State of India's Economy

STATE OF INDIA'S ECONOMY

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Economic growth decelerated in 2008-09 to 6.7 per cent. This represented a decline of 2.1 per cent from the average growth rate of 8.8 per cent in the previous five years (2003-04 to 2007-08). The five years of high growth had raised the expectations of the people. Few, however, remember that during the preceding five-year period from 1998-99 to 2002-03 average growth was only 5.4 per cent, while the highest growth rate achieved during the period was 6.7 per cent (in 1998-99). Per capita GDP growth, a proxy for per capita income, which broadly reflects the improvement in the income of the average person, grew by an estimated 4.6 per cent in 2008-09. Though this represents a substantial slowdown from the average growth of 7.3 per cent per annum during the previous five years, it is still significantly higher than the average 3.3 per cent per annum income growth during 1998-99 to 2002-03.

Despite the slowdown in growth, investment remained relatively buoyant, growing at a rate higher than that of GDP. The ratio of fixed investment to GDP consequently increased to 32.2 per cent of GDP in 2008-09 from 31.6 per cent in 2007-08. This reflects the resilience of Indian enterprise, in the face of a massive increase in global uncertainty and risk aversion and freezing of highly developed financial markets. A decline in all major elements of private demand, including exports and consumption, necessitated a compensating widening of the fiscal deficit above the Fiscal Responsibility and Budget Management Act (FRBMA) target. The new, higher expenditures announced during the 2008-09 Budget, which would have been offset by greater revenue mobilization, had to be supplemented by an additional fiscal expansion. This got reflected in an increase of 20.2 per cent in government final consumption expenditure during 2008-09. The effect of this and subsequent fiscal stimuli (e.g. excise and service tax reduction) on private demand would be expected to appear gradually with a lag. Needless to say it is an imperative to return to the FRBM targets for the fiscal deficit at the earliest, possibly by 2010-11.

A noteworthy development during the year was a sharp rise in Wholesale Price Index (WPI) inflation, followed by an equally sharp fall, with the WPI inflation falling to unprecedented level of close to zero per cent by March 2009. This was driven largely by the rapid rise and equally rapid fall in global commodity prices during January 2008 to March 2009. Global food prices also went through a similar cycle, but have not declined to the same extent. Though domestic food prices are partially de-linked from global prices, these global developments affected domestic prices to some extent. Domestic food price inflation, as measured by the WPI food sub-index, though declining, remains much higher than overall inflation.

The global financial meltdown and consequent economic recession in developed economies were major factors in India’s economic slowdown. Given the origin and dimension of the crisis in the advanced countries, which some have called the worst since the Great Depression, every developing country suffered to a varying degree. No country, including India, remained immune to the global economic shock.

The Economic Survey says that India’s economic growth may accelerate to about 7 per cent in 2009-10 provided there is a normal monsoon and the government undertakes sweeping reforms like abolition of fuel subsidies and expansion of infrastructure. The speed at which the country’s economy would return to a high growth trajectory in the short term would also depend on a revival of the global economy, particularly the US economy, the survey added.

The Survey also said that inflation was no longer a worry and called for an urgent return to the targeted fiscal deficit of 3%. The deficit grew to 6.2% in 2008-09 as the government unleashed stimulus spending to insulate the economy against the global meltdown.

The survey also called for offloading equity in public sector undertakings, reform of fertilizer and food subsidies and auction of third-generation cellular phone spectrum.

The survey also added that the government should take advantage of the recent low price in oil costs to deregulate petrol and diesel prices. It also urged for improving the investment climate, including hiking the foreign investment cap in insurance to 49% from 26%. FDI in multi-brand retail should be allowed, starting with food retailing, and price controls on sugar and fertilizers should be removed, the survey recommended.

Per capita income and consumption

The per capita income in 2008-09, measured in terms of gross domestic product at constant 1999-2000 market prices, was Rs. 31,278. In 2007-08 this stood at Rs. 29,901. Per capita consumption in 2008-09 was Rs. 17,344 as against a level of Rs. 17,097 in 2007-08. While there has been an increase in levels of per capita income and consumption, there has been a perceptible slowdown in their growth rate. The growth in per capita GDP decelerated from 8.1 per cent in 2006- 07 to 4.6 per cent in 2008-09, while the per capita consumption growth declined from 6.9 per cent in 2007-08 to 1.4 per cent in 2008-09.

Overall GDP growth

The overall growth of GDP at factor cost at constant prices in 2008-09, as per revised estimates released by the Central Statistical Organisation (CSO) (May 29, 2009) was 6.7 per cent. This is lower than the 7 per cent projection in the Mid-Year Review 2008-09 (Economic Division, Department of Economic Affairs (DEA), December 2008) and the advance estimate of 7.1 per cent, released subsequently by CSO in February 2009. With the CSO drastically reducing their estimate of GDP from agriculture (based on third advance estimates), and given that the DEA’s 7 per cent estimate assumed normal agricultural growth, it would have had to be adjusted for any shortfall. The growth of GDP at factor cost (at constant 1999-2000 prices) at 6.7 per cent in 2008-09 nevertheless represents a deceleration from high growth of 9.0 per cent and 9.7 per cent in 2007-08 and 2006-07 respectively.

