An Economic Evaluation of Budget 1990

Economic Review, July 1990 | Go to article overview

An Economic Evaluation of Budget 1990


An Economic Evaluation of Budget 1990

The year 1989-90 is particularly important being the first complete year of an elected government of a party which has a manifesto with strong economic orientation. It may be said at the outset that one cannot expect all the structural problems of the economy to be removed in such a short period especially when the freedom of choice is constrained. A reasonable measure of success is, therefore, to assess as to whether a sustainable change has occurred in the right direction. Measure by this standard the overall picture which emerges gives enough reasons for serious concern about the state of the economy, but at the same time points out to several important indicators registering significant changes in the right direction. However, it is difficult to conclude that these changes are sustainable because their causative links with policies are not yet plausibly substantiable.

Growth

With all its limitations the single-most important indicator of the overall performance of the economy is its GDP growth rate. The average historical GDP growth rate during the 1982-88 period had been 6.5 per cent. For 1988-89 an ambitious target of 6.9 per cent was set. However, only 4.8 per cent could be achieved. In view of this a rather modest target of 5.8 per cent was set for this year. It will not be achieved, with the expected growth rate of 5.2 per cent. However, while this growth rate is far below its historical value, it is higher than last year. The primary reason for this is the faster growth of the large scale manufacturing sector. This sector, although contributes only about 18 per cent to the GNP, has strong links with other sectors which make its growth performance relatively more important.

The government policy of privatisation, deregulation and simplification of sanctioning procedures has been credited for the substantially increased private investment in large scale manufacturing sector in 1989-90. In the 1990-91 Budget major areas opened up for private investment are housing finance, road construction and life insurance. While the direct impact of these policies on specific sectors is yet to be seen, it is the signal which these policies will convey to the private sector which should help to improve the overall environment of private investment.

The major reasons put forth why the target growth of 5.8 per cent in GDP could not be achieved in 1989-90 is the relatively low growth in the agricultural sector. Its growth has been only 4 per cent compared to the historical growth of 5.9 per cent during 1982-88, 7.1 per cent last year and 5.2 per cent target for the year.

The main reason that the GDP growth during the last two years has been significantly below the historical value is perhaps the restraints partly related to the implementation of IMF conditionalities. There is substantial evidence, including the low ADP share of the GDP, which indicate that implementation of the structural adjustment programme is at least partly responsible for the sluggish growth of the economy during the last two years. If this is true then it will be years before the economy gets back to its historical path as the full impact of the conditionalities is yet to come. It is also important to carefully investigate the channels through which the structural adjustment programme influences the economy before pursuing it more vigorously to avoid the possibility of ending up in a severe recession.

Budgetary Position

Looking at the phenomenal growth in debt servicing during the last few years one can understand the impatience of the donor agencies. Debt servicing now accounts for about 41 per cent of the total current expenditure and over the last decade the compound annual growth has been 24 per cent. Total deficit which was envisaged to be Rs. 56 billion for this year, in spite of the restraints, is now expected to be Rs. 65 billion. The external borrowing is Rs. …

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