17th AUGUST 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
With the
economy continuing to do well during the first quarter of fiscal 2005-06 and
the bountiful rains of July imparting optimism to the growth prospects this
year, the overall mood about the economy has turned bullish and business
confidence is at a new high. Such an
upbeat sentiment is also reflected by the Reserve Bank of India which, in its
first quarterly review, has estimated a real GDP growth of 6.9 percent for the
year 2005-06 on the back of positive developments in agriculture, industry and
the services sector.
South
West Monsoon and Agriculture
The cumulative
rainfall recorded during June 1 to July 13, 2005 has been one percent above
normal as against 10 percent below normal a year ago. Furthermore monsoon rains during the period June 1, 2005 to July
20, 2005 have been normal / excess is 81 per cent of meteorological
sub-divisions which is a marked improvement over the previous year. The good monsoon rains have buoyed up hopes
of an impressive agriculture performance and the country looks forward to a
record kharif food grain production this year. Already a positive outlook regarding the monsoon, has led to a
fall in future prices of agriculture commodities like pulses, jeera, soyabean
and soya oil. Nevertheless, the spread
of monsoon has so far been uneven across the country as a result of which
prices of some agricultural commodities have shown a tendency to firm up.
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 10.3 percent
during April-June, 2005-06 over and above a cumulative increase of 7.7 percent
registered over the corresponding period of the preceding year. This makes the growth rate achieved in the
first quarter of the current fiscal at par with the rate achieved a decade
ago. 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 16 of the
17 two digit industry groups have shown positive growth during June 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 37.6 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 20.2% growth in basic
chemicals and chemical products (except products of petroleum and coal) and
19.2% in Beverages, Tobacco and related products.
On the other hand, metal products and
parts except machinery and equipment has shown a negative growth of 0.4%.
Within
industry, the manufacturing sector has recorded a ‘shining’ performance. The manufacturing index rose by 11.2 percent
during the first quarter 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. What is more, the
current expansion has not been a companied by sharp increases in the prices of
manufactured goods like those evidenced in the mid-nineties. The non-inflationary nature of this
expansion has allowed the RBI to maintain the benign interest rate scenario
that has led to competitiveness in industry.
The electricity sector has also
outperformed last year’s production growth. The sector recorded a growth of 7.6
percent during the first quarter of the current fiscal as against 5.9 percent
in the same period last year. However, the sub sector of mining has not been
able to keep pace and has showed some slackening of growth during the
three-month period. The mining growth
slowed down to 4.5 percent in April-June 2005-06 against 5.7 percent in the
first quarter of 2004-05.
The commendable industrial performance has
also been confirmed while analyzing the performance of industry on a monthly
basis. The month of June has witnessed
a sharp up trend in industrial performance recording a double-digit growth of
11.7 percent against 7.5 percent achieved in the same month in the previous
year. This is the second consecutive
month when IIP has recorded a double-digit growth in the current fiscal. 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 12.5 percent during the month compared to 8.3
percent in June 2004. What is most
remarkable is the striking performance of the electricity sector, which has
sprung a surprise by vaulting up a growth rate of 9.4 percent as compared to
4.5 percent in the same month last year.
As per use based classification, the
growth index of capital goods declined somewhat to 10.8 percent in June 2005
against the corresponding year on year growth rates of 17.6 percent for June
2004. This may be a one off occurrence
and is not essentially a cause for concern.
The figures of June 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 23.7 percent with consumer
durables showing a healthy growth of 13.3 percent during June 2005 while
non-durables surged to 27.5 percent in June 2005 indicating 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 8.5 percent growth in June 2005 over 2.8 percent in June
2004 while intermediates continued to show a decelerating performance by
posting 3.2 percent growth as against 7.7 percent achieved during June
2004.
The first quarter results of corporate
sector also conform to the overall macro economic performance of industry at
the aggregate level as shown in the recent survey conducted by the Economic
Times. Though the first quarter growth
of the corporate sector (770 companies)-15% plus top line growth and 17.3% jump
in bottom line growth- is much below the 23% and 25.4% growth in sale and net
profits respectively in April-June 2004, but on a stand alone basis, these
numbers portray a robust performance of the India Inc. at the firm level.
