19th JULY 2005
PHD House, 4/2,
Siri Institutional Area, August Kranti Marg, New Delhi – 110 016
Tel : 26863801-04,
Fax : 26863135, 26568392
Email : phdcci@phdccimail.com;
website : www.phdccimail.com
Current Economic Situation
The prevailing scenario portrays a mixed picture
of the Indian economy with certain segments exhibiting a subdued performance
even as the economy, on the whole, continues to be in the resurgent mode in the
current period. The deceleration in the
growth of certain core segments is a cause for concern especially at a time
when the economy appears to be increasingly entangled in a web of unexpectedly
high energy prices, rising interest rates, mounting trade deficit and prospect
of an uncertain monsoon. Against this
backdrop, the question is : would it will be possible to replicate the super
performance of the last two years in this fiscal as well? In other words, would
the economy succeed in ratcheting up a 7-8 percent growth as envisaged in the
Common Minimum Programme.
Recent estimates released by CSO show that
the economy has registered a GDP growth of 7.0 percent in the fourth quarter of
2004-05 thereby indicating a slower pace of growth as compared to 8.4 percent
during the same period last year. The
slackening of the growth momentum can be attributed essentially to a
perceptible fall in agriculture output that showed a growth of 1.8 percent
during Jan-March, 2005 as compared to 10.4 percent increase during the last
quarter of the previous fiscal.
Despite the above, the growth rate of 7.0
achieved in the last quarter of 2004-05 is an improvement over the GDP growth
of 6.2 percent recorded during the third quarter of the same fiscal thereby
making it possible of the economy to firm up its overall performance for the
year 2004-05.
Nevertheless, it is satisfying to observe
that the industry and services sectors have shown a resurgence in growth in the
last quarter of 2004-05. The growth of the manufacturing sector, at 8.6 percent
during Jan-March 2005 as compared to 7.6 percent during the same period last
year, has perked up business sentiment and imbued confidence about the
prospects of the Indian economy.
The services sector, which constitutes a
major share in our GDP has also shown an impressive performance. The sector is led by 11.1 percent growth in
trade, hotel, transport and communications activities during January-March,
2005 followed by 7.7 percent growth in financing, insurance, real estate and
business services as well as community, social and personal services during this
period. The slower sectors are confined
to mining and quarrying, electricity and construction.
With the data pertaining to all four
quarters of 2004-05 in place, the CSO has put the growth estimates at 6.9
percent for the full year (2004-05).
This slackening of growth rate over the previous year is attributed
mainly to the disappointing performance of the farm sector which has witnessed
sharp fluctuations in growth over the last eight quarters. In fact, agricultural growth performance has
fluctuated widely-between a negative 0.5 percent and a high of 18.2 percent-in
the last eight quarters. This is in
contrast to the manufacturing sector which has shown of reasonably stable
growth of between 6.1 percent and 10.5 percent during the same period.
All this calls for much greater attention
to the farm sector as it not only affects the overall growth of the economy but
also impacts the welfare of a majority of our populace.
South West Monsoon and Agriculture
The lackluster performance of the agriculture
sector, which is a result of a shortfall in South-West monsoon in July, 2004
has caused the Agriculture Ministry to lower its estimates of foodgrain
production (fourth advanced estimates for July-June, 2004-05). According to
latest estimates, foodgrain production in 2004-05 stood at 204.61 mt which is 9
mt below the 213.46 mt produced during the same period in the previous year.
The estimated drop in foodgrain production
is higher in the case of rabi crop as compared to kharif crop. The fall is sharpest in the case of coarse
cereals where the output is expected to be 33.9 mt which is lower by 4.2 mt as
compared to the same period last year.
All this makes it imperative to take steps to insulate the sector from
the vagaries of monsoon.
However, it is heartening to hear about
the good rains and near normal monsoon so far during the current fiscal. Already by 30th June, 2005, the
South-West monsoon has covered the entire country ahead of its normal arrival
schedule. However, despite this, the
spatial distribution of the monsoon continues remain poor in June. Out of 36 subdivisions, rainfall has been
above normal only in eight subdivisions.
About 56 percent of the districts received less than normal rains.
As far as agriculture production is concerned,
as of 4th July, 2005, total area sown was 143.7 lakh hectares, 42
percent lower than 248.2 lakh hectares sown during the same period a year
agro.
Sugarcane and jute were the only crops for
which area sown was higher as of 4 July 2005, as compared with area sown a year
ago. Area sown under foodgrain stood at
64.1 lakh hectares as of 4 July 2005.
