Fiscal deficit is at 90-91 levels, fat forex reserves sign of low growth: CII

Projecting a gross domestic product (GDP) growth of 5.2 per cent in the current fiscal, Confederation of Indian Industry (CII) has warned that of size of the combined fiscal deficit of central and state governments has bloated to the levels of 1990-91, when India faced her last major macro economic crisis.

In an update on the state of the economy, CII has described the all time high foreign exchange reserves of $54.2 billion as an ‘expensive embarrassment of riches’. In fact, CII has pointed out that the large foreign exchange reserve were actually due to low growth and low import demand. CII has stated that neither central nor state governments have had any success in trimming their fiscal deficit. “After some improvement in the mid 1990s, the deficit has gone back to the levels prevalent in the pre-liberalisation days,” CII has stated. The estimated combined fiscal deficit of the central and state governments for 2001-02 is as high as 8.6 per cent of GDP. It was 9.4 per cent in 1990-91 and after coming down to 6.4 per cent during 1996-97, shot up again to 9.4 per cent in 1999-2000. While CII has projected a 5.2 per cent GDP growth in 2002-03 at current pace of reforms, it could touch 6 per cent with some limited reforms. But CII has ruled out a six per cent-plus growth in absence of structural factors, especially poor state of physical infrastructure.

The country’s most high profile industry body has presented a grim picture of corporate sector, based on the analysis of aggregate financial results of first three quarters of 2001-02. Profitability has been severely eroded in manufacturing as well as services. A sample of 1,443 companies in the manufacturing sector shows that profit after tax (PAT) has declined by a record 14.4 per cent. The PAT of 355 service companies has also declined by 5.3 per cent, suggesting tough times ahead for all.

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Agriculture sector growth during 2002-03 is projected at three per cent, industry at four per cent and services at seven per cent. CII has suggested capital account convertibility should be introduced only after controlling fiscal deficit and bringing financial sector in shape.

“Given our inflexible and high real interest rates, the rupee might appreciate in the short run due to a sharp spurt in the inflow of ‘hot money’. If that happens, it could further erode the competitiveness of India’s manufacturing sector,” it said.

Commenting on the exchange rate movement, the survey said, although the rupee has depreciated against the dollar it has appreciated against other major currencies such as the Pound, the Euro and Yen.