21ST SEPTEMBER 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
As
the last month of the first half of the current fiscal draws to a close there
is an emerging consensus that the Indian economy, which had been treading the
high growth path during the first quarter of the current fiscal, has begun to
show faint signs of fatigue. What has
emerged is that while the economy is still in the high growth orbit, there are
crucial weaknesses, which if allowed to continue, could cause a set back to
growth and restrain our march towards progress.
The rainfall till end August 2005 has been
6 percent below the long period average (LPA).
This is considered to be an improvement as compared with the
corresponding period of 2004 when the rainfall was 10 percent below LPA. Of the thirteen weeks of the monsoon season
till 3rd August, rainfall was poor in eight weeks and good in five
weeks. The rainfall was deficient by
20% and more only in five sub-divisions which include West Uttar Pradesh,
Nagaland, Manipur, Mizoram & Tripura, Jharkhand, West Rajasthan and Coastal
Andhra Pradesh while rain dependent states such as Andhra Pradesh, Karnataka,
Maharashtra, Madhya Pradesh and Tamil Nadu have recorded good rains.
As a result of bountiful rains,
agriculture growth is expected to be significantly better in 2005-06 as
compared to last year. The favourable
monsoon conditions have raised hopes that Khariff production would be
normal. As a result, the prospects of
realizing 2.2 percent growth in agriculture production in 2005-06, as projected
by CMIE, have considerably brightened.
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 9.3 percent
during April-July, 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 four months of the current fiscal at par with the rate achieved a decade
ago. The vibrant industrial performance
indicates that the underlying conditions of the economy are buoyant, leading to
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 13 of the
17 two digit industry groups have shown positive growth during July 2005
compared to the corresponding period last year.
A
further break up shows that the Beverages, tobacco and related products have
shown the highest growth of 26.7 percent followed by 24.0 percent in other
manufacturing industries. The textile
sector (including wearing apparel) has also evidenced a growth of 21.4 percent
which suggests that the end of the quota regime has not been particularly
detrimental for Indian producers.
On the other hand, metal products and
parts except machinery and equipment has shown a negative growth of 19.2
percent followed by a decline of 5.0% in wood and wood products, furniture and
fixtures and 3.0% fall in wool, silk and man-made fibre textiles.
Within
industry, the manufacturing sector has recorded a ‘shining’ performance. The manufacturing index rose by 10.4 percent
during the first four months of the fiscal year 2005-06 against 8.2 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. 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, however,
evidenced a decline as compared to last year’s production growth. The sector
recorded a growth of 5.3 percent during the first four months of the current
fiscal as against 7.9 percent in the same period last year. The sub sector of mining has also not been
able to keep pace and has showed some slackening of growth during the
four-month period. The mining growth
slowed down to 3.1 percent in April-July 2005-06 against 5.3 percent in the first
four months of 2004-05.
Doubtless, the industrial performance at
the cumulative level for the first four months of 2005-06 has been
commendable. However, it is
disconcerting to note that the month of July has witnessed a significant deceleration
in industrial performance recording a lower growth of 6.7 percent against 8.5
percent achieved in the same month in the previous year. The lower growth in July 2005 was
essentially on account of the decline in the mining and electricity
sectors. Indeed, the output growth in
mining and electricity sectors have, for the first time in this fiscal,
recorded a negative growth of (-) 0.4% and (-) 1.2% respectively in the month
of July 2005 as against 4.2% and 13.7% in the same month last year.
The manufacturing sector, however,
continues to exhibit a shining performance during the month, by recording an
8.3% growth in July 2005 which is marginally lower than 8.4 percent registered
in the same month last year.
As per use based classification, the
growth index of capital goods declined somewhat to 13.9 percent in July 2005
against the corresponding year on year growth rates of 15.0 percent for July
2004. This may be a one off occurrence
and is not essentially a cause for concern.
The consumer goods industry, too, have
evidenced a subdued overall growth rate of 11.0 percent with consumer durables
showing a growth of 5.2 percent during July 2005 while non-durables rose to
13.1 percent in the same month.
The performance of basic goods has also
been lackluster with 3.9 percent growth in July 2005 over 5.7 percent in July
2004 while intermediates continued to show a decelerating performance by
posting 2.9 percent growth as against 6.2 percent achieved during June 2004.
Despite the above, experts contend that
the uninspiring performance of
industry is only a temporary phase as the index has captured the impact of
Mumbai floods on industrial production and is not indicative of a slowdown in
industrial activity in general. Hence,
a reversal of trend could be expected in the coming months particularly in the
manufacturing and electricity sectors.
