State of India's Economy - II

STATE OF INDIA’S ECONOMY-II

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In the second half of 2008-09 there was a significant slowdown in the growth rate, following the financial crisis that hit the world in 2007. The fiscal year 2009-10, thus, began on a difficult note. There was apprehension that the slow-down will continue to affect the economy thus making 2009-10 a difficult year.

However, 2009-10 turned out to be a year of reckoning for the policy makers, who took a calculated risk by providing substantial fiscal expansion to counter the negative fallout of the global slowdown.

The downside of the fiscal stimulus was that India’s fiscal deficit increased, reaching 6.8 per cent of GDP in 2009-10. A sub-normal monsoon added to the overall uncertainty.

Despite all odds the economy, at the end of the financial year, posted a remarkable recovery, not only in terms of overall growth figures but, more importantly, in terms of certain fundamentals, which justify optimism for the Indian economy in the medium to long term.

The real turnaround came in the second quarter of 2009-10 when the economy grew by 7.9 per cent. As per the advance estimates of GDP for 2009-10, released by the Central Statistical Organisation (CSO), the economy is expected to grow at 7.2 per cent in 2009-10, with the industrial and the service sectors growing at 8.2 and 8.7 per cent respectively.

This recovery is impressive for at least three reasons. First, it has come about despite a decline of 0.2 per cent in agricultural output, which was the consequence of sub-normal monsoons. Second, it fore-shadows renewed momentum in the manufacturing sector, which had seen continuous decline in the growth rate for almost eight quarters since 2007-08. Indeed, manufacturing growth has more than doubled from 3.2 per cent in 2008-09 to 8.9 per cent in 2009-10. Third, there has been a recovery in the growth rate of gross fixed capital formation, which had declined significantly in 2008-09 as per the revised National Accounts Statistics (NAS). While the growth rates of private and government final consumption expenditure have dipped in private consumption demand, there has been a pick-up in the growth of private investment demand.

There has also been a turnaround in merchandise export growth in November 2009, which has been sustained in December 2009, after a decline nearly twelve continuous months.

The broad- based nature of the recovery created scope for a gradual rollback, in due course, of some of the measures undertaken to overcome global slowdown effects on Indian economy, so as to put the economy back on to the growth path of 9 per cent per annum.

The emergence of high double-digit food inflation during the second half of the financial year 2009-10 was a major cause of concern. On a year-on-year basis, wholesale price index (WPI) headline inflation in December 2009 was 7.3 per cent, but for food items (primary and manufactured), with a combined weight of 25.4 per cent in the WPI basket, it was 19.8 per cent. A significant part of this inflation was due to supply-side bottle-necks in some of the essential commodities, precipitated by the delayed and sub-normal southwest monsoons.

Overall GDP growth

The CSO has effected a revision in the base year from 1999-2000 to 2004-05. It includes changes on account of certain refinements in definitions of some aggregates, widening of coverage, inclusion of long-term survey results and the normal revision in certain data in respect of 2008-09. While there are no major changes in the overall growth rate of GDP at constant 2004-05 prices, except for 2007-08 where it has been revised upward from 9.0 to 9.2 per cent, there are some changes in growth rates at sectoral level and in the level estimates of GDP.

The contribution of the agriculture sector to the GDP at factor cost in 2004-05 has declined from 17.4 per cent in the old series to 15.9 per cent in the new series. Similarly, while the contribution of registered manufacturing has declined from 10.9 per cent in the old series to 9.9 per cent in the new series, that of unregistered manufacturing has increased from 4.9 to 5.4 per cent.

There is also an increase in the contribution of real estate, ownership of dwellings and business services from 8.2 per cent to 8.9 per cent.

In the case of level estimates of GDP at current prices, the difference ranges from 3.1 per cent in 2004-05 to 6 per cent in 2008-09. As a result, there are also changes in the expenditure estimates of the GDP.

