In the infrastructure bond market, the budget has opened floodgates to foreign investments. The withholding tax rates have been cut. Considering the high yield, this particular Indian debt instrument may work out to be more attractive to foreign investors than what is available in any other sound economies despite the five-year lock-in period proposed in the budget. The foreign fund investment limit in corporate infrastructure bonds has been raised almost 400 per cent. However, the flip side of the policy is that the government has not spelt out its own future strategy as to how it will manage to generate large volumes of foreign exchange income on a sustainable basis to service the foreign bond holders, in terms of payment of annual interest and retirement of principals. There is no clamp on wasteful import or on import dumping and also on the government’s ever-increasing administrative expenses. There is no special stress on export on the lines of other rival Asian economies such as China, South Korea, Vietnam, Thailand and Malaysia.

Both the budget decisions, which helped the market balloon almost instantly, carry high risk elements — some in short-term like the stock market as well as mutual funds market and others in the mid-term as in the case of corporate infrastructure bonds. Foreign investors will further tighten their grip on India’s stock market and, indirectly, on the economy and the corporate sector. The market may become more volatile to the whims of these investors. The latter can force the government to go fast-forward on further liberalization of foreign direct investment in many other sectors such as insurance, multi-brand retail, infrastructure and domestic civil aviation. Similarly, they may also call shots in the debt market if the economy fails to grow at projected levels of 8-9 per cent a year and domestic corporate borrowers find it stressful to meet the debt service commitment. The success of both the measures is linked with a high economic growth rate on a sustainable basis.

It is not that the finance minister did not consider these risk factors before announcing these decisions. Gains, at least in the short term, weigh more than possible mid-term risks. These vital decisions have helped the government work on lower budget deficits, while meeting higher investment needs of the economy for a steady growth and better results from the infrastructure and social sector. The Indian economy has become increasingly hungry of funds. An annual government borrowing of Rs. 3.5 to Rs. 4 lakh crore is simply not enough to pump up the economy to move fast on the desirable growth path. A sustained nine per cent economic growth, in genuine terms, over a period of the next eight to 10 years should be ordinarily able to more than neutralize a possible external debt remittance default related risk provided that domestic price inflation stays under control and the external trade gap gets narrowed.

Unfortunately, India’s growth story itself appears to be less convincing this year in the face of an astounding claim of a 5.4 per cent output increase in the case of the firm sector. A ‘good monsoon’ is given as a key reason for such a ‘good’ growth. In reality, the last monsoon was not only delayed. It was also uneven and scanty in many states. It was hardly adequate and farm friendly. A fear of mid-year wheat shortage loomed large as the government entered into import contracts to ship some two lakh tones of wheat during April-September at a huge cost of $280-285 per tonne. The volume was 27 per cent higher than the corresponding import in the previous year, 2009-10, when food grains production showed a big fall. Traditionally, the farm sector output refers to food production, of which wheat and rice constitute the most vital parts. The official statistics hide the fact that this year’s growth is in the backdrop of a big shortfall in the previous year’s food grains output.

If the food grains production is so good this year, why did the food prices in the whole sale market shot up by almost 20 per cent in September-October, 2010? At retail level, the average foods price increase was close to 40 per cent for almost 12 weeks. The official explanation blamed the price rise to ‘the poor storage and distribution system’. This is untrue. The system was not a product of 2010. It existed earlier. It has been a perennial problem with the farm sector. Logically, it should have led to a price crash at least at growers’ points and village markets. This did not happen. Instead, food inflation was uniformly high through 2010, hurting farmers and industrial workers alike across the country. The year also witnessed heavy shortage of a number of other farm products, including eggs, fish and milk. These on ground experiences make the unusually high farm sector growth statistics for 2010 a suspect.

The command economies such as the People’s Republic of China and the erstwhile socialist block in Eastern Europe and Central Asia had always tampered with the production statistics of the farm sector. China, which leads the world in food production, includes many fresh vegetables into its foods basket to compute the total tonnage making it look like a really huge volume and several times more than India’s generally conservative estimates. Whenever there is a less satisfactory performance of the industrial sector, the government statisticians made higher guesstimates of the outputs of the farm sector and the services sector. Technically, the industrial sector’s performance is less difficult to compute and as such more reliable. But, this is not so in the cases of the vast and less organised farm and services sectors in a country such as India.

The government has always fiddled with the key economic indices to suit its purpose and also to blunt its critics, more often. The items included in the basket of production and the weightage given to each of them to compute the whole-sale price index were tampered with every time the nation faced with high inflation for long duration. The central statistical organization is controlled by the government. The later also hires the services of outside data providers, especially after the abolition of the directorate general of technical development which had established a highly reliable data collection machinery for industrial performance in the organised sector. This is now outsourced.

Suffice it to say that the computation of the country’s GDP should be flawless as much as possible. For this, the country must have a 100 per cent reliable and tamper-proof system in place. Such a system is also necessary to detect the areas of growth of unaccounted economy, which leads to under-reporting of the real GDP and creation of large black money and corruption. The finance ministry, the planning commission, the agriculture and commerce ministries and the Reserve Bank of India must work together and get every state government involved in the process to devise such a reliable system before indulging in making major policy decisions on hot money inflow into equity and debt markets, external borrowings, derivatives market and speculation in commodities. India is relying too much on external factors for its internal growth. What worries one is the reliability aspect of official growth numbers. (IPA Service)