Economy in recovery mode

INDIA expects to clock 8.5 percent economic growth during the current financial year (2010-11) and 9 percent in the next financial (2011-12). This is revealed in the document ‘Economic Outlook 2010-11’ released by Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister.  While, agriculture is projected to grow at 4.5 percent in 2010-11 and 4.0% in the next fiscal, industry is projected to grow at 9.7 percent in the current fiscal and 10.3 percent in the next financial year. Services, according to the document, is to grow at 8.9 percent in 2010-11 and 9.8 percent in 2011-12.

The inflation rate is projected to come down to 6.5 per cent by end of the current fiscal (March, 2011) The decline is attributed to the expected normal monsoon, combined with the base effect. The provisional headline inflation rate was above 10 per cent in June 2010, the report says. Dr Rangarajan, Chairman of PMEAC is of the view that to sustain a growth rate of 9 per cent, focus is required on containing inflation, improving farm productivity and closing the large physical infrastructure deficit, especially in the power sector.

Agriculture, which grew at 0.2 per cent in 2009-10, is projected to grow at 4.5 per cent in current fiscal year and 4 per cent in the following year. Industry, which 9.3 per cent growth in 2009-10, is projected to grow at 9.7 per cent in 2010-11 and higher at 10.3 per cent the following year. The services sector is projected to grow at 8.9 per cent in 2010-11 and 9.8 per cent in 2011-12 against 8.5 per cent growth in fiscal 2009-10.

Referring to the slow recovery in the global economic and financial situation the PMEAC identifies the rising domestic savings and investment as the chief engines of growth in the economy. The investment rate was expected to be 37 per cent in 2010-11 and 38.4 per cent in 2011-12 and  the domestic savings rate is expected to be over 34 per cent in 2010-11 and close to 36 per cent in the following year.

PMEAC projects merchandise trade deficit at US$ 137.8 billion or 9 per cent of the GDP in 2010-11 and US$ 160 billion or 9.3 per cent of GDP in fiscal 2011-12. Invisibles trade surplus was projected to be US$ 96 billion or 6.3 per cent of the GDP in 2010-11 and US$ 109.7 billion or 6.4 per cent in 2011-12.  

According to the PMEAC projection, capital flows could be readily absorbed by financing the needs of the high growth of the economy. Against US$ 53.6 billion in 2009-10, the capital inflows are projected to be US$ 73 billion for 2010-11 and US$ 91 billion for 2011-12. The accretion to reserves is projected to be $ 30.9 billion in 2010-11 and $ 39.8 billion in 2011-12 compared with US$13.4 billion in fiscal 2009-10.   

The fiscal deficit, according to the PMEAC projection, outturn might be lower than the budgeted consolidated fiscal deficit of 8.4 per cent of GDP for 2010-11. The revenue deficit as a ratio of GDP is expected to decline from 6.3 per cent in 2009-10 to 4.6 per cent in 2010-11.

Despite that India remains as one of the most attractive investment destinations in the world. The World Investment Report 2009 has identified India as one of top five most attractive locations for FDI in 2009-2011 alongside China, the US, Brazil and the Russian Federation. A survey conducted by the Japan Bank of International Cooperation also identify India as the second most promising country for overseas business operations. The global meltdown notwithstanding, India along with China is emerging as two major drivers of growth in the Asian economy. These two countries are seen as most favourite investment destinations in the world today as revealed in a survey conducted by Bloomberg News survey sometime back. Investor sentiment in India has improved significantly in the first quarter of 2009, according to a survey conducted by Dutch financial services firm ING. According to a survey by the Indian School of Business and the Vale Columbia Center on Sustainable International Investment, with foreign assets growing by more than 100% annually in recent years, Indian multinational enterprises (MNEs) have become significant investors in global business markets and India is rapidly staking a claim to being a true global business power.

The economic reforms are yet to be in full bloom. India has its socio-political limitations for speedier reforms. The candid statement of the country's Finance Minister Pranab Mukherjee that reform is a political issue in India is a pointer to the pace of reform the country has to keep along. Expressing that the government requires Parliamentary approval for reforms the Finance Minister in an interview with the financial newspaper The Economic Times said:" We have to carry people with us. And it is essentially political. The political system does not permit. One sentence is adequate. If the political system does not permit, no other system can bring it.....But the resilience of our system is that it accepts change, and when it accepts it, we shall proceed. What we did in the 1990s we could not do in the 80s. What we could do in beginning in 2000, we could not do it in 70s. So there is progress and advancement."

Closely linked with reforms is the issue of foreign direct investments (FDI). Foreign Direct Investment (FDI) equity inflow in India increased from US $ 5.5 billion in 2005-06 to US $ 27.31 billion in the year 2008-09 showing a growth of 11% over the previous financial year. Though on a cumulative basis FDI inflows into India in the first nine months of fiscal 2009-10 remained almost flat at $ 19.38 billion against $19.79 bn in the comparable period in previous fiscal, November 2009 witnessed marked 60 percent growth in FDI inflow totaling at $ 1.74 bn compared with 56 percent growth in October when FDI inflows stood at $2.33 bn.

