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Budget: 2005

Services, not agriculture or industry, will fuel the Indian economic expansion, says Ashish Gupta.

Budget: 2005April 1, 2005: Scenario I: The Indian elephant is on the rampage. The economy is growing at 8-9 per cent, industry even faster, services at over 8.3 per cent and agriculture at close to 4 per cent. Exports have soared to $90 billion, the rupee has made a dramatic comeback versus the dollar, and is now quoting at Rs 38, the balance of trade is only marginally negative, and inflation is cruising at 8 per cent, but the central bank is not too worried. The population below poverty is down to a historic 5 per cent.


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April 1, 2005: Scenario II: It's business as usual. Reforms are crawling at a snail's pace. The third consecutive year of drought has ravaged agriculture, which grew by just 1.5 per cent; industry has been smothered by (Chinese) imports, the core sector is hobbling at 3 per cent growth, but services has bucked the trend at 6 per cent a year. Nobody talks of 8-9 per cent growth anymore-not even in gabfests. The rupee has sunk to Rs 65, and interest rates have ballooned to 18 per cent-thanks in large part to a staggering fiscal deficit of Rs 3,70,510 crore.

Take your pick. Which India would you rather prefer? The economic superpower of Scenario I or the habitual underdog of Scenario II? Surely, the happier scenario. Both these scenarios are likely five years down the line. But which one we end up with will depend on what roadmaps the Government of India, industry, and other constituents of the economy follow.

We will reach Happyville if infrastructure improves, tax collection soars, industry pulls itself up by its bootstraps, the administration behaves, and, most importantly, consumers continue to believe that tomorrow will be a better day. Says B.B. Bhattacharya, Head of the Delhi-based Institute of Economic Growth: ''If there are no major exogenous shocks like an oil crisis, drought, or major structural changes, we will grow at 6 per cent for the next five years.''

The Economy
The haves and the have-nots: a growing divide

In the three decades to 2000, the percentage of population below the poverty line has fallen to 35 from 55. The credit, experts say, goes to the economy pulling itself out of the quagmire of the Hindu rate of growth (3.5 per cent) of the early 1980s. Since then, however, the GDP has been growing at about 6 per cent a year. At the same time, the gains of higher growth have not been shared equally. Per capita income is skewed in favour of urban India, the organised sector, richer states and property owners, and worryingly so at the expense of rural India, the unorganised sector, poorer states and wage-earners. ''The post-reform period has seen no reduction in rural poverty,'' says Abhijit Sen of the Centre for Economic Studies, Jawaharlal Nehru University. A slower growth in agriculture during the 1990s as compared to the 1980s, has not helped matters. Thing may get worse in the coming years, since agricultural production is expected to stagnate at less than 3 per cent a year. The new millennium, alarmists say, could sow the seeds of a civil war.

That isn't all the good news. Not too many jaws will drop if the budget speech by Mr Finance Minister on February 28, 2005, pegs the fiscal deficit-the biggest bugbear for over two decades now-at 3 per cent of gross domestic product, and the revenue deficit at zero. For the sceptics, a 3 per cent fiscal deficit-an avowed objective of the current Finance Minister, Yashwant Sinha-is very much in the realm of possibility by 2005. With the enactment of the Fiscal Responsibility Act, 2000, the government is legally bound not only to cut down wasteful expenditure, but also borrowings. Again, don't be surprised if the government misses its target by a decade.

The Changing GDPscape

What is certain is that services will account for the lion's share of the GDP. Its share could be as high as 60 per cent, up from the current 52 per cent. There's also some confidence that India will turn the corner to earn the label of a knowledge-based post-industrial society. The optimism stems from the continued software boom, never mind the NASDAQ. Then there is the financial sector, especially insurance. ''After software, it will be financial services that will power growth in Circa 2005,'' says Tabasum Inamdar, Analyst and Strategist, Kotak Securities.

The share of agriculture and manufacturing in the GDP will go down (though they will continue to grow). ''The long-term average growth of the agriculture is unlikely to cross 3 per cent. For one, there's a glut and a big push seems unlikely,'' says D.K. Srivastava, Professor, National Institute of Public Finance and Policy.

In manufacturing, says Confederation of Indian Industry's Senior Advisor T.K. Bhaumik, India has an edge only in bulk drugs, basic chemicals and cosmetics. Chemexil (the apex body for chemicals and pharma products) Chairman Ramu S. Deora is upbeat: ''We foresee a 40 per cent compounded growth in exports touching $20 billion over the next five years. By 2005, India will overtake South-East Asia and Europe as the second-largest exporter of chemical products after the US.''

That said, it's not exactly the end of the road for the others. Says ICRA's Economic Advisor Saumitra Chaudhury: ''The professionally-run companies will come out as winners.'' Jardine Fleming's Chief Strategist Rukshat Shroff, however, adds: ''Consolidation, cross-border M&As, and supply-chain integration will be a common feature of the industrial scenario in the medium-term.''

What's also clear is that the government will have an increasingly smaller role to play in industry. Instead, there will be pressure on it to develop sectors such as health and education. But for the pachyderm to dance, its people must first script a tune.

The Economy
The Budget Speech: 2005

Sir, I rise to present the first Budget of the new government. Unlike the past, there are no indirect or direct tax proposals, since rates have been standardised. Instead, this year's budget speech has been structured like a corporate annual report and, therefore, I will focus on the government's performance in the past year. We ended the year with a loss (read budget deficit), but tax collections were up by 30 per cent. With the economy continuing to boom, we hope to accelerate tax collection and bring more services under the tax net. On a notional basis, the government's return on assets fell marginally. As for the government's expenditure, 40 per cent of the available funds were spent on infrastructure projects, health, and education. Non-plan expenditure is estimated at Rs 4,02,000 crore compared to Rs 3,61,800 crore in 2004-05. However, subsidies on food and fertilisers, which at times constituted as much as 4 per cent of the GDP last year has been done away with.

From this year on, the government plans to use the balanced scorecard concept to measure and modify its performance. We believe this will add to the administration's competitive strengths.



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