The advance estimate of GDP growth at 7.2 per cent for 2009-10, falls within the range of 7 +/- 0.75 projected nearly a year ago in the Economic Survey 2008-09. With the downside risk to growth due to the delayed and sub-normal monsoons having been contained to a large extent, through the likelihood of a better-than-average rabi agricultural season, the economy responded well to the policy measures undertaken in the wake of the global financial crisis. While the GDP at factor costs at constant 2004-05 prices, is placed at Rs 44,53,064 crore, the GDP at market prices, at constant prices, is estimated at Rs 47, 67,142 crore. The corresponding figures at current prices are Rs 57,91,268 crore and Rs 61, 64,178 crore, respectively.

The recovery in GDP growth for 2009-10 is broad based. Seven out of eight sectors/sub-sectors show a growth rate of 6.5 per cent or higher. The exception is agriculture and allied sectors where the growth rate is estimated to be minus 0.2 per cent over 2008-09. Sectors, including mining and quarrying, manufacturing; and electricity, gas and water supply have significantly improved their growth rates at over 8 per cent in comparison with 2008-09.

The construction sector and trade, hotels, transport and communication have also improved their growth rates over the preceding year, though to a lesser extent. However, the growth rate of community, social and personal services has declined significantly, though it continues to be around its pre-global crisis medium-term trend growth rate.

Financing, insurance, real estate and business services have retained their growth momentum at around 10 per cent in 2009-10.

In terms of sectoral shares, the share of agriculture and allied sectors in GDP at factor cost has declined gradually from 18.9 per cent in 2004-05 to 14.6 per cent in 2009-10. During the same period, the share of industry has remained the same at about 28 per cent, while that of services has gone up from 53.2 per cent in 2004-05 to 57.2 per cent in 2009-10.

Per capita growth

The growth rates in per capita income and consumption, which are gross measures of welfare in general, have declined since 2008. This is a reflection of the slowdown in the overall GDP growth. While the growth in per capita income, measured in terms of GDP at constant market prices, has declined from a high of 8.1 per cent in 2007-08 to 3.7 per cent in 2008-09 and then recovered to 5.3 per cent in 2009-10, per capita consumption growth as captured in the private final consumption expenditure (PFCE) shows a declining trend since 2007-08 with its growth rate in 2009-10 falling to one-third of that in 2007-08. The average growth in per capita consumption over the period 2005-06 to 2009-10 was slower at 6.08 per cent than that in per capita income at 6.52 per cent. These year to year differences in growth rates can be explained by the rising savings rate and also the rise in tax collections that have been observed in some of these years.

Aggregate demand and its composition

The change in the base year, from 1999-2000 to the new base of 2004-05, has brought about significant revision in the expenditure estimates of the GDP for 2008-09. While growth of the PFCE in 2008-09 was revised upward from 2.9 per cent to 6.8 per cent, growth in government final consumption expenditure was revised downwards from over 20 per cent in 2008-09 on the old base to 16.7 per cent on the new base. In 2009-10 a growth of 4.1 per cent is expected in private final expenditure and 8.2 per cent in government final expenditure.

There is a significant decline in the growth of consumption expenditure in 2009-10. However, the overall share of consumption expenditure, both private as well as government in GDP at market prices, at constant 2004-05 prices, has declined only marginally from 70.9 per cent in 2008-09 to 69.6 per cent in 2009-10.

At the same time, the growth rate of gross fixed capital formation in 2008-09 has also undergone a revision. It was revised downward from 8.2 per cent in the earlier base to 4 per cent in the revised base for 2008-09. It is, however, estimated to grow by 5.2 per cent in 2009-10.

With growth in private expenditure on food, beverages and tobacco falling behind the overall growth in private consumption expenditure, the share of expenditure on food items has gradually been declining over the years. As per the CSO data, it was 35.3 per cent in 2008-09 as against 39.6 per cent in 2004-05. At the same time, the growth in expenditure on transport and communication and miscellaneous goods and services has been increasing, though with occasional aberrations, with the result that together they account for nearly the same share in total private consumption as the expenditure on food items.