However, in respect of growing capital flows country's Finance Minister Pranab Mukherjee in an interview with ET sounded a note of caution and said: "..But there should not be a situation where volatility of the inflowing capital would cause problems. In our system it has not reached that stage where we would have to be worried. But we are always watching the situation." FDI equity inflows into India as a percentage of GDP has grown from 0.75 percent in 2005-06 to nearly 2.49 percent in 2008-09.

According to country’s Commerce and Industry minister Anand Sharma, the FDI inflows into India for the month of December, 2009 stood at US $ 1.542 billion signifying an increase of 13 percent, in US $ terms, over inflows in the month of December, 2008 (previous year), which were US $ 1.362 billion. The minister is of the view that the increase in FDI inflow is reflective of the trend seen from the month of June, 2009 onwards, wherein FDI inflows for almost all months in the current financial year (excepting only September, 2009) have shown an increasing trend over the FDI inflows of the same months in the previous financial year (2008-09).

India’s FDI growth is favourably placed in comparison with the UNCTAD World Investment Report, 2009, that noted a fall of global FDI inflows, from a historic high of  US$ 1.979 billion in 2007 to US$ 1.697 billion in 2008, a decline of 14 percent. UNCTAD had subsequently predicted a fall in global FDI investment flows by 30 percent, from US $ 1.7 trillion in 2008 to US $ 1.2 trillion in 2009.

Cumulative FDI inflows for the current financial year (April, 2009 to December, 2009) have been US $ 20.92 billion. These are comparable to the FDI inflows for the same period (April, 2008 to December, 2008) in the previous financial year, which were of the order of US $ 21.15 billion. The corresponding figure for April, 2007 to December, 2007 was US $ 12.70 billion. With this, total FDI into India since the onset of the liberalization process (August, 1991-December, 2009) is nearly US $ 127.46 billion.(Source: Federal Commerce Minister's Press meet, February 11, 2010)

In global perspective Indian economy has clocked average 8.8% growth rate during 2003-08, the highest ever recorded only next to China. India's Planning Commission in its Eleventh Five Year Plan document suggested measures that may help Indian economy to clock around 9% GDP during the Plan period. However, the global financial meltdown led to a fall in India's growth rate to 6.7% in 2008-09 with growth in the second half of 2008-09 at 5.8%. The fall is attributed mainly to lower export demand and shrinking foreign liquidity. 

According to an advance estimate of the Central Statistical Organization, The growth in GDP during 2009-10 is estimated at 7.2 per cent as compared to the growth rate of 6.7 per cent in fiscal 2008-09. (Source: CSO Press Note, February 8, 2010). Estimates are based on Constant (2004-05) Prices. Gross Domestic Product (GDP) at factor cost at constant (2004-05) prices in the year 2009-10 is likely to attain a level of Rs. 44,53,064 crore, as against the Quick Estimates of GDP for the year 2008-09 of Rs. 41,54,973 crore, released on 29th January 2010.

The 7.2 percent growth in GDP ( as per advance estimates) is attributed to the growth rates of over 5 percent in the sectors of ‘mining & quarrying’, ‘manufacturing’, ‘electricity, gas and water supply’, ‘construction’, 'trade, hotels, transport and communication', 'financing, insurance, real estate and business services', and 'community, social and personal services'.

In the ninth meeting of IMF's International Monetary and Financial Committee held on April 25, 2009 India said that country's growth momentum was interrupted by the global financial crisis. Since downside risks have materialized, the GDP growth for 2008-09 is now projected to turn out to be in the range of 6.5% to 6.7% after clocking annual growth of 8.9% on an average over the preceding five years (2003-08). Domestic demand, in the form of both private consumption and investment expenditure, has slackened although government final consumption rose on account of discretionary fiscal stimulus measures. The global crisis brought to the fore the strong interactions between funding liquidity and market conditions. (Source: Statement by Mr. Duvvuri Subbarao, Alternate Governor, (On behalf of Mr. Palaniappan Chidambaram, Home Minister of India) On behalf of Bangladesh, Bhutan, India, Sri Lanka). 

Early 2009 Asian Development Bank (ADB) in its annual economic publication, Asian Development Outlook 2009 (ADO 2009) said that India's economic growth will slow to 5% in 2009, down from 7.1% in 2008, but should speed up next year as the global economy recovers and lower local interest rates spur private investment and manufacturing. The fiscal stimulus measures that the government announced between December 2008 and February 2009 should allow India's growth to rise to 6.5% in 2010, it said. (Source: Asian Development Bank Press release, March 31, 2009)

ADB Acting Chief Economist Jong-Wha Lee maintained that the central government has to bring down its deficit in the medium term to a manageable level in order to ensure long-term debt sustainability. Expansionary fiscal policies could impair the confidence of investors unless clear signals are given that the present large deficits are truly temporary, he said.