However, the spiraling oil prices are likely to bring some decline in
industrial production.
M3, the conventional measure of money
supply, has decreased to 14.1 percent in July, 2005 as compared to 15.4 percent
in the same period in the previous year.
And in August 2005 non-food credit expanded by Rs.1, 10,313 crore as
against Rs. 58, 890 crore increase recorded in the corresponding period of
2004-05 indicating that liquidity has been in abundance during August 2005.
Against this backdrop it would be
reasonable to deduce that for our industrial growth to be sustained over time,
it is crucial to rev up the performance of our ‘core’ sector.
The
infrastructure sector, which is known to critically impact the economy, has
been showing a vacillating performance over the recent months with sharp
fluctuations in growth which could restrain the economy from realizing its full
potential and halt its progress towards joining the league of developed
countries in the near future.
During fiscal April-July, 2005 the index
has gone up by a meager 4.2% against 8.9% during the corresponding period last
fiscal. The poor growth performance
during the first four months of this fiscal has been on account of a decline in
the production of crude petroleum and petroleum refinery products-which has
remained in the negative territory during this period-and a slowdown in the
production of coal, electricity and finished steel. Interestingly, the output of cement has evidenced a sharp rise of
10% during this period against a 4.4% growth witnessed in April-July, 2005 last
year.
The Index of infrastructure industries has
also been marked by a sharp deterioration in performance during the month of
July 2005. The sector grew at 0.5% in
July 2005 as against 11.1. % in the corresponding month last fiscal and against
a robust growth of 10.4% in June this year.
The core sector, in July, has registered the second lowest growth rate
in over a year after recording a negative growth of 0.6 percent in February
this year.
The slowdown in the infrastructure sector
has been manifest in all the six core industries including petroleum refining
with sectors such as crude petroleum, coal and power generation experiencing
negative growth during the month under reference.
The drop in the performance has been
partly attributed to the high base effect as the 0.5% growth in July 2005 has
followed a high 11.1% growth in July last year. Similarly, the growth of 10.4% in June 2005 was on top of a low
2.4% growth in June last year.
A sectoral break-up shows that during the
month of July 2005 the performance of crude petroleum products has been
disturbing. The crude oil sector has
witnessed a fall of 4 percent in its production level during the month-from
2864 thousand tones in July 2004 to 2750 thousand tones in July 2005 - compared
to 0.2% growth in July last fiscal.
Experts are of the opinion that this fall in crude production, which has
been prevalent for the last few months, is expected to continue till at least
early next year. The slowdown is also
likely to accentuate further in view of the recent fire at Bombay High. The full impact would be felt in month of
August which may witness lower production and growth as compared to July this
year.
Similarly, coal output has also decreased
to 1.7% from 28.6 mt. in July 2004 to 28.1 mt in July 2005 and this could have
an impact on the power sector which has
reported a fall in production from 50.3 billion units (BU) in July 2004 to 49.6
BU in July 2005. In fact, expectations
are that the coal sector would continue to achieve sub-optimal production
levels due to the slow pace of progress towards opening up of captive mining to
the private sector. This shortage would
also have an adverse effect on electricity generation.
At the same time, growth in finished steel
production showed a meager growth of 3.7 % in July while cement production grew
at 2.3% during the month.
Against this backdrop of lackluster
performance of infrastructure, it has become imperative to take steps to
bolster this sector in order to move up on the trajectory of growth.
The underlying pace of merchandise exports
growth in US dollar terms has remained firm in the current fiscal though there
has been a substantial loss of momentum in relation to the previous year. This is borne out by the fact that the
country’s exports during April-July 2005 registered a growth of 21.33 percent,
which though impressive, significantly trails behind the 31 percent growth
achieved during the same period in the previous year. Similarly the month of July experienced a vibrant 26.8 percent
rise which is also marginally lower than the 28 percent growth evidenced during
the same month last year.
Despite the above, the export boom
continues to persist and there is an increase in the number of sectors that
have done well during the current year.
This gives enough indication that external demand remains a strong
factor in the excellent showing of the economy. And our outlook for exports looks even more bright considering
the recent firming up of growth in the three largest economies – US, Japan and
Germany.
The marginal drop in export growth over
the previous year could, however, be attributed to the high oil prices,
depreciation of the US dollar and revaluation of the yuan.
The commodity composition of exports shows
that the sectors that have performed well in July include iron ore, petroleum
products, plastics and linoleum, rice, readymade garments, basic chemicals,
engineering goods and gems and jewellery.