Agriculture

Total foodgrains production in 2008-09 was estimated at 233.88 million tonnes as against 230.78 million tonnes in 2007-08 and 217.28 million tonnes in 2006-07. In the agricultural season 2009-10, the impact of the delayed and sub-normal monsoon is reflected in the production and acreage data for kharif crops. As per the first advance estimates, covering only the kharif crop, production of foodgrains is estimated at 98.83 million tonnes in 2009-10, as against the fourth advance estimates of 117.70 million tonnes for the kharif crop in 2008-09 and a target of 125.15 million tonnes for 2009-10.

Overall production of kharif cereals in 2009-10 has shown a decline of 18.51 million tonnes over 2008-09. In terms of acreage, the kharif 2009-10 season saw a decline of nearly 6.5 per cent or 46.18 lakh ha in the area covered under foodgrains. Almost the entire decline in this acreage was confined to the kharif rice crop. Some of this decline in acreage may have been made up by the increased acreage in the rabi season.

Industry and Infrastructure

The cyclical slowdown in the industrial sector, which began in 2007-08 and got compounded by the global commodity price shock and the impact of the global slowdown during the course of 2008, was arrested at the beginning of 2009-10. After the first two months of 2009-10, there were clear signs of recovery. While the CSO’s advance estimates place industrial-sector growth at 8.2 per cent, as against 3.9 per cent in 2008-09, the IIP industrial growth is estimated at 7.7 per cent for the period April-November 2009-10, significantly up from 0.6 per cent during the second half of 2008-09. The manufacturing sector, in particular, has grown at the rate of 8.9 per cent in 2009-10.

Core industries and infrastructure services, led by the robust growth momentum of telecom services and spread across power, coal and other infrastructure like ports, civil aviation and roads, have also shown signs of recovery in 2009-10. In the current fiscal, electricity generation emerged from the lacklustre growth witnessed in the previous year and equalled its performance in 2007-08. That this was achieved despite constraints imposed by the inadequate availability of coal and the dismal hydel generation scenario due to the sub-normal monsoon, attests well to its potential.

The domestic supply of crude oil remained around 34 million metric tonnes (mmt) and natural gas at about 32 billion cubic metric tonnes during the past five years. With 15 new oil and gas discoveries during 2009-10, the domestic availability is expected to improve. During 2009-10, the projected production for crude oil is 36.7 mmt, which is about 11 per cent higher than the actual crude oil production of 33.5 mmt in 2008-09.

In 2009-10, as against the stipulated target of developing about a 3,165 km of national highways under various phases of the National Highway Development Project (NHDP), the achievement up to end November 2009 has been about 1,490 km. Similarly, as against the 2009-10 target of about 9,800 km for awarding projects under various phases of the NHDP, projects totalling a length of about 1,285 km have been awarded up to end November 2009.

The service sector which has been India’s workhorse for well over a decade has continued to grow rapidly. Following the NAS classification, it comprises the sub-sectors trade, hotels, transport and communications; financing, insurance, real estate and business services; and community, social and personal services. As against a growth of 9.8 per cent in 2008-09 it grew at 8.7 per cent in 2009-10.

Savings and investments

Gross domestic savings (GDS) at current prices in 2008-09 were estimated at Rs 18,11,585 crore, amounting to 32.5 per cent of GDP at market prices as against 36.4 per cent in the previous year. The fall in the rate of GDS has mainly been due to the fall in the rates of savings of the public sector (from 5.0 per cent in 2007-08 to 1.4 per cent in 2008-09) and private corporate sector (from 8.7 per cent in 2007-08 to 8.4 per cent in 2008-09).

In respect of the household sector, the rate of saving has remained at the same level of 22.6 per cent in 2007-08 and 2008-09. The rate of GDS on the new series increased from 32.2 per cent in 2004-05 to 36.4 per cent in 2007-08 before declining to 32.5 per cent in 2009-10, as against the old series where it rose from 31.7 per cent in 2004-05 to 37.7 per cent in 2007-08.