Agriculture
In agriculture sector a robust growth that sustained for long five years (2003-2008), the overall output declined in last fiscal year (2008-09) though the food grains production stood at a record level of around 234 million tonne. While rabi output increased substantially, the growth trend was could not be maintained during khariff due to floods in some states. Production of coarse cereals, pulses, oilseeds, showed slippage and output of sugarcane and cotton also declined. However, diversified activities relating to other areas such as horticulture, livestock and fisheries did yield encouraging results and they today account for 60% of the agriculture and allied GDP. Allied sector is expected to grow between 5 per cent and 6 per cent during 2008-09. The share of agriculture in the GDP however declined markedly to around 17% today from 36.4% in the 1980s but significantly number of people who are dependent on agriculture only for their livelihood has not reduced much. 60% of people still depend on agriculture and this signifies why India continues to lay greater emphasis on agriculture in its long term economic planning.

India has faced unprecedented drought in certain parts of the country but there is no need for the people to be panicky about food grain reserves. The country will have a surplus of 16 million tonne of grains ( 10 mn tonne wheat and 6 mn tonne rice) at the beginning of wheat and rice seasons. As already indicated by the country's Food Minister Sharad pawar, government would import, if required, foodgrains to bridge the demand-supply gap. In fact, the federal states have already been asked to do the needful to keep food prices under control. 

MSEs
Another important sector of the Indian economy is Micro and Small Enterprises (MSEs) segment where credit is a vital input for growth. According to the Annual Report of Ministry of Micro, Small and Medium Enterprises, 2006-07, the sector accounted for around 39% of total industrial production, 34% of the exports in the industrial sector and around 35% of total employment among units engaged in manufacturing and services. The annual average growth in value of output, exports and employment stood at 16.8%, 20% and 4.4%, respectively, during the expansionary phase of 2003-07. However in India too the growth in this sector has slowed down like in other countries. The employment growth in particular has slowed down to 2.9%. 

Infrastructure
To attain 9% GDP during its 11th five year plan India has to step up its investments in infrastructure substantially. The gross capital formation in infrastructure requires to be stepped from 5% of GDP in 2006-07 to 9% of GDP by 2011-12, the terminal year of the 11th five year plan. The investment requirement is estimated at of US$ 502.88 billion. Private funding will play a crucial role in this respect. It is expected that of the total fund requirement around 30% would come from the private sector. The banking industry has already stepped up lending to infrastructure sector. Banks' lending to the infrastructure sector has increased significantly to 9.25% of bank credit in fiscal 2008-09 from 6% in 2004-05. Country's central bank has initiated various measures to facilitate infrastructure finance. To stimulate public investment in infrastructure, the government has set up a special purpose vehicle - India Infrastructure Finance Company Limited (IIFCL) to provide long-term financial assistance to infrastructure projects.

Foreign Trade
India's new five-year (2009-2014) Foreign Trade Policy was announced on August 27, 2009. The decline in country's foreign trade in the last 10 months is attributed to a contraction in demand in the traditional markets of country's exports.The protectionist measures being adopted by some of these countries have aggravated the problem as well. 

Cumulative value of India's exports for the period April- November, 2009  stood at US $ 104247  million (Rs 501297 crore) as against US $ 134201 million (Rs. 587904 crore) registering a  negative growth of 22.3  percent in Dollar terms and 14.7  percent in Rupee terms over the same period last year.  

Cumulative value of imports for the period April- November 2009 was US $ 170430 million (Rs. 819107 crore) as against US $ 234353 million (Rs. 1031574 crore) registering a negative growth of  27.3 percent in Dollar terms and 20.6 percent in Rupee terms over the same period last year. (Source: Ministry of Commerce, Government of India).

In the last five years our exports witnessed robust growth to reach a level of US$ 168 billion in 2008-09 from US$ 63 billion in 2003-04. India's share of global merchandise trade was 0.83% in 2003; it rose to 1.45% in 2008 as per WTO estimates. Country's share of global commercial services export was 1.4% in 2003; it rose to 2.8% in 2008. India's total share in goods and services trade was 0.92% in 2003; it increased to 1.64% in 2008. On the employment front, studies have suggested that nearly 14 million jobs were created directly or indirectly as a result of augmented exports in the last five years. 

India seeks to achieve 15% growth in exports per annum to clock an annual export target of US$ 200 billion by March 2011. In the remaining three years of the new FTP,s i.e. upto 2014, the country should be able to come back on the high export growth path of around 25% per annum. By 2014, we expect to double India's exports of goods and services. The long term policy objective is to double India's share in global trade by 2020. 

To achieve the target of 15 percent growth in exports per annum the government is following a mix of policy measures including fiscal incentives, institutional changes, procedural rationalization, enhanced market access across the world and diversification of export markets. Improvement in infrastructure related to exports; bringing down transaction costs, and providing full refund of all indirect taxes and levies, would be the three pillars, which will support us to achieve this target.

Updated: July, 2010