The signs of a step up in industrial
activity during April-June 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.11, 834 crore for the
fortnight ended July 8, 2005 to touch Rs.11, 73,221 crore. Non-food credit, for the fortnight ended 8th
July, 2005 increased by Rs.11821 crore to touch Rs.11,28,404 crore.
M3, the conventional measure of money
supply, has increased by 14.0 percent as on 8th July, 2005 as
compared to 13.9 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 performance
of infrastructure industry, which is a critical determinant of the pace of
economy growth in the country, has started to show signs of recovery after an
overall subdued performance since December 2004 which continued in the first
month of this fiscal. This has
rekindled hopes of sustainability of our resurgent industrial performance in
the near future.
What is most
noteworthy is the robust performance of this sector during the month of June
2005. The growth in the sector
leapfrogged to register an impressive 10.2 percent in June 2005 as against 2.4
percent in the same period last month.
This surge in growth could be attributed to a strong performance of
steel, cement and electricity sectors which, coupled with the low base effect
has sharply pushed up the Index.
Indeed, at a
disaggregated level the production of finished steel notched up a growth rate
of 21.9% as compared to a decline of 1.8 percent in the corresponding month
last year. This is mainly on account of
a strong global demand, propelled by China and a significant pick-up in
domestic demand that comes mainly from automobiles, consumer durables and
engineering, apart from infrastructure.
Experts are of the opinion that the outlook for this sector is positive
in the medium term and there is visible capacity expansion in this sector.
The cement
industry has evidenced a turnaround in performance with its growth rate rising
to 13.3% in June 2005 as compared to –3.9% in the same month last year. The sector’s output has been growing on the
strength of infrastructure projects and robust demand from the construction
sector.
The crowning
glory, however, goes to the continuing good performance of the electricity
sector which has registered a growth of 9.3% in June 2005 as against a modest
4.6% in rise the same month last year.
This provides some comfort against the perception that power shortage
would, sooner or later, cripple growth.
The improved
performance of the above three sectors has been able to offset the showdown in
crude oil, refining and coal sectors. The coal sector, which had shown a sharp
recovery in May 2005 at 11.2 per cent, has shown a deceleration in growth to
3.2% in June 2005. Though the growth of
this sector for the first quarter stood at 7.5% against 5.6% in the first
quarter of last year, the concerns remain.
The coal shortage could hamper production not only in the power sector
but also in cement and steel as well.
The problems of this sector hence need to be urgently addressed and
policy amendments suitably initiated to ensure sustained growth in this sector.
Despite the
above, the index of infrastructure industries for the first quarter of the
current fiscal, at 5.5%, is much below the 8.1 percent recorded in the
comparable period last year. The
lackluster performance, during April-June 2005 has been an account of a decline
in refinery products and crude petroleum which remained in the negative
territory during this period.
During the
first quarter of the current year, except for the impressive performance of
coal, electricity and cement industries, which showed impressive growth rates,
all other sectors have witnessed a decline in growth.
Against this
backdrop of a tepid core sector performance at the aggregate level, it has
become imperative to take appropriate steps to strengthen this sector especially
as this gives a preview of the performance of the industrial sector of the
economy.
External
Trade
The momentum of
high growth recorded during the first two months of the current fiscal continued
into the third month as well with the country’s exports clocking a robust
19.04% rise at $7.11 billion in June 2005 as against $5.97 billion during June
2004. Similarly, the first quarter
export growth touched $20.9 billion representing a growth of 19.54% over the
$17.4 billion made in the same period in the previous year.
The export boom
has been wide spread with traditional items such as textiles, gems and
jewellery, chemicals and related products and petroleum products doing
exceedingly well in the export market.
Our robust export performance is also a reflection of the booming trade
sector.