Gross domestic capital formation (GDCF) at current prices (adjusted for errors and omissions) increased from Rs18,65,899 crore in 2007-08 to Rs19,44,328 crore in 2008-09 and at constant (2004-05) prices, it decreased from Rs16,22,226 crore in 2007- 08 to Rs15,57,757 crore in 2008-09. The rate of gross capital formation at current prices rose from 32.7 per cent in 2004-05 to 37.7 per cent in 2007-08 before declining to 34.9 per cent in 2008-09.

The sectoral investment rate is a useful indicator of the direction of new investments. While the overall growth of investment in India was in the range of 15 to 16 per cent per annum during the last few years, it plunged to -2.4 per cent in 2008-09 as a result of the external shock-led slowdown. At sectoral level, there has been a welcome rebound in the growth rate of investment in the agricultural sector, which grew at 16.5 per cent and 26.0 per cent in 2007-08 and 2008-09 respectively. This is in contrast to the growth rate of 1.4 per cent recorded in 2006-07.

Prices and Inflation

The year-on-year WPI inflation rate was fairly volatile in 2009-10. It was 1.2 per cent in March 2009 and then declined continuously to become negative during June-August 2009, assisted in part by the large statistical base effect from the previous year. It turned positive in September 2009 and accelerated to 4.8 per cent in November 2009 and further to 7.3 per cent in December 2009. For March to December 2009 period WPI inflation was estimated at 8 per cent.

Year-on-year inflation in the composite food index (with a weight of 25.4 per cent) at 19.8 per cent in December 2009 was significantly higher than 8.6 per cent in previous year. In respect of food articles, inflation on year-on-year basis in December was 19.2 per cent and on fiscal-year basis (i.e. over March 2009) it was 18.3 per cent. At the same time, the composite non-food inflation within the manufactured group of the WPI (with a weight of 53.7 per cent) at 2.4 per cent in December 2009, was lower than the 6.7 per cent recorded in previous year.

A significant part of this inflation can be explained by supply-side bottlenecks in some of the essential commodities, precipitated by the delayed and sub-normal south-west monsoons as well as drought-like conditions in some parts of the country. The delayed and erratic monsoons may also have prevented the seasonal decline in prices, normally seen during the period from October to March for most food articles other than wheat, from setting in. At the same time, it could be argued that excessive hype about kharif crop failure, not taking into account the comfortable situation in respect of food stocks and the possibility of an improved rabi crop, may have exacerbated inflationary expectations encouraging hoarding and resulting in a higher inflation in food items. This is supported by the estimates on shortfall in production/availability of major food items in 2009-10 for rice and wheat, as also for some other items, except pulses. In the case of sugar, delay in the market release of imported raw sugar may have contributed to the overall uncertainty, thereby allowing prices to rise to unacceptably high levels in recent months.

The implicit deflator for GDP at market prices defined as the ratio of GDP at current prices to GDP at constant prices is the most comprehensive measure of inflation on annual basis, Unlike the WPI, the GDP deflator also covers prices in the services sector which now accounts for well over 55 per cent of the GDP. Overall inflation, as measured by the aggregate deflator for GDPMP, increased from 4.7 per cent in 2005-06 to 5.6 per cent in 2006-07 and then declined to 5.3 per cent in 2007-08, before rising again to 7.2 per cent in 2008-09. It has been estimated at 3.6 per cent in 2009-10 as per the advance estimates.

External-sector Developments

The global economy, led by the Asian economies especially China and India, has shown signs of recovery in fiscal 2009-10. While global trade is gradually picking up, the other indicators of economic activity such as capital flows, assets and commodity prices are more buoyant.

As per the latest data for fiscal 2009-10, exports and imports showed substantial decline during April-September (H1) of 2009-10 vis-à-vis the corresponding period in 2008-09. However, there has been improvement in the balance of payments (BoP) situation during H1 of 2009-10 over H1 of 2008-09, reflected in higher net capital inflows and lower trade deficit. The trade deficit was lower at US$ 58.2 billion during H1 (April-September) of 2009 as compared to US$ 64.4 billion in April-September 2008 mainly on account of decline in oil import.