Industrial Growth
A noteworthy feature of our current economic
scenario is the momentum displayed by the industrial sector. In fact, latest figures show that the Index
of Industrial production (IIP) has notched up an annual growth of 9.6 percent
during April-May, 2005-06 over and above a cumulative increase of 7.9 percent
registered over the corresponding period of the preceding year. This makes the growth rate achieved in the
first two months of the current fiscal at par with the rate achieved in the
boom year of 1994-95. The vibrant
industrial performance indicates that the underlying conditions in the economy
are buoyant thereby creating a rise in demand in the market-place. This could signal a return to a high growth
phase for industry this fiscal.
At the sectoral level as many as 14 of the
17 two digit industry groups have shown positive growth during May 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 35.1 percent
reflecting buoyancy in the export market and suggesting that the end of the
quota regime has not been particularly detrimental to the Indian
producers. This is followed by 15.9
percent growth in machinery and equipment other than transport equipment, 14.6
percent in basic chemicals and chemical products other than petroleum and coal
and 14.1percent growth in transport equipment and parts.
On the other hand, three of the two digit
industry groups have shown a decline in growth. The low growth segments include wool, silk and man-made fibre
textiles where growth has declined by 6.6 percent followed by a dip of 2.7
percent in both jute and other vegetable fibre textiles (excluding cotton) and
wood and wood products, furniture and fixtures. A slowdown is also evidenced in segments like commercial vehicles
and some core sector industries.
Within industry, the manufacturing sector has recorded a ‘shining’ performance. The manufacturing index rose by 10.5 percent during the first two months of the fiscal year 2005-06 against 8.1 percent in the corresponding period of 2004-05. Experts contend that such a sustained growth in manufacturing sector is reminiscent of the boom period of 1993-96 when the manufacturing performance was at its zenith.
However, the sub sector of mining has not been
able to keep pace and has showed some slackening of growth during the two month
period. Besides, the electricity sector
has also not outperformed last year’s production growth. While growth in electricity production, at
6.8 percent in April-May 2004-05 has been almost the same as that evidenced in
the last fiscal, mining growth slowed down to 3.2 percent in April-May 2005-06
against 7.2 percent in the first two months of 2004-05.
The commendable industrial performance has
also been confirmed while analyzing the performance of industry on a monthly
basis. The month of May has witnessed
a sharp up trend in industrial performance recording a double-digit growth of
10.8 percent against 6.8 percent achieved in the same month in the previous
year. This growth comes even as the
global economy appears to be losing steam.
If the trend continues for the rest of the year our economy would have
exceeded 7 percent growth for the third consecutive year.
Such growth, which is one of the highest
in the world, was on account of a distinct and sudden upsurge in manufacturing
growth, which catapulted to 10.6 percent during the month compared to 6.8
percent in May 2004. What is a most
remarkable is the striking performance of the electricity sector which has sprung
a surprise by vaulting up a growth rate of 10.8 percent as compared to 3.1
percent in the same month last year.
As per use based classification, the
growth index of capital goods rose sharply to 19.2 percent in May 2005 against
the corresponding year on year growth rates of 13 percent for May 2004. The figures of May 2005 show that the
consumption led recovery has translated into investment led growth. Some categories like machinery and equipment
have been showing a robust performance even outstripping growth of industrial
production.
The consumer goods industry has also
evidenced an impressive overall growth rate of 18.9 percent with consumer
durables showing a healthy growth of 19.5 percent during May 2005 while
non-durables surged to 18.7 percent in May 2005 indicating an overall buoyancy
in demand in the economy. The spike in
consumer goods production reflects a sharp rise in consumer confidence in the
economy’s performance.
The performance of basic goods has also
been noteworthy with 8.1 percent growth in May 2005 over 3 percent in May 2004
while intermediates continued to show a decelerating performance by posting 2.3
percent growth as against 13 percent achieved during May 2005.
The signs of a step up in industrial
activity during April-May 2005 on a cumulative basis, is apparent from the
credit off take in the economy. In
fact, according to RBI, gross bank credit increased by Rs.6,318 crore for the
fortnight ended June 10, 2005 to touch Rs.11,50,189 crore. Non-food credit, for the fortnight ended 10th
June, 2005 increased by Rs.6,117 crore to touch Rs,11,04,441 crore. Similarly, total accommodation provided by
scheduled commercial banks to the industry in the form of bank credit and
investments in shares, debentures bonds and commercial paper increased by
Rs.50,995 crore to touch Rs.11,95,276 crore for the fortnight ended June 10,
2005.
