BOMBAY, 27 August — Over the past few days, a lot of apprehensions have been cast over the state of the Indian economy. The recent downward ratings made by two of the international ratings agencies has once again raised doubts about the direction in which the Indian economy is headed.

Moreover reports have also been coming that all is truly not well with the Indian economy. So then it was time to take a real hard look at the facts and then decide for oneself whether all is lost or whether there is still hope for those who have invested in India.

As per the latest figures, led by a dismal performance in crude petroleum, coal and cement sector, the country’s infrastructure growth fell to 1.2 percent in July against a healthy 6.1 percent recorded in the same month last year. Growth rate in cement sector plummeted to a negative 6.1 percent in July 2001 as opposed to a healthy 6.2 percent growth in the same month the previous fiscal. Electricity generation, however, grew by 4.2 percent compared to 2.6 percent last year. Growth in finished steel fell to 3 percent in July 2001 from 8.3 percent a year ago. The center appears to be more or less reconciled to a one-percentage point slippage in its fiscal deficit target of 4.7 percent of gross domestic product (GDP) during the current fiscal. It is expected that under the “worst case” scenario, the center’s gross tax revenues would fall short of the budget estimate by around Rs.160.00 billion. Of this, roughly Rs.60.00 billion would be on account of customs and Rs.40.00 billion each under the excise and direct taxes heads.

First the good news. Foreign exchange reserves, for the week ended Friday, Aug. 10, 2001, rose by $326 million to $44.14 billion ($43.81 billion in the previous week), as per figures released by the Reserve Bank of India (RBI).

The government has cleared 29 foreign direct investment proposals worth Rs.1.35 billion, mainly in the areas of electricals and engineering industry, tourism and merchant banking.

There is some good news from the Indian agriculture sector too which is the backbone of the Indian economy. India’s agricultural exports have topped imports by $3 billion. Courtesy, zooming exports of fruits and vegetables, seafood, juices and beverages, poultry and processed foods into world markets. From a gain of $1.7 billion in 1999-2000, the balance of trade in agriculture (total exports minus total imports) has risen to $3.23 billion in 2000-01. What makes this performance even more remarkable is that India continues to have an overall trade deficit of $5.32 billion in 2000-01.

Now for the bad news. First some facts and figures about the state of the Indian economy. There is no doubt that the fall in the investment levels, cross subsidization in railways and power sector and other adverse factors has led to the current economic slow down. But the silver lining over this black cloud is that there has been a decline in the number of people living below the poverty line. People living below the poverty line has come down to 26 percent of the population during 2000-01 from 55 percent in 1975-76 and 35 percent in 1993-94 as per the National Sample Survey statistics.

Moreover, the total employment in organized and unorganized sectors witnessed an increase from 374.45 million jobs in 1993-94 to 397 million in 1999-2000. The average growth rate of growth of employment was 0.98 percent per annum during 1993-94 to 1999-2000. That’s not much but atleast there is some improvement. India’s inflation rate currently stands at 5.22 percent.

What came as a real shocker was the downward ratings by Standard & Poors and Moody’s. Standard & Poor’s downgraded India’s long-term local currency sovereign credit rating to ‘BBB minus’ from ‘BBB’ on account of unchecked fiscal deficit and rising domestic indebtedness, while revising the rating outlook to ‘negative’ from ‘stable’.

The agency cited unchecked budget deficits and rising domestic indebtedness for the rating cut. It said India’s general government budget deficit, which includes both the central and state governments, was likely to exceed 10 percent of gross domestic product (GDP) in the current year, adding general government debt could approach 70 percent of GDP, which is higher than in most similarly rated countries.

Moody’s also revised the rating outlook of the local currency to ‘stable’ from ‘positive’ while assigning ‘negative’ outlook on the domestic debt situation from the earlier ‘positive’ outlook.

Despite the downgrade, the Indian government does not seem to be overtly worried and feels that this would not affect the basic fundamentals of the economy.

Union Finance Minister Yashwant Sinha said that the country would proceed with the reforms process at its own pace as it is not hostage to anyone so far as the reforms are concerned and reiterated that the rating criteria were an “absolutely wrong” assessment of India’s reform process.

Whether the government accepts it or not, the forthcoming tax figures will surely make them all sit up and take notice. Analysts expect the revenues from direct taxes for the current fiscal to fall far short of the target. The revenue authorities apprehend that the shortfall in direct taxes could be anywhere between 20 and 25 percent of the projected target. The projected collection for the current fiscal is Rs.840.00 billion while the actual collection could be as low as Rs.650.00 billion.

There is also apprehension that in the context of fears of revenue collection falling short of target , the recommendation of the Advisory Committee on Tax Policy and Tax Administration for the 10th Plan, to bring down the corporate tax rate to the level of personal tax rate, may not be implemented. The corporate tax rate and the personal tax rate are 35 percent and 30 percent respectively.

Well, there is no doubt that the Indian economy is on a weak footing. The recent UTI debacle has further crippled the country. Now with the advent of good monsoons, it is hoped that rural demand will pick and this will turn will give a kickstart to the entire economy. Depending on the monsoons, even in this age of information technology, well, that is indeed a very big gamble!