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Current
Economic Situation
It is being increasingly realized that the
Indian economy, which had been treading the high growth path during the first
two quarters of 2004-05, has begun to show faint signs of fatigue at the close
of fiscal 2004-05 thereby raising concern on whether the growth momentum is
losing steam. What has emerged is that
while the economy is still in the high growth orbit, there are overall crucial
weaknesses which, if allowed to continue, could hold back further growth and
would act as a drag on India’s march towards progress.
A noteworthy feature of current economic scenario is the momentum displayed by the industrial sector. In fact, latest figures show that Index of Industrial production (IIP) has notched up an annual growth of 8.0% per cent during April-March 2004-05 over and above a cumulative increase of 7.0% registered during the corresponding period of the preceding year. This makes the fiscal year (2004-05) the best since 1995-96 when industry grew at 13%.
Within industry, the manufacturing sector recorded a ‘shining’ performance. The manufacturing index rose by 8.8% during the fiscal year 2004-05 against 7.4% in the corresponding period of 2003-04. Experts contend that such a sustained growth in manufacturing sector is reminiscent of the boom period of 1993-96 period when the manufacturing performance was at its zenith.
At the sectoral level as many as 14 of the 17 two digit industry groups have shown positive growth during March 2005 compared to the corresponding period last year.
A further break up shows that the textile sector (including wearing apparel) has shown a highest growth of 29.4% followed by 22% in leather and leather & fur products and 18.1% in beverages, tobacco and related products. On the other hand, wood and wood products, furniture and fixtures have shown a negative growth of 11.6% followed by a decline of 4.9% in food products and 0.9% in metal products and parts except machinery and equipment. The chemicals sector has also continued to show a lackluster performance with growth rates falling to 4.5%.
Furthermore, the other sub sectors of IIP, namely the core sector of mining and electricity have not been able to keep pace and have showed some slackening of growth during the year. The growth in electricity production, at 5.2% in April-March 2004-05, was only marginally higher than the 5.1% evidenced in the last fiscal, while mining growth slowed down to 4.3% in April-March 2004-05 against 5.2% in the same period of 2003-04.
Though the industrial performance at the cumulative level for 2004-05 has been commendable, it is disconcerting to note that the month of March has witnessed a deceleration in industrial performance. The index of industrial production has recorded a growth of 7.2% in 2004-05 against 8.1% in the same month in the previous year. The lower growth in March 2005 has been on account of a distinct slowdown in manufacturing growth, which slipped to 7.8% during the month compared to 8.1% in March 2004 as well as in the fall in growth of the electricity sector which has plummeted to 3.0% in March, 2005 as compared to 10.6% in March, 2004. The output growth in the mining sector, however, has increased to 5.6% in March, 2005 as against 5.1% in March, 2004.
As per use based classification, the growth index of capital goods has improved to 14.2% in March 2005 (as compared to a meager 4.5% growth in February, 2005) and 12.6% during April-March 2004-05 although it is considerably lower than the corresponding year on year growth rates of 25.2% for March 2004 and 13.6 per cent for April-March 2003-04. The figures for March 2005 show that the expansion in capital goods industry, representing investment activity in the economy, has been lower over the year raising concerns about the sustainability of our nascent investment revival.
What is more, a recent CMIE study on capital expenditure, shows that investment outstandings have touched an all time high of Rs.18,95,211 crore or 60% of India’s GDP. Steel, aluminium, cement and infrastructure as well as automobile and consumer goods sectors are planning capacity expansion. However, analysts estimate, projects actually under implementation account for only about 26% of GDP. And what is worrisome is that only a quarter of the intentions are likely to see implementation in near future. However, despite this finding, it may be too early to say that a cyclical down trend has started. The situation needs to be watched carefully before arriving at any particular value judgement in this regard.
Within consumer goods, consumer durables industry showed a healthy growth of 14.0% during April-March 2004-05 against 11.6 per cent during the previous period while non-durables surged to 10.4% in April-March 2004-05 as against 5.8% in the corresponding year indicating an overall buoyancy in demand in the economy. The performance of basic goods (5.5% in April – March 2004-05 versus 5.4% in April-March 2003-04) has been steady while intermediates continued their decline to achieve 5.8% growth as against 6.4% achieved during April-March 2003-04.
In the month of March 2005, the manufacturers of consumer goods scaled up production to 7.5% as against 6.3% in March 2004. The reason for the up trend has been a 7.2% growth in consumer non- durables in March 2005 against a growth of 1.6% in the corresponding month last year. Consumer durables grew by 8.2% in March 2005 as against 23.3% in March, 2004. Basic goods output grew 6.9% in March 2005 against 6.4% in the same time last year and intermediate goods by 4.1% compared to 5.3% in March 2004.
Business reports show that the Corporate
Sector has posted excellent results during the last quarter of 2004-05. Profits have surpassed all expectations and
there is a surge in business confidence.