M3, the conventional measure of money
supply, has decreased by 14.2 percent as on 10th June, 2005 as
compared to 15.3 percent 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.
Infrastructure Industry
The infrastructure sector, which is a
critical determinant of the pace of economic growth in the country is
continuing to show signs of fatigue even in the second month of the current
fiscal leading to apprehensions about whether the resurgence in our industrial
performance would be sustained in the near future.
The Index of infrastructure industries has
witnessed a sharp decline in performance as the sector grew by 4.9 percent in
April-May, 2005-06 as compared to 8.2 percent in the same period last
year. The poor growth performance
during the first two months of the current fiscal has been on account of a
decline in production of petroleum refinery products and crude petroleum, which
remained in the negative territory during this period.
During the first two months of the current
fiscal, except for an impressive performance of the coal sector which has
doubled its growth to 9.7 percent in April-May, 2005 from 5.1 percent last
year, all other sectors viz electricity, cement and finished steel have shown a
decline in growth.
During the month of May 2005 the index has
gone up by 5.6 percent which is lower than the growth record of 6.7 percent in
the same month last year. This growth
rate, however, is a sharp improvement over the average of 3 percent recorded in
January-March, 2005. Even in the month
of May, 2005 the performance of crude petroleum and petroleum-refined products
has been disturbing. The growth of
crude petroleum declined from 8.2 percent in May, 2004 to (-)1.9 percent in
May, 2005 while petro refined products registered a fall in growth from 13.8
percent to (-) 6.1 percent during the period.
The silver lining, however, is the
significant rise in growth all other sectors except finished steel. And the best bet of all is the electricity
sector which has registered a growth of 10.5 percent in May, 2005 as against a
meager 3.2 percent rise in the same month last year. This provides some comfort against the perception that power
shortage would, sooner or later, cripple growth. The coal sector has also recorded an upturn in growth from 2.9
percent to 11.2 percent in May. Cement,
too, grew from 1.4 percent to 3.1 percent during this period. However, finished steel evidenced a slower
growth of 5.1 percent as compared to 13.5 percent in the corresponding period
of the earlier year.
Against this backdrop of tepid growth of
the infrastructure sector, it has become imperative to take appropriate steps
to rev up this sector especially as this gives a preview of the performance of
the industrial sector of the economy.
India moved towards higher echelons of
export growth by notching a 19.81 percent rise in April-May 2005-06. Furthermore, during the month of May, 2005
the country’s exports touched $7.2 billion representing a growth of 22.28
percent over the $5.9 billion in the corresponding month of 2004.
Our exports have witnessed an upward
movement across the board in all major sectors in recent times. A break-up of the commodity composition of
trade for April 2005 (latest available) shows that five commodities, accounting
for close to 39 percent of the country’s aggregate exports have emerged in the
top notch growth bracket during the first month of the current fiscal. These are transport equipment (114.39%),
cotton ready made garments (20.74%), drugs, pharmaceuticals and fine chemicals
(15.45%) germs and jewellery (11.8%) and petroleum crude and products (9.17%).
At the same time, export of agriculture and allred products (7.72%) has
suffered a decline during this period.
Among our major export destinations South
Africa has recorded the highest growth of 146% followed by South Korea (76%),
France (72%), the UK (53%), Singapore (32%) and China (31%).
Nevertheless, imports grew at a faster
pace to log a growth of 40.91 percent during the first two months of the
current fiscal. At the same time,
imports in May outpaced exports by recording a whopping 35.46 percent rise in
the month under review.
At the sectoral level, oil imports have jumped
to $6.09 billion during April-May, 2005 recording a 35.84 percent growth over
$4.5 billion in the corresponding months of 2004. This reflects an upsurge in global oil prices, which have
exceeded $60 / barrel, rather than a pick-up in domestic consumption of
petroleum products.
Non-oil imports, too, have gone up by
40.91 percent over the level of imports in April-May, 2005. This relatively robust up trend in non-oil
imports highlights persisting demand in our manufacturing sector which is
edging towards the double digit level due to faster economic growth.
At sectoral break up of imports for April
2005, as per latest available reports, show that crude oil has almost topped
the list of imports during the month.
In fact, import of petroleum crude and products grew by 30.10% in April
2005 partly fuelled by a flare up in global crude prices. And among non-oil imports, it is found that
gold imports have evidenced resurgence in growth. As per recent data, gold imports logged a growth rate of 21.09%
which is in keeping with the trend of 2004-05 when such imports crossed $10
billion. Other high growth import items
during April 2005 include electronic goods (28.17%), machinery other than
electrical and electronic (93.33%) and bulk imports (35.66%).