The net invisibles surplus (invisibles receipts minus invisibles payments) stood lower at US$ 39.6 billion during April-September of 2009 as compared to US$ 48.5 billion during April-September 2008. The current account deficit increased to US $ 18.6 billion in April-September 2009, despite a lower trade deficit, as compared to US $ 15.8 billion in April-September 2008, mainly due to the lower net invisibles surplus.

Net capital flows to India at US $ 29.6 billion in April-September 2009 remained higher as compared to US $ 12.0 billion in April-September 2008. All the components, except loans and banking capital that comprise net capital flows, showed improvement during April-September 2009 from the level in the corresponding period of the previous year.

Net inward FDI into India remained buoyant at US$ 21.0 billion during April-September 2009 (US $ 20.7 billion in April-September 2008) reflecting better growth performance of the Indian economy. Due to large inward FDI, the net FDI (inward FDI minus outward FDI) was marginally higher at US$ 14.1 billion in April-September 2009, reflecting better growth performance of the Indian economy.

Portfolio investment mainly comprising foreign institutional investors’ (FIIs) investments and American depository receipts (ADRs)/global depository receipts (GDRs) witnessed large net inflows (US $ 17.9 billion) in April-September 2009 (net outflows of US $ 5.5 billion in April-September 2008) due to large purchases by FIIs in the Indian capital market reflecting revival in growth prospects of the economy and improvement in global investors’ sentiment.

Given the uncertain global context, the government did not fix an export target for 2009-10. Instead, the Foreign Trade Policy (FTP) 2009-14 set the objective of an annual export growth of 15 per cent with an export target of US$ 200 billion by March 2011. With the deepening of the global recession, the beginning of 2009-10 saw acceleration in the fall of export growth rate. The upwardly revised export figures for the first half of 2008-09 also contributed to the faster decline in the growth rate. While the export growth rate was a negative 22.3 per cent in April-November 2008-09, in November 2009, it became a positive 18.2 per cent after a 13-month period of negative growth. This significant turnaround is due to the low base figures in November 2008 (at $11.2 billion compared to $14.1 billion in October 2008 and $13.4 billion in December 2008). The export growth rate in November 2009 over October 2009 was marginally positive at 0.04 per cent. In December 2009 the recovery in export growth has continued with a positive year-on-year growth of 9.3 per cent and a growth of 10.7 per cent over the previous month.

During 2009-10 (April-December) import growth was a negative 23.6 per cent accompanied by a decline in both POL and non-POL imports of 29.8 per cent and 20.7 per cent respectively. Gold and silver imports registered negative growth of 7.3 per cent primarily on account of the volatility in gold prices. The continuous rise in prices of gold also dampened the demand. Non-POL non-bullion imports declined by 22.4 per cent reflecting slowdown in industrial activity and lower demand for exports. Import growth was at a positive 27.2 per cent in December 2009 due partly to the base effect and partly the 42.8 per cent increase in the growth of POL products with the pick-up in oil prices and industrial demand. Non-POL items also registered a significant growth in imports at 22.4 per cent, despite a high negative growth of gold and silver imports.

Trade deficit fell by 28.2 per cent to US$ 76.2 billion (as per customs data) in 2009-10 (April– December) from US$ 106 billion in the corresponding period of the previous year. There have been significant changes in the composition and direction of both exports and imports in this period.

During fiscal 2009-10, foreign exchange reserves increased by US$ 31.5 billion from US$ 252.0 billion in end March 2009 to US$ 283.5 billion in end December 2009. Out of the total accretion of US$ 31.5 billion, US$ 11.2 billion (35.6 per cent) was on BoP basis (i.e excluding valuation effect), because of higher inflows under FDI and portfolio investments, while accretion of US$ 20.3 billion (64.4 per cent) was on account of valuation gain due to weakness of the US dollar against major currencies.

Besides, the Reserve Bank of India (RBI) concluded the purchase of 200 metric tonnes of gold from the IMF, under the IMF’s limited gold sales programme at the cost of US$ 6.7 billion in the month of November 2009. Further, a general allocation of SDR 3,082 million (equivalent to US$ 4,821 million) and a special allocation of SDR 214.6 million (equivalent to US$ 340 million) were made to India by the IMF on August 28, 2009 and September 9, 2009, respectively.