The results reported by 280 companies in the January-March quarter show
a 29 percent rise in sales and a 74 percent jump in net profits. This is despite the slight slowdown in GDP
numbers in the October-December quarter, high oil prices and downtrend in
commodity prices other than metals. The
sectoral break-up shows that engineering, shipping, steel and information
technology have recorded a healthy growth in profit while cement, fertilizer,
paper and pharmaceutical companies have reported an erosion in their bottom
lines.
The signs of a step up in industrial
activity is apparent from a sizeable increase in total financial assistance
rendered by scheduled commercial banks to the commercial sector in fiscal
2004-05. In this context, the annual
policy statement of the RBI observes that credit off- take from commercial
banks increased by about 26 percent during 2004-05 compared to 15 percent in the
last fiscal. Non-food credit registered
a 26 percent growth in 2004-05 and fund flow to the commercial sector rose by
about 24 percent as against 15 percent recorded in the previous year. Not surprisingly, the incremental non-food
credit to deposit ratio i.e the ratio of non-food credit disbursed during the
current fiscal to the total deposits added during the same period - was over
100 percent. This implies that banks
have lent more in non-food credit than what they have collected as deposits
during the year.
The strong growth in bank credit is
essentially due to robust demand from all sectors of the economy. Furthermore, corporate lending by banks
received a fillip in 2004-05 as companies started to move out from overseas
markets as interest rates abroad started to inch up. Sharp increases were seen in credit flow to sectors like
infrastructure, power and telecommunications.
Strong credit flows were also witnessed in sectors such as food
processing, pharmaceuticals, gems and jewellery and automobiles.
However, gross bank credit to the food and
non-food sector decreased by Rs. 9427 core to Rs. 11,32,274 on crore for the
fortnight ended April 15,2005
M3, the conventional measure of money supply, has increased by 13.3% in March, 2005 as compared to 16.5% in the same period in the previous year.
Against this backdrop the question is whether the tempo of industrial growth, evidenced so far, would be sustained over time. This would depend on the performance of our ‘core’ sector.
It is distressing to note that the
performance of the infrastructure industries continues to be out of sync with
the overall buoyancy experienced by the corporate sector thereby raising
concerns about the sustainability of high growth rates in the industrial
sector.
The annual growth rate of the index of
Infrastructure industries - which constitutes six core sectors and has a
combined weight of 26.68 percent in the index of Industrial production-has
slipped to 4.4 percent in 2004-05 against 6.2 percent recorded in 2003-04. The index for the month of March, 2005 is a
meager 3.7 percent compared with the 8.3 percent growth logged in the previous
year. The poor growth performance of
the core sector during the month of March, 2005 has mainly been on account of a
decline in production of petroleum refinery products and a sharp fall in the
growth rates of industries like finished steel and electricity.
During fiscal 2004-05, except for a
marginal increase in production of cement, electricity and crude oil, all other
sectors posted lower growth rates than those in the previous fiscal. Annual coal production in 2004-05 has
increased by only 3.9 percent compared to 5.8 percent in 2003-04. This in turn has also affected the rate of
growth of the electricity sector which has grown by 5.2 percent which is almost
the same as last year.
The sharpest drop has been in the case of
finished steel which has risen by only 3.7 percent against 9.8 percent in
2003-04. The reason ascribed for the
slump is the slowdown of the Chinese economy which had, in the past, fuelled
demand for the product.
Against this backdrop, experts contend
that there is an impelling need to address the factors inhibiting the
performance of infrastructure sector in order that the economy rebounds to
achieve at least 7 percent growth in 2005-06.
Our external sector has continued to
remain on the high growth trajectory with our foreign trade having touched $186
billion during 2004-05 as compared to $141 billion in the previous financial
year. The additional trade of $45
billion comprises $17 billion increase in exports and $28 billion rise in
imports.
Our exports have shown a salutary
performance during the last three years – an acknowledgement of the growing
efficiency and competence exhibited by our industrial sector. During the year 2004-05, the country’s
merchandise exports touched a whopping $79.59 billion registering a record
growth of 24.41 percent over the last year’s figure of $63 billion. Our country has hence exceeded the export
growth target of 16 percent originally set for 2004-05 (corresponding to a
value of $73.4 billion). The resurgence
in exports has been fuelled by sustained overseas demand for traditional and
non-traditional items due to global economic recovery as well as productivity
changes and growing competitiveness of Indian exports.
The commodity composition of exports
suggest that petroleum, crude and products, gems and jewellery, machinery and
instruments, drugs and pharmaceuticals and fine chemicals and readymade
garments, cotton including accessories have emerged as big ticket items of
exports. Similarly, the geographical
distribution suggests that during fiscal 2004-05 (first seven months) USA
remained the most important export destination followed by United Arab
Emirates, China and Hong Kong.
However, despite the above, there has been some slackening in exports during March 2005. In fact, export during the month was just $8513 million which is only 8.28 percent higher than $7862 million accrued during March, 2004. This below average growth could be attributed to the high base effect as export growth in March, 2004 had zoomed to a resounding 52 percent. Nevertheless, the present scenario also makes us aware of the mounting challenges that are likely to be faced in pushing export growth during 2005-06. In this context, it is felt that a major thrust would be required to sustain the high growth rate of merchandise exports which have materialized after the slowdown of 2001. This would require a diversification of our exports away from low value added labour and resource intensive exports like plantation or farm products towards knowledge intensive exports which have high value addition.
