Indian economic recovery faces tough challenges in 2003

Tuesday, 24 December 2002, 08:00 Hrs
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NEW DELHI: After two extraordinarily stressful years of depression the Indian economy largely managed to hold its own against an unrelentingly gloomy global outlook in 2002.

Analysts say 2003 will only bring more challenges to the economy, as the government strives to achieve a significantly higher growth to improve the living standards of over a billion people.

In the second year of the new millennium the Indian economy went through turbulent times caused by halting reforms, the sectarian violence in one of the most industrialised states, border tensions with Pakistan and severe drought, besides the global slowdown.

Yet the economy grew by six percent in the three months from April to June, comfortably ahead of expectations and putting it among the fastest expanding economies in the world.

The figure was well ahead of last year's 3.5 percent growth for the same period, and in line with the government's own hopes.

Prime Minister Atal Bihari Vajpayee is pitching for a sharply higher growth of eight percent growth during the next five years compared with the projected growth level of 5.5 percent in fiscal 2002-03, saying this is achievable if reforms gain momentum and the government reins in the high fiscal deficit.

The government has said cutting down a ballooning budget deficit, which stood at 5.9 percent of gross domestic product (GDP) last year way above the targeted 5.1 percent, was a priority area for the economy.

"We have witnessed some positive achievements on the macro economy front such as low inflation rate, low interest rate and high foreign exchange reserves in the last few months of 2001," said economist D.H. Pai Panandiker.

The foreign exchange reserves rose by $682 million in the week ended December 13 to a new peak of $68.435 billion.

There has also been a 60 percent increase in the foreign direct investment inflows during the first half of 2002, setting a new record in recent years at $2.51 billion, as against $1.35 billion in the comparable months of 2001.

"But in spite of these encouraging signs, the economy is likely to face some daunting challenges in the year ahead. The government primarily will face the challenge of accelerating the growth in the next fiscal year even as the global economy shows little signs of pick up in the near term," Panandiker told IANS.

The year 2002 started on a promising note with the government announcing the privatisation of two blue-chip state-run firms in February in a bid to give a major boost to the gasping economic reforms process in the country.

New Delhi raised 14.4 billion by selling a 25-percent stake along with management control in Videsh Sanchar Nigam Ltd. (VSNL), India's international telecom service provider, to the Tata Group.

The New York Stock Exchange-listed VSNL, in which the government held almost 53 percent, had a monopoly on international calls until end-March and is one of India's biggest Internet service providers.

The government sold its 33.58 percent stake in IBP Ltd. to state-owned marketing and refining major Indian Oil Corporation for 11.53 billion. IBP runs a chain of 1,500 fuel stations across the country.

The investor euphoria over the government's aggressive sell-off drive, however, didn't last for long.

The privatisation drive, projected as the cornerstone of the government's reforms agenda, came repeatedly under attacks from the trade unions and partners of the ruling multi-party coalition for better part of the year 2002.

"When the government announced the sell-off of VSNL and IBP after all years of feet-dragging, it really brought back the feel-good-factor in the market," said Neeraj Deewan, an analyst with New Delhi-based Prime Securities.

"The decision instilled investor confidence in the Indian economy. They hoped there would not be any reversal or slowdown of the process from this point. But it didn't happen that way," he added.

Repeated declarations by Vajpayee -- who came to the rescue of beleaguered Disinvestment Minister Arun Shourie -- that the privatisation process would be continued, failed to silence critics.

The government was then forced to halt the divestment process of public sector Hindustan Petroleum Corp (HPCL) and Bharat Petroleum Corp (BPCL) in September for three months following intense political squabbling.

Although the gridlock over the privatisation of HPCL and BPCL was ended two days ahead of the end of the moratorium period in December, analyst say, the "confusion" surrounding the entire divestment agenda created an adverse impact on the economy.

The government raised 48 billion selling state-run companies in April-October, less than half of the 120-billion target set for the year to March 2003.

Communal violence in Gujarat state in early 2002 also took a heavy toll on the economy.

Besides, fears of a full-fledged war breaking out between nuclear capable India and Pakistan also cast a shadow over the nascent economic recovery.

Tensions between India and Pakistan dramatically escalated after terrorists, who New Delhi says were Pakistanis, massacred 32 people near Jammu city May 14 -- the worst terror attack since the beginning of 2002.

The decision of a host of Western countries, including the U.S. and Britain, to issue travel warnings to their citizens in view of the war fears had an adverse impact on the Indian economy.

Travel, trade and the hospitality industry were badly hit and capital markets also felt the tremors of war.

But the worst blow came in the form of a severe drought that struck much of the vast, largely agricultural country. In Punjab and Haryana, two main wheat and rice growing states in northern India, the damage to crops has been extensive.

The monsoon is crucial to India's economic performance as agriculture contributes about 25 percent of the country's gross domestic product and employs 70 percent of its one billion population.

If the agricultural sector so much as splutters, the whole economy starts looking peaky.

"The agriculture sector will hold the key for higher growth in 2003. If we get satisfactory rains next year then probably we will achieve a higher growth rate even if the reforms process slows down a bit," said Panandiker.

The economy also pinned hopes of recovery on new Finance Minister Jaswant Singh with experts hoping he would be able to replicate his success in diplomacy to financial management as well.

In a cabinet reshuffle in July, External Affairs Minister Jaswant Singh swapped his place with Finance Minister Yashwant Sinha.

Singh's predecessor was given a media roasting in March this year for unveiling a national budget that newspapers slammed as "short on line," "lacklustre and dispirited" and "crushing".

The economy suffered another blow after rating agency Standard & Poor's downgraded its long-term local currency credit rating on India in September, citing a rising debt burden and vulnerable public finances.
Source: IANS
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