Monetary Policy

Since the outbreak of the global financial crisis in September 2008, the RBI followed an accommodative monetary policy. In the course of 2009-10, this stance was principally geared towards supporting early recovery of the growth momentum, while facilitating the unprecedented borrowing requirement of the government to fund its fiscal deficit. The fact that the latter was managed well with nearly two-thirds of the borrowing being completed in the first half of the fiscal year not only helped in checking undue pressure on interest rates, but also created the space for the revival of private investment demand in the second half of the year.

The transmission of monetary policy measures continues to be sluggish and differential in its impact across various segments of the financial markets. The downward revisions in policy rates announced by the RBI post-September 2008 got transmitted into the money and G-Sec markets; however, the transmission was slow and lagged the in the case of the credit market. Though lending rates of all categories of banks (public, private and foreign) declined marginally from March 2009 (with benchmark prime lending rates [BPLR] of scheduled commercial banks [SCBs] having declined by 25 to 100 basis points), the decline was not sufficient to accelerate the demand for bank credit. Consequently, while borrowers turned to alternate sources of possibly cheaper finance to meet their funding needs, banks flush with liquidity parked their surplus funds under the reverse repo window.

Demand for bank credit/non-food credit remained muted during 2009-10. It was only from November 2009 that some signs of pick-up became evident. On financial-year basis (over end March), growth in non-food credit remained negative till June 2009. It picked up thereafter, only to hover between 0.0 to 1.8 per cent till mid-September 2009. Consistent growth in non-food credit was recorded only after November 2009.

Growth in sectoral deployment of gross bank credit on a year-on-year basis (as on November 20, 2010) shows that retail credit has not picked up during 2009-10. While growth in credit to agriculture remained more or less the same as on the corresponding date of the preceding year, for the other broad sectors–industry, personal loans and services—growth in credit decelerated as compared to the corresponding period of the preceding year.

Fiscal Policy Developments

The fiscal expansion undertaken by the Central government as a part of the policy response to counter the impact of the global economic slowdown in 2008-09 was continued in fiscal 2009-10. The expansion took the form of tax relief to boost demand and increased expenditure on public projects to create employment and public assets. The net result was an increase in fiscal deficit from 2.6 per cent in 2007-08 to 5.9 per cent of the revised GDP (new series) in 2008-09 (provisional) and 6.5 per cent in the budget estimates for 2009-10 (as against 6.8 per cent of the GDP on the old series, reported earlier). Thus the fiscal stimulus amounted to 3.3 per cent of the GDP in 2008-09 and 3.9 per cent in 2009-10 from the level of the fiscal deficit in 2007-08.

As part of the fiscal stimulus, the government also enhanced the borrowing limits of the State governments by relaxing the targets by 100 basis points. As a result, the gross fiscal deficit of the States combined rose from 1.4 per cent of the GDP in 2007-08 to 2.6 per cent in 2008-09 (revised estimates [RE]) and was estimated at 3.2 per cent of the GDP in 2009-10 (BE).

The relative success of the fiscal stimulus in supporting effective demand, particularly the consumption demand, in 2008-09 and 2009-10 could be traced to its composition. The approach of the government was to increase the disposable income in the hands of the people, for instance by effecting reductions in indirect taxes (excise and service tax) and by expanding public expenditure on programmes like the National Rural Employment Guarantee Act (NREGA) and on rural infrastructure.

The implementation of the Sixth Pay Commission recommendations and the debt relief to farmers also contributed to this end. The fact that the approach worked is attested to by the GDP growth rate and more specifically by the growth in private consumption demand in 2008-09 and also in 2009-10 as reflected in the relevant data on the NAS new series. Consumption expenditure, by its very nature, has short lags, and affects demand quickly, with little or no effect on productivity, while productive infrastructure expenditure takes much longer to translate into effective demand. The recovery having taken root now necessitates a review of public spending. It has to be geared towards building medium-term productivity of the economy and making up for the decline in investment growth in certain sectors of the economy.

