Though the general elections slated for early next year are a certainty, what their outcome will be and how the new government formed at the Centre will change economic policies, and hence economic performance, is anybody's guess. There is a view widely propagated and tenaciously held that the economy works on the basis of its set (and hence predictable) "laws". Sure enough, there are some principles that govern the working of the economy, but all over the world crucial decisions relating to the functioning of the economy are taken outside it, most of them by governments acting on the basis of political compulsions. India is no exception: economic reforms initiated by the ruling party are redefining the role of the economy and reshaping its functioning.
The performance of the Indian economy in 1996 to a large extent will depend on the outcome of the general elections and the economic policies that the new government pursues. This is not to say that economic policies will continue to be the same if the Congress is voted back to power or will be completely changed if some other party or a coalition of parties forms the next government. Whatever be the case, there is bound to be some continuity and some change.
This notwithstanding, a few predictions are still possible. The economy has been slowly recovering from the steep fall in the growth rate it witnessed in 1991-92 as a result of the drastic structural adjustment programmes. The preliminary estimates of the growth in GDP for 1994-95 was about 5.3 per cent and the advance estimate for 1995-96 shows a slight increase—about 6 per cent. One reason for this: the good performance of agriculture, thanks to favourable weather conditions. Foodgrains production, particularly, has been moving from peak to peak during the past four years. But the advance estimate shows that in the total agricultural production there has been a slight decline between 1994-95 and 1995-96. If this decline continues through 1996, it will certainly act as a drag on overall growth.
Even in the industrial sector, the performance has not been very reassuring. Though industrial growth of 13.3 per cent during April-June 1995 was considerably higher than the corresponding period in 1994 when it was 7.3 per cent, within that period there was a pronounced decline from 14.8 per cent in April to 10.9 per cent in June.
Some manufacturing industries, such as automobiles are doing very well, but the recent rupee depreciation will make imports costly and consequently affect industrial production adversely. The increase in interest rates is also likely to slow down industrial growth in 1996 unless corrective action is taken.
The balance of payments situation may also worsen in the coming year. While exports have been picking up and the depreciation of the rupee may further give a stimulus to this trend, imports too have been going up and there was a deficit of $3.8 billion in the trade account in 1994-95. Some quasi official projections indicate that in 1995-96 it may turn out to be around $6 billion. During 1996-97, debt repayment obligations are approximately $7 billion. If along with these repayment requirements, remittances slow down (as they are beginning to do), there will certainly be some heavy pressure on the external accounts.
The movement of foreign liquid capital into and out of the country has been one of the major features of the economic liberalisation programme of the past four years. It has been affecting not only external accounts and the external value of the rupee but also stockmarkets and the performance of the domestic economy. The volatility thus generated will be further compounded by political uncertainty.
The new year may well turn out to be an unhappy, bumpy one for the Indian economy.
(C.T. Kurien is former director, Madras Institute of Development Studies and is currently National Professor of Economics.)