Tackling financial constraints

April 10, 2011 11:11 pm | Updated 11:11 pm IST

The Union Finance Minister may have to overcome major challenges in 2011-12 as it will not be smooth sailing as in the case of the previous year. Last year has witnessed balanced economic growth and if the latest reports are any indication the contribution of the agricultural sector to the growth in gross domestic product (GDP) will be 5.4 per cent against 0.4 per cent.

The industrial sector for its part did not acquit itself in an equally creditable manner if the deceleration in growth after August last year happens to be correct. However, as the actual performance should be equally impressive, there should not have been a reduced growth of 8.3 per cent in April-January against 9.5 per cent comparably. The services sector has progressed satisfactorily as on the basis of the balance of payments data, gross invisible receipts have registered a smart rise. This is why the GDP has risen by 8.6 per cent in 2010-11 against 8 per cent in the previous year.

Record grain output

It will not be out of place to point out here that the output of food and cash crops in the 2010-11 agricultural season will turn out to be an all-time record. The details furnished in the latest estimate of output of food and cash crops indicate that the total yield of foodgrains will be at a new peak of 235.88 million tonnes against the earlier estimate of 232.07 million tonnes. The increase is due mainly to a record wheat crop of 84.27 million tonnes against the earlier estimate of 81.47 million tonnes. There will be only a marginal rise in rice and coarse cereals while the production of pulses will be at a new high level of 17.29 million tonnes (16.51 million tonnes). With the harvesting of bumper crops in the rabi season, food inflation should tend to decline further and it is comforting to note that it had declined to 9.18 per cent in the week ended March 26 from 9.50 per cent in the previous week. This is the lowest level for 2010-11 and it will not be surprising if the 7.5 per cent level is reached in the coming weeks. Procurement operations of rice have been satisfactory and the harvesting of a bumper wheat crop will necessitate heavy purchases.

The Ministry of Agriculture should be worried about storage of bulging buffer stocks in good condition and whether it will become inevitable to export surplus foodgrains. Already arrivals against new wheat crop into the mandis are increasing in volume. With traders waiting on the sidelines, open market prices have tended to decline and if these prices happen to be below the new minimum support prices, procurement operations will have to be intensified. As wheat purchases will be usually heavy in April-July, it will not be surprising if the quantity procured turns out to be 25 million tonnes or more. As there will also be continuing procurement of rice, buffer stocks may rise to over 75 million tonnes by the middle of July.

Having regard to the observations of the Supreme Court and the compulsion to avoid waste in transit and storage in open space, there may be compulsion on the part of the government to export wheat in limited quantities with shipments proving to be profitable. The spurt in yield of pulses should be helpful in minimising the deficit and bringing about also the drop in prices, especially as imports too may become less costly.

While the developments on the food front in 2010-11 having been highly gratifying, it is noteworthy that the output of oilseeds has risen further in the revised estimate as well as sugarcane. While it remains to be seen what decision will be taken by the Ministry of Agriculture in consultation with the Ministry of Commerce it has to be decided to what extent there should be resumption of wheat exports. It is important that there should not be any delay in permitting exports of white sugar which will be more profitable than sales in the domestic market. If the output of sugar turns out to be more than 260 lakh tonnes, the industry can fetch valuable forex earnings through timely shipments evenwhile fulfilling completely export obligations in respect of earlier raw sugar imports.

It may be remembered that the record cotton crop earned for the economy valuable forex resources through exports of nearly 55 lakh bales or 16 per cent of the gross yield of the crop. It is now being discussed by experts in the Ministry of Agriculture and those in the agro sector whether it will be possible to repeat the performance of 2010-11 especially as there are indications of the earlier onset of monsoon which will be beneficial for the forthcoming kharif season.

When assessing precisely the prospects for 2011-12, it is important that there should be a repeat of the performance of the agricultural sector. The objective of ensuring a growth of 9 per cent in GDP will be feasible only if the output of food and cash crops compares favourably with the record of 2010-11.

In respect of the industrial sector, there is confused thinking as the deceleration in growth after August last year has given rise to fears that the performance of 2009-11 will be difficult of repetition. The growth in industrial output in 2009-10 was 10.3 per cent and 8.6 per cent in 2010-11, the actual rise in April-January being 8.3 per cent against 9.5 per cent. It is improbable that there has been a pronounced deceleration in industrial growth as the demand for various types of manufactured goods in the domestic market has been brisk.

Trends in foreign trade

The trends on the foreign trade front in April-February 2010-11 have been highly impressive as exports grew by 31.4 per cent to $208.23 billion from $158.50 billion. Imports also were higher though in a less pronounced manner by 18 per cent at $305.30 billion ($258.75 billion). Oil imports have risen by 12.4 per cent to $88.18 billion ($78.42 billion) and non-oil imports by 20.4 per cent to $217.12 billion ($180.33 billion). The increase in export earnings by $49.73 billion in 10 months has more than offset the rise of $46.55 billion in aggregate imports. As a consequence, the trade deficit has declined noticeably to $97.07 billion from $100.25 billion.

This excellent progress on the foreign trade front has been useful in obviating a smart rise in the current account deficit (CAD) in April- December. Actually, the widening of the CAD to $38.9 billion from $25.5 billion in April-December was due mainly to the less pronounced rise in net invisible receipts in April-September. In fact, the details for October-December are encouraging as the trade deficit, according to RBI, was $31.6 billion ($30.9 billion). With net invisible receipts improving to $21.9 billion ($18.7 billion), the CAD was lower at $9.7 billion ($12.2 billion). It has been possible to bridge the deficit with inflows on capital account and yet have a surplus of $4 billion against $1.8 billion.

With reports of larger inflows under various heads and the ability of exporters to meet effectively competition in overseas markets the rupee has been strengthening latterly against the U.S. dollar and it was quoted at a higher level of Rs. 44.01 on April 8.

Against this background, it will be recognised that food inflation will no longer be a bogey but non-food inflation will be worrisome particularly as oil prices have been rising with sustained recovery in the U.S. and elsewhere, as well as the confusion on account of adverse developments in the Middle East. While the UPA Government will have the difficult task of preventing oil inflation from creating problems for users of petro products, there is a controversy over how the inflationary pressures will be tackled and whether an orthodox approach should be adopted for pursuing the dearer money policy.

If a pragmatic view is to be adopted there should be a clear understanding of outstanding issues if the growth process is to be sustained and the economy helped to be placed on the double-digit growth path.

There should not thus be any bottleneck in respect of availability of resources in forex and rupee and the interest rate structure should also remain reasonable.

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