Column: Commentary

COMMENTARY: POLICY
Talking Up The Economy

Finance Minister Yashwant Sinha's exhortations will not help a recovery unless they are backed by the sound economic policies that he promised in his budget.

By Seetha

Towards the end of his 'I am innocent' press conference, Finance Minister Yashwant Sinha dwelt on the state of the economy. There were three courses of action, he began, to reverse the slowdown. ''The first,'' he joked, ''was praying to God.''

Since God doesn't seem to be very well-disposed towards Sinha these days, let's take a look at the two other solutions Sinha spoke about-good monsoons and ministries actually spending their money right now instead of leaving it for the end of the year. This, Sinha has been promising, would lead to a turnaround in the economy by December. And now banks are holding out the same hope citing an increase in credit offtake as the reason for their optimism.

The rain god has been somewhat kind this year. The monsoons have been good, improving the prospects for agriculture. Agricultural production had declined by 4.6 per cent in 2000-01, but is expected to rebound by 9 per cent this year. That, conventional wisdom says, should increase rural incomes and push up rural demand.

It may not quite work out that way. Improved productivity doesn't necessarily equal higher profitability. The government is at its wit's end trying to cope with overflowing granaries. Indeed, over the past year, the rise in the prices of primary articles has actually been subdued. There's practically a distress sale of wheat in the export market. Add to that rising input prices and Saumitra Choudhary, Economic Advisor, ICRA, certainly has a point when he says that rural profitability and demand will both be dampened.

Let's look at government spending. Besieged with demands for some old-fashioned pump-priming, Sinha has been turning the heat on various infrastructure ministries to start spending their budgeted funds, instead of waiting till the end of the year, as they are wont to do. Such prodding is needed. A look at plan expenditure figures over the past five years shows that the revised estimates are, on an average, 3 per cent less than the budgeted estimates, and the actual expenditure at least 10 per cent less than the budgeted estimates!

But merely ensuring that ministries spend their budget allocations is hardly likely to put the zing back in the economy immediately. The civil aviation ministry, for example, has a Rs 350 crore capital expenditure budget, most of it to be spent on airport modernisation. Extension of runways or improving facilities at terminals isn't going to kick start the economy. Where the government spending can make a difference is in the roads and power sectors.

Fortunately, there is some progress on the roads front. Of the 5,858 km of the Golden Quadrilateral, which is to link the four metros, work is on in 2,100 km, while contracts for another 1,200 km have been awarded. That should spur demand for cement, steel, construction equipment, and bitumen, all vital inputs for road building. The power sector, doesn't present such a pretty picture. Several private power projects have not reached financial closure, and four multinational power companies have left the country.

But the fact remains that by pushing ministries to spend, banks to lend, and cuts in interest rate, the Finance Minister can only cure the symptoms and bring temporary relief. For a permanent solution, fundamental questions need to be addressed: the slew of second generation reforms Sinha promised in his Budget:2001 speech, but of which we have seen little. As Shankar Acharya, Professor, Indian Council for Research on International Economic Relations, says: ''The economy responds to good economic policy and not to exhortations.'' Let's see some of that good policy, Mr Sinha.

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