finance companies, courier services etc; allowing private investment in military hardware; reduction of peak customs duty; simplification of excise rules 1944.

Here is a question crying to be answered: why has industrial growth slumped?

Here are various pointers to an answer in other chapters, some of which I have set out above. But the Survey simply does not connect them into a coherent logical model.

Capital goods imports have been falling since 1999 if not before. Investment proposed in letters of intent peaked in 1996 at Rs 299 billion; in 2001 it was a measly 13 billion.

The Survey notes that capital goods production has been falling since December 1999. Thus the slump in industrial growth originates in industrial investment, which began to decline much before the two bad agricultural years.

The Survey trumpets the relaxation of restrictions on foreign investment; and, indeed, it has declined much less than total investment or purchases of capital goods.

But there is a basic misconception here. Foreign investment is not necessarily real investment; it may just be a takeover of an existing facility. The present byzantine restrictions on foreign direct investment are stupid; but if the government is making miscellaneous relaxations in them in the hope of raising industrial growth, it is just not thinking straight.

The Economic Survey is a difficult document to produce at the best of times; this Survey is perhaps better than recent predecessors.

But this time there is a Chief Economic Advisor - sorry, Economic Advisor Extraordinary - who used to be a perfectly good industrial economist, there is a pressing problem - the problem of poor industrial growth - and there is the vast machinery of the Economic Division. It would have been nice if the three had combined to produce a serious answer. Now we will have to wait another year. Unless, of course, the EAE turns into a CEA.

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