On the other
hand, imports grew at a faster pace to register a spectacular 29.98% during
June 2005. At the same time import
outpaced exports by recording a whopping 38.02% rise during April-June, 2005.
A sectoral
break-up shows that the imports made by the oil sector were valued at $9.59
billion, which is 33.16 percent higher than $7.20 billion worth of imports
during the first quarter of last year. This
reflects a surge in global oil prices, which have touched an all time high of
$67 per barrel, rather than any pronounced pick-up in domestic
consumption.
Similarly,
non-oil imports were valued at $22.7 billion which is 40.18% higher than $16.24
billion in April-June 2004.
A substantial
growth in non-oil imports is also a sign of heightened demand for imported
items particularly machinery and export production which would get reflected in
the growth of the manufacturing sector.
The excess of
imports over exports has yielded a trade deficit of $11.4 billion in the first
quarter of the current fiscal as compared to $5.9 billion in the same period
last year which is over 6% of GDP. All
this shows that the economy is growing at a fast pace and using up foreign
exchange reserves to drive that growth in the April – June 2004-05.
Fiscal
Situation
Aided by the
sharp growth in industrial production and an upbeat performance of the external
sector, revenue receipts during April-June 2005 have registered a healthy
growth at Rs.38, 003 crore accounting for 10.8% of budget estimates which is
marginally higher than the previous year.
What is more, the impressive customs duty and corporate tax collections
in the first quarter resulted in the net tax revenue of Rs.31, 668 crore which
is 12 percent of Budget estimates, against 10 percent during April-June
2004-05.
However,
despite buoyancy in tax revenues, the fiscal situation of the country has shown
sign of detioriation during the first quarter of the current fiscal. The fiscal deficit for the first quarter
ended June 30, 2005 surged 30.79% to
touch 54,517 crore against 41,683 crore recorded in the same period last year. The deficit for April-June 2005 constitutes
36.1% of the fiscal deficit of Rs.1, 51,144 crore estimated for the full
2005-06. The higher fiscal deficit
during April-June 2005 has been on account of low non-debt capital realization
due to drying up of debt-swap scheme of the union government.
However, the
revenue deficit has shown some signs of improvement. The revenue deficit of the center in the first quarter of the
current fiscal stood at 47,311 crore representing 49.63 percent of the
estimated revenue deficit of Rs.95, 312 crore for the year 2005-06 which was
lower than the revenue deficit in April-June last year which accounted for
60.9% of the budget estimates.
The improvement
in revenue deficit is the result of better tax realization coupled with a check
on both Plan and non Plan expenditure.
The wholesale price-index (WPI) based
inflation level has grown to 3.84 percent for the week ended 30th
July 2005 to touch a 23 month low amidst concerns that domestic petroleum
prices could be raised soon and the government ruling out easing of customs
duty on imported crude. The inflation
rate was at a record high of 8.02% a year ago which is also responsible for
making the current price rise seem very nominal. Besides, the decline in the rate of inflation has been led by
cheaper food product, rubber, chemicals and basic metals as also manufactured
products.
The inflation rate based on Consumer Price
Index for Industrial Workers (CPI-IW) has subsequently decreased to 3.3 percent
in June 2005.
The secondary equity markets have continued
to rally for yet another month in July 2005 with BSE sensex touching an all
time high of 7800 on July 25. This
noteworthy performance has been on account of heightened activity of Foreign
Institutional Investors who have turned into net Buyers of equity with net
investment of Rs.1040.60 crores on July 25.
The resurgent performance has been not confined to BSE and nifty
Companies alone as even small and mid cap companies join this rally.
During calendar year 2004, FII’s
investment in India was a whopping $8.5 million. So far, in the first seven months of the current year, FIIs have
invested over $7.3 billion indicating that total investment for the full year
would be a record breaker.
The primary market has continued to do
well. As a result, in the current
fiscal till July 2005, resources raised from the primary market stood at Rs.23,
323 crore which was 39% higher than Rs.16, 773 crore raised in the
corresponding period of 2004. This is
largely due to higher floatations through private placements in the current
fiscal.
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