The geographical distribution of imports
show that during April 2005, the highest growth was recorded by South Africa
(93%) followed by Germany (86%), Belgium (85%), Malaysia (83%), Hongkong and UK
(79% each) and Switzerland and Singapore (77% each).
Balance of Payments
As per recently released figures, the main
feature of the balance of payments for the fourth quarter of 2004-05, is the
record flow of invisible receipts which achieved an inter-year peak of $11.7
billion driven by remittances and business and professional services. This surplus, accrued on the invisible
account together with a restraint in trade deficit due to seasonal factors, has
halted the rising current account deficit achieved in the last two quarters and
enabled a modest current account surplus in the last quarter of 2004-05.
Nevertheless, data available for the
entire year draws attention to the widening trade deficit which reached a
historic high of $38.129 billion in 2004-05 as against a deficit of $15.454
billion in the previous fiscal. Not
surprisingly, the current account surplus in 2004-05 slipped into a modest
deficit of $6.432 billion after a three year span of continuous surpluses.
What is worrisome is that the spurt in
trade deficit is because of higher oil bill on account of a 40% rise in crude
prices-from $27.8 per barrel in 2003-04 to $38.9 per barrel in 2004-05. Capital inflows by way of invisible
receipts, have so far helped to contain the current account deficit to $77.5
billion from $52.98 billion a year ago.
However, given the volatile nature of these flows, a high current
account deficit would be a matter of concern.
The capital account has registered a
surplus of $32.176 billion during April-March 2004-05 driven by portfolio
investment and a sharp rise in ECBs, short term credits and other banking
capital. This has resulted in an
overall balance of payments surplus of $26.16 billion during fiscal 2004-05.
The country’s external debt rose to
US$123.3 billion at the end of March 2005 against $120.9 billion as on end
December 2004. The NRI deposits, multilateral debts, ECBs and trade credits
emerged as the key drivers in the growth of external debt.
Inflation
The wholesale price-index (WPI) based
inflation level has increased to 4.09 percent for the week ended 4th
July 2005 to touch a 22-month low. The
rate was 7.08% a year ago and 4.14% in the previous week. The softening is despite an almost 7% rise
in petrol and diesal prices in June.
The decline in the rate of inflation has been led by cheaper food products
which registered a decline of 16 percent.
The inflation rate based on the consumer
Price Index for Industrial workers (CPI-IW) has continued to remain at a
moderate level in the range of 2-3 percent in early 2004-05 before firming up
to reach 4.8 percent in September, 2004.
The point to point rate of inflation, based on the CPI-IW has
subsequently decreased to 3.7 percent in May, 2005.
Fiscal Situation
The fiscal situation of the country has
shown signs of deterioration during the first-two months of the current fiscal.
Latest figures show that the fiscal deficit, at Rs.47,603 crore during the
April-May 2005 registered an increase of 22 percent over Rs.38,982 crore
experienced last year. The higher
fiscal deficit during April-May 2005 was on account of lower total receipts
accounting for 3.3 percent against 6.7 percent during April-May, 2004. A further break up shows that our non-debt
capital receipts during April-May 2005 was only Rs.190 crore or 1.6 percent of
the total as against 43 percent during the same period last year. This is, as per reports, essentially on
account of drying up of inflows into the exchequer from debt swap scheme. The deficit constitutes 31.5% of the budget
estimate of Rs.1,51,144 crore for the entire 2005-06.
The revenue deficit also remains a major
cause for concern. At Rs.44,154 crore
during April-May 2005-06, it is 46.3 percent of Rs.95,312 crore estimated for
2005-06. The situation is marginally
better than the same period last year where the revenue deficit accounted for
48.8 percent of budget estimates.
The improvement in revenue deficit is the
result of better tax realization as the tax revenue during April-May 2005 was
Rs.8659 crore as compared to realization of Rs.4720 crore during the
corresponding period last year.
Stock Market Trends
The secondly equity markets have continued
to rally for yet another month in June, 2005 with BSE sensex touching an all
time high of 7194 points. This note
worthy performance has been on account of revival of investments by foreign
institutional investors who have turned into net buyers of equity during the
month. However, the resurgent
performance has been confined mainly to sensex and NIFTY companies and does not
cover the broader market which did not perform as well.
The primary market has continued to do
well. As a result, resources raised in
the domestic primary market peaked at Rs.14,609 crore in June, 2005. However, the flow of funds has been largely
attributed to higher private placements as the equity market has remained
subdued.
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