Apart from merchandise exports, exports of
services, too, have been making rapid strides in the international markets and
have grown almost three folds in the last three years. As a result, services exports, presently
account for 64% of merchandise exports and around 40% of total exports. This boom in service exports has
fundamentally changed the nature of India’s balance of payments with India’s
current account showing a marginal deficit or surplus even with burgeoning
trade deficit.
On the other hand, imports have registered
a growth of 36.36% during April-July 2005.
During the month of July, 2005 import grew by 33.21 percent-over the
same month in the previous year.
A sectoral break up shows that oil imports
recorded a growth of 32.33% during April-July 2005-06 as compared to the same
period last year. This is on account
of a surge in oil prices which have touched an all time high of $70 per barrel.
Non-oil imports, at $29.5 billion, during
the first four months of the current year, have registered a growth of
38.14%. A high growth of non-oil
imports reflects a revival of domestic investment based on higher aggregate
demand particularly capital goods, raw materials, intermediaries and export
production.
The excess of imports over exports has
caused the trade deficit to almost double to $13.97 billion during April-July,
2005 as compared to a deficit of $7.6 billion in April-July last year. This shows that the economy is growing at a
fast pace and consuming foreign exchange in its quest to move towards a higher
orbit of growth. What is more, the
growth in trade deficit has not so far led to the flashing of danger signals
because our earnings from services have more than made up for the trade gap and
our strong export performance is making a significant difference to our growth.
The fiscal situation of the country,
during the first four months of the current fiscal, continues to remain
worrisome. This is borne out from the
fact that our fiscal deficit has climbed by 53.7 percent over last year, from
Rs.50, 398 crore to Rs.77, 480 crore during this period. The fiscal deficit during, April-July 2005,
has accounted for 51.3% of budget estimates as compared to 36.7% of budget
estimate during April-July 2004. What
is more, the deficit has presently grown to 2.2 % of GDP. The higher fiscal deficit could be
attributed to a decline in total receipts of the center and a rise in center’s
spending.
A break up shows that the non-debt capital
receipts of the center during April-July, 2005 has declined by almost 20%,
essentially on account of drying up of inflows from the Debt Swap Scheme.
Similarly Plan expenditure, which
essentially comprises investible funds of the government, has risen by 26.2 %
in the first four months of the fiscal as compared to 20.8 percent in the
corresponding period of last year. At
the same time, the Non-Plan expenditure, which represents the money spent for
interest payments on debt, defence, subsidies and salaries, has risen by a
marginal 5.8% over last year. As a
result, total expenditure of the center has risen by 10.36% compared to 2004-05
- from Rs.1, 23, 296 crore to Rs.1, 36,073 crore in 2005-06.
The burgeoning fiscal deficit is a cause
for concern as it means that we as a nation are living beyond our means. Hence, there is an impelling need to rein in
our fiscal deficit and bring our finances back in shape.
The revenue deficit is, however, a
relatively comfortable zone as there has been a 26 percent rise in tax revenue
during the first quarter of this fiscal.
The revenue deficit has shown a 19% rise from Rs. 58076 crore in
April-July 2004 to Rs. 68,929 crore in April-July 2005. Non-tax revenue is also
marginally above the level recorded in April-July last year. Nevertheless, the revenue deficit is still
high when viewed against the backdrop of the budget estimate (BE) of Rs. 95,312
crore for this fiscal which shows that 72.3% of BE has already been
covered. The revenue deficit comprises
around 2% of GDP.
The
surge in the sensex has continued for another month. On 8th
September, the sensex reached a
new milestone in Indian history when it
breached the 8000 level from the 7000
mark within the span of 55 days. This
rally in sensex has been fuelled mainly by FIIs who have pumped in roughly Rs.18000 crore in the market in last
three months. The total number of FIIs
registered with SEBI has now increased to 772.
Mid
capital stock also join this rally as the CNX mid capital benchmark index has
reached 700 plus points.
The primary market has reached the capitalization Rs.
3.6244 crore in August, 2005. Of this
Rs. 2680 crore (74.1 of the total) was
raised through the private placement route.
During the month, five public issues entered the market to mobilize
Rs.560 crore. The largest public issue,
of HT Media Ltd, was worth Rs. 245 crore.
Latest
Trends in Inflation
The
annual wholesale price index based inflation rose to 3.16% during the week
ended September 3, up from the 3.01% experienced in the previous week.
The increase in WPI doesn’t reflect the recent increase in price of
Petroleum products. The spurt in the
year on year inflation was largely due to a rise in energy and food prices.
The
inflation rate based on the Consumer Price Index for Industrial workers rose to
4.1 % in July, 05 from 3.2% in July, 2004