In the meanwhile, imports during the year
were valued at $106 billion during the fiscal representing an increase of 35.62
percent over $78 billion in 2003-04.
During the month of March, 2005 imports registered a buoyant growth of
$10 billion recording a 25.52 percent rise over the previous period. At the sectoral level, oil imports have escalated
sharply to register 41.19 percent growth at $29 billion as compared to $20
billion in the corresponding previous period.
On the other hand a spurt in domestic demand has also pushed up non-oil
imports which are estimated at $ 77 billion i.e 33.62 percent higher than $ 57
billion clocked earlier.
One reason for a sharp pick-up in non-oil
imports may be the continued acceleration of growth in the manufacturing
sector. But such a large imbalance
between growth of exports and imports is something unusual, especially because
export growth which is import intensive in many cases has slackened in the more
recent period. Hence it is quite likely
that the appreciation of the rupee exchange rate in terms of the dollar may
also have contributed to the unexpectedly large pick-up in non-oil imports.
However, the strong growth in both imports
and exports in recent times has led to an increase in India’s share of global
trade propelling the government to hike its targets for the concern year.
The surge in imports over exports has left
trade deficit at an all time high during fiscal 2004-05. Our trade deficit has burgeoned to touch $
26.52 billion which is around 86 percent higher than $ 14.27 registered in
2003-04. The previous highest
merchandise trade deficit ever recorded was $ 17.8 billion in 1999-2000.
During the month of March, 2005 our trade
deficit increased by a resounding 824 percent - from $ 0.17 billion in March,
2004 to $ 1.57 billion in March, 2005 which is a cause for concern.
Gross tax revenue of the centre grew by
20.3 percent during fiscal 2004-05.
However, at Rs.3,03,856 crore, it is marginally short of the revised
estimate of Rs.3,05,314 crore. The
shortfall in tax collection has been primarily on account of lowering of excise
duty on petroleum products and subsequently lower income tax owing to under
recovery from oil PSUs and banks.
The indirect tax collection witnessed a growth of 16.09 percent while there was a 26.3 percent increase in revenue from direct taxes. In fact, for the first time, direct tax collections as a proportion of GDP has crossed 4.25 percent compared to 3.8 percent in 2003-04.
The highest growth of taxes was in service
tax which grew by 79.12 percent though on a lower base. This was followed by corporate tax at 31.50
percent and income tax by 16.76 percent.
Similarly, in the area of indirect taxes, growth in customs revenue was
18.58 percent and excise 9.29 percent.
Collection of all the individual taxes was significantly higher than in
the previous year.
Foreign Direct Investment has picked up to
$ 4.2 billion during April-January 2004-05.
Total portfolio investments during the period were $ 4.9 billion taking
up the total foreign investment flows to $ 9.2 billion. The inflow of commercial bank deposits of
the non-resident Indians declined by $ 1.3 billion during April-January,
2004-05. This is in sharp contrast to
the net inflows of $ 3.7 billion during the corresponding period of the
previous year.
After a relentless rise during the first
week of March, 2005 – when the sensex touched an all time high at 6915.19,
- there was a subsequent fall and by
end March the sensex was down by 3.29 percent.
The fall in secondary equity markets have been widespread with returns
on almost all size deciles turning negative.
Industry-wise returns also reveal that the decline in March was
broad-based. Nevertheless, despite a
fall in returns in March, trading volumes have remained considerably high.
The inflation rate based on the consumer Price Index for Industrial workers (CPI-IW) continued to remain at a moderate level in the range of 2-3% in early 2004-05 before firming up to reach 4.8% in September, 2004. The point to point rate of inflation, based on the CPI-IW has subsequently decreased to 4.2% in March, 2005.
The ushering in of fiscal 2005-06 has
motivated experts to come out with economic forecasts for the year. Accordingly, the National Council of Applied
Economic Research has projected 7.2 percent economic growth rate has 2005-06
which is the same as that estimated by the Economic and Social Commission for
Asia and the Pacific (ESCAP) in its latest survey.
The prospects for a robust GDP growth rate
has also brightened an account of the normal monsoon forecast by the India
Meteorological Department. It is
believed that a normal monsoon would ensure a buoyant farm sector growth which
had slowed down considerably in 2004-05 due to a 13 percent deficient
rainfall. An improvement in farm
sector growth would also favourably impact the manufacturing as well as the
service sectors of the economy.
However, experts also suggest that the
business environment would get tougher
in 2005-06. In fact, analysts contend
that corporates would find it hard to maintain profitability in the face of
rising interest rates, firm input prices and possibly higher fuel prices. Not surprisingly, the Institute of Economic
Growth has forecast that IIP would slow down to about 6.7% in 2005-06.
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