Social-sector Development

Fiscal 2009-10 saw the strengthening of several public initiatives and programmes with a view to cushioning the impact of the global slowdown on the more vulnerable segments of the population in the country. While some of these programmes were a part of the ongoing interventions to give effect to a more inclusive development strategy, there were some measures that were undertaken as a direct response to the slowdown of growth, especially in the tradable sectors of the economy. Thus emphasis in favour of higher allocation to social-sector development given in recent years continued to be reflected in the allocations under the Union Budget 2009-10. The share of Central government expenditure on social services, including rural development in total expenditure (Plan and non-Plan), increased to 19.46 per cent in 2009-10 (BE) from about 10.46 per cent in 2003-04. Similarly, expenditure on social services by general government (Centre and States combined) as a proportion of total expenditure increased from 19.9 per cent in 2004-05 to 23.8 per cent in 2009-10 (BE).

A major concern was regarding the possibility of a rise in unemployment due to the slowdown of the economy. While comprehensive employment data for the current financial year are not available, some sample surveys conducted by the Labour Bureau, Ministry of Labour and Employment, government of India, indicated job losses in the wake of the global financial crisis, which seemed to reverse in later part of 2009-10. Employment is estimated to have declined by 4.91 lakh during the third quarter (October-December) of 2008; it increased by 2.76 lakh during January-March 2009, followed by a decline of 1.31 lakh during April-June 2009, and then an increase of 4.97 lakh during the second quarter (July-September) 2009.

Under the NREGA, which is a major rural employment initiative, during the year 2009-10, 4.34 crore households were provided employment till December 2009.

Road Ahead

There are some deep changes that have taken place in India, which suggest that the economy’s fundamentals are strong. First, the rates of savings and investment have reached levels that even ten years ago would have been dismissed as a pipedream for India. On this important dimension, India is now completely a part of the world’s fast growing economies.

In 2008-09 gross domestic savings as a percentage of GDP were 32.5 per cent and gross domestic capital formation 34.9 per cent. These figures, which are a little lower than what had been achieved before the fiscal stimulus was put into place, fall comfortably within the range of figures one traditionally associated with the East Asian economies. Since these indicators are some of the strongest correlates of growth and do not fluctuate wildly, they speak very well for India’s medium-term growth prospects. It also has to be kept in mind that as the demographic dividend begins to pay off in India, with the working age-group population rising disproportionately over the next two decades, the savings rate is likely to rise further.

Second, the arrival of India’s corporations in the global market place, and informal indicators of the sophisticated corporate culture that many of these companies exhibit, lends to the optimistic prognosis for the economy in the medium to long run.

In the medium term it is reasonable to expect that the economy will go back to the robust growth path of around 9 per cent that it was on before the global crisis slowed it down in 2008. To begin with, there has been a revival in investment and private consumption demand, though the recovery is yet to attain the pre-2008 momentum. Second, Indian exports have recorded impressive growth in November and December 2009 and early indications of the January 2010 data on exports are also encouraging. Further, infrastructure services, including railway transport, power, telecommunications and, more recently but to a lesser extent, civil aviation, have shown a remarkable turnaround since the second quarter of 2009-10. The favourable capital market conditions with improvement in capital flows and business sentiments, as per the RBI’s business expectations survey, are also encouraging. Finally, the manufacturing sector has been showing a buoyancy in recent months that was rarely seen before. The growth rate of the index of industrial production for December 2009 was a remarkable 16.8 per cent. There is also a substantial pick-up in corporate earnings and profit margins.

Hence, going by simple calculations based on the above-mentioned variables, coupled with the fact that agriculture did have a set-back in 2009 and is only gradually getting back to the projected path, a reasonable forecast for the year 2010-11 is that the economy will improve its GDP growth by around 1 percentage point from that witnessed in 2009-10. Thus, allowing for factors beyond the reach of domestic policy-makers, such as the performance of the monsoon and rate of recovery of the global economy, the Indian GDP can be expected to grow around 8.5, with a full recovery breaching the 9 per cent mark in 2011-12.