Need for a reality check

With the stock markets booming in this country of unequal opportunities, there is more reason to introspect than celebrate, discovers Paranjoy Guha Thakurta

At a time when quite a few seem rather upbeat, if not euphoric, about the state of the Indian economy, to point towards the structural impediments that are preventing the country from growing faster and—more importantly—hampering the spread of the benefits of economic growth to large sections of the population, is to play the role of the proverbial party-pooper. Be that as it may, it is still important to acknowledge not only what is good about the economy but also what is not.

Gross domestic product (GDP) is growing by over 8 per cent. Two out of the five years the country's GDP went up by 8 per cent or more were during the past three years. For the second time in the history of independent India, the economy would have grown by over 7 per cent three years in a row. Business confidence is buoyant, savings and investment rates are at record levels of 30 per cent of GDP, and finance minister P Chidambaram is of the view that not only is there "an investment boom…it appears that India is catching up with the high investment rates of East Asia and China". There's more good news pouring out. Stock markets are booming like never before. Dalal Street is dizzy with joy. The bears have been driven deep inside the urban jungle. Hardly a week goes by when the BSE sensitive index does not hit a record high.
Yet, the fact is simply that this boom is almost entirely fuelled by foreign institutional investors and only marginally by the savings of domestic Indian investors parked in mutual funds. As a bloc, at present the 700-plus FIIs operating in the country hold around 30 per cent of the equity capital of almost all the top 50 Indian companies. Domestic financial institutions like the Unit Trust of India, which used to be the main mover-and-shaker of the stock markets till the early-1990s, today play at best a subservient role. One estimate has it that the FIIs together currently control around 40 per cent of the total floating stock.

Those obsessed with the Sensex forget a basic fact about India: less than 5 per cent—and one is being charitable here, for the real figure will probably be closer to 3 per cent—of the population has currently invested some savings in stocks and shares. The other point worth noting is that not even 3 per cent of the more than one billion citizens of this great country of ours pays personal income tax. The government, on its part, has not been making any moves to widen the tax net.

Whatever happened to poverty and unemployment? Well, these problems haven't exactly disappeared. Prime minister Manmohan Singh agrees that "growth is a necessary condition for poverty reduction but not a sufficient condition" and that public funds are badly required in sectors where market forces are absent or do not operate very efficiently—notably in areas such as basic education, healthcare and infrastructure development. Who does not know that the country's social and physical infrastructure facilities are completely inadequate and creaking at their knees?

Besides the stagnation and decline in domestic crude oil production in the recent past, more disconcerting is the fact that India's total crude oil import bill is expected to rise by roughly 50 per cent during 2005-06. Electricity generation grew by only 4.7 per cent in the April-December 2005 period against 6.5 per cent in the same period in 2004. The Economic Survey states that with a peak power shortage of 12 per cent, and an average shortage of 8 per cent, the power generation foregone would be worth Rs 15,000 crore—implying an associated GDP loss of Rs 300,000 crore, or around 8 per cent of the country's GDP.

During the first nine months of fiscal 2005-06, the index of six core infrastructure industries (coal, electricity, crude oil, refined petroleum products, steel and cement) grew by 4.5 per cent, a good two percentage points lower than the growth rate in the corresponding period of the previous year. The point is simply that it would be unrealistic to expect the Indian economy to sustain a GDP growth rate of 8 per cent, with the infrastructure growing at less than 5 per cent.

While the services sector and manufacturing industry have expanded rapidly, the growth rate of the agricultural sector has been tardy at less than 3 per cent. To gloat about the projected 2.3 per cent rate of growth of the "agriculture and allied sector" in 2005-06 against 0.7 per cent the previous year will not be appropriate at a time when the government is contemplating wheat import. Nearly 60 per cent of the total cropped area is still not irrigated, and to expect the economy to become "monsoon proof" is unwarranted in view of the sharp fluctuations in the growth rate of this sector in recent years Like it or not, India's farmers still need the blessings of Indra bhagwan. And, whether the incidence of farmers committing suicide because of their inability to repay money borrowed from usurious moneylenders will come down in the coming years because of the government's new scheme of extending farm loans at an annual rate of interest of 7 per cent still remains to be seen. What is often not highlighted is that the phase of low increases in the prices of "primary articles"—specifically, food products—seems to have come to an end. Between early-February 2005 and early-February 2006, the point-to-point inflation rate for this group in the WPI went up from 1.2 per cent to 5 per cent.

One out of four Indians, or more than 250 million people, lives below the "poverty line" and half the population earns an income of $2 or less a day. One out of three Indians cannot read and write, and close to half of the children who join primary school drop out. Corrupt officials divert most of the government's development funds, and subsidies meant for the poor do not reach them. This scenario has not changed, and may not alter dramatically despite the implementation of the National Rural Employment Guarantee Programme in 200 backward districts, said to be the world's biggest social security scheme of its kind.

Affluent Indians flaunt lifestyles that are comparable to those of the rich in developed countries. But even in cities of concrete and steel that glitter on the surface, a third of the residents live in abject poverty, denied secure jobs, social security and access to basic sanitation facilities and clean drinking water. This country has a long distance to travel before it can hold its head high in the comity of nations. Before you start celebrating, look around you and do a reality check.