Originally Published 2004-09-28 09:33:22 Published on Sep 28, 2004
There have been few significant changes in the basic parameters of the Indian economy in the last three months and in general, the economy is still on a relatively high annual growth path of around 7 per cent. The impact of drought that affected some parts of India during the last monsoons is yet to be severely felt on industry because it always
Review of the Economy
There have been few significant changes in the basic parameters of the Indian economy in the last three months and in general, the economy is still on a relatively high annual growth path of around 7 per cent. The impact of drought that affected some parts of India during the last monsoons is yet to be severely felt on industry because it always takes a few months before low farm output gets translated into lower demand for industrial goods. <br /> <br /> In fact, the farm sector grew at 3.4 per cent between April and June 2004 which is a reasonable high rate as compared to a much lower growth rate 1 per cent registered a year earlier. But because the Kharif crop is likely to show a reduced output and food production is likely to be down by 8 million tons or by 7.5 per cent from the previous year, various forecasting agencies have predicted that GDP growth for the current fiscal year will be around 6 to 6.5 per cent and not 8 per cent. <br /> <br /> Despite the uncertainty on the agricultural front, there has been some good news on the export growth and industrial growth fronts. Exports grew at the rate of 24 per cent and were backed by a higher rate of industrial growth. Total exports in the first half of the current fiscal year amounted to $33.75 billion. Export growth in September 2004 was slower at 17 per cent but there has been a sharp rise in handicrafts exports, especially in the area of embroidered and crocheted goods that grew at 27 per cent. The rise in the index of industrial production (IIP) was due to a sharp rise in the growth of the manufacturing, mining and quarrying sectors.&nbsp; <br /> Exports were however exceeded by imports and the trade deficit grew rather alarmingly. It was at $11 billion in September 2004 as compared to $3.6 billion, last year. The widening of the trade deficit was mainly due to an increase in the value of oil imports as a result of the sharp rise in international oil prices. Other imports also grew at a healthy pace showing that there has been an increase in the demand for imported inputs that go towards enhancing the quality of products produced domestically.&nbsp; <br /> <br /> India's overall balance of payments showed a surplus because of the high remittances and it amounted to 1 per cent of the Gross Domestic Product. The balance of payments is arrived at after factoring in the current account and the capital account transactions in the external sector. While the trade deficit is part of the current account and it showed an outflow of dollars, the capital account showed a surplus and a net inflow of $5.6 billion between April and June 2004 due to a rise in the remittances from Indians working abroad. Other capital inflows included software exports and earnings from tourism. There was an increase in international tourist traffic and arrivals rose by 26.8 per cent in the last quarter of the current fiscal year.&nbsp; <br /> <br /> The external debt of the country also rose by $121 million between April and June 2004 and the total external debt in March 2004 was $112.6 billion. But foreign exchange reserves exceeded the external debt by $6.9 billion and provided a cover of 106 per cent to the external debt at the end of June 2004. A major part of the external debt is expressed in dollars and the good news is that at the end of July 2004, forex reserves of the country rose to$120 billion.&nbsp; <br /> <br /> Though the reserves are high, there is an urgent need for an increase in foreign direct investment especially in infrastructure and in the manufacturing sector for higher productivity growth and in order to reach a GDP growth of 8 per cent. A higher growth rate would create more jobs in the economy. According to A.T. Kearney, a world investment- rating agency, India has climbed up a few notches in the rankings of countries according to their desirability as an investment destination. India has become the world's third most favoured destination after China and US and is above UK and Germany. <br /> <br /> Recently, the FDI limit for domestic airlines has been raised to 49 per cent. The privatization and modernization of Delhi and Mumbai airports have however been postponed till June 2005. The short listing of bidders will be completed by November 2005 according to sources. Other major decisions regarding the raising of caps on the foreign investment in the telecom and insurance sectors are yet to be taken because of problems of coalition politics.&nbsp; <br /> <br /> On the negative side, the main news that has captured attention is the rise in the rate of inflation. It reached a four year high at 8.3 per cent but now it has been tamed and brought down to 7.1 per cent. The rise in the whole sale price index (WPI) that measures the rate of increase in inflation has been due to the rise of imported oil . In the last three months, international prices reached $55 per barrel.&nbsp; <br /> <br /> Inflation ahs been controlled by various means and customs duties on steel and excise duty on crude oil have been reduced. Perhaps the raising of the cash reserve ratio for banks to 5 per cent by the Reserve Bank of India, has also worked. With banks being asked to hold more cash reserves, there has been a mop up of excess liquidity from the economy.&nbsp; <br /> <br /> For the first five months of the current fiscal year, there has also been a rise in the fiscal deficit that grew by 21 per cent by the end of August. Even though there has been a 16 per cent rise in tax revenue collection, it is unlikely that the targets for revenue collection can be reached this year. This is because the target has been set really high this fiscal year and the Centre has realized only 19.5 per cent of the target up to the end of August. Indirect tax collection target may go haywire also because of the import duty cuts in petro products, steel and edible oils as part of the inflationary control exercise.&nbsp; <br /> <br /> More caution would thus be required on the fiscal deficit front. The proposed Employment guarantee scheme may also run into trouble because it would cost Rs 1,20, 500 crore over the next four years. Additional taxes may have to be mooted for financing the project.&nbsp; <br /> <br /> In general, the world economy seems to be doing well and this would have a positive impact on the flow of investments to South Asia and India over the next few months. Export demand is also likely to grow and export production will hopefully generate more jobs in the economy. On the agricultural front, more efforts for higher sustainable growth would be needed.&nbsp; <br /> ( Based on an AIR presentation made by me recently) <br /> <em>* Views expressed in this article are those of the author and do not necessarily reflect those of Observer Research Foundation.</em>
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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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