The deceleration of growth in 2008-09 was spread across all sectors except mining & quarrying and community, social and personal services. The growth in agriculture and allied activities decelerated from 4.9 per cent in 2007-08 to 1.6 per cent in 2008-09, mainly on account of the high base effect of 2007-08 and due to a fall in the production of non-food crops including oilseeds, cotton, sugarcane and jute. The production of wheat was also marginally lower than in 2007-08. The manufacturing, electricity and construction sectors decelerated to 2.4, 3.4 and 7.2 per cent, respectively, during 2008-09, from 8.2, 5.3 and 10.1 per cent, respectively, in 2007-08. The slowdown in manufacturing could be attributed to the combined impact of a fall in exports followed by a decline in domestic demand, especially in the second half of the year. The rise in the cost of inputs during the beginning of the year and the cost of credit (through most of the year) reduced manufacturing margins and profitability. The growth in production sectors, especially manufacturing, was adversely affected by the impact of the global recession and associated factors. The electricity sector continued to be hampered by capacity constraints and the availability of coal, particularly during the first half of the year. As long as the coal sector remains a public sector monopoly (the only remaining nationalized sector), it could remain a bottleneck for accelerated development of the power sector.

The construction industry consists of different segments like housing, infrastructure, industrial construction, commercial real estate, etc. While the industry went through a boom phase with growth as high as 16.2 per cent in 2005-06, and continued to grow thereafter (albeit with moderation), the increase in the costs of construction due to a rise in the prices of inputs like steel and cement and interest costs had started impacting the industry. In certain segments of the industry, there was an excessive price build up in the form of a speculative bubble, related to limited supply of urban land for those segments. The rise in interest rates and the slowdown in housing loans also moderated demand. The double squeeze on the costs, as well as the demand side, and the fall in the liquidity in mid-September 2008 precipitated a sharp downturn in this sector.

Savings and Investment

A notable feature of the growth of the Indian economy from 2002-03 has been the rising trend in the gross domestic capital formation (GDCF). Gross capital formation (GCF), which was 25.2 per cent of the GDP in 2002-03, increased to 39.1 per cent in 2007-08. Much of this increase is attributable to a rise in the rate of investment by the corporate sector. The rise in the rate of investment has been on account of various factors, the most important being the transformation in the investment climate, coupled with an optimistic outlook for the growth prospects for the Indian economy.

Gross Domestic Savings

The growth in capital formation in recent years has been amply supported by a rise in the savings rate. The gross domestic savings as a percentage of GDP at current market prices stood at 37.7 per cent in 2007-08 as compared to 29.8 per cent in 2003-04. Private sector savings dominated the total savings in 2007-08 and were at 33.2 per cent of GDP. Of this, the household sector savings was 24.3 per cent of GDP while the private corporate sector accounted for 8.8 per cent. Savings by the public sector was 4.5 per cent of GDP.

Capital formation

The gross capital formation (adjusted) as a percentage of GDP steadily moved up from 27.6 per cent in 2003-04 to 39.1 per cent of GDP in 2007-08. There has been an increase in the rate of investment in both the public and private sectors. For the public sector, the gross investment rate rose from 6.3 per cent in 2003-04 to 9.1 per cent in 2007-08 and for the private sector from 19.6 per cent in 2003-04 to 28.5 per cent in 2007-08. Within the private sector, the share of the household sector has remained at the same level. However, the share of the corporate sector steadily increased to touch 15.9 per cent of GDP in 2007-08.

It is also pertinent to note that the overall increase in investment has come about mainly from a rise in the rate of gross fixed investment. Gross fixed investment which was 25.0 per cent of GDP in 2003-04 increased to 34.0 per cent in 2007-08.

The saving investment gap in the public sector stood at (-) 5.3 per cent in 2003-04 that moderated to (-) 4.6 per cent in 2007-08. This reflected the narrowing gap between public sector capital formation and public sector gross domestic savings. For the household sector the gap has remained more or less constant reflecting no major change in the saving investment balance. In the case of the private corporate sector however, the saving investment gap widened to (-) 7.0 per cent in 2007-08 reflecting the high rate of capital formation over and above their internal savings.

Sectoral investment

The overall rate of growth of capital formation at constant prices was 15.6 per cent in 2007-08 as compared to 13.9 per cent in 2006-07. The growth rate of gross capital formation in different sectors is indicative of the direction of fresh investment. The rate of growth of capital formation during 2007-08 (as compared to 2006-07) increased in mining and quarrying, transport storage and communication, financing, insurance, real estate and business services and community personal and social services. However, the growth rate of gross capital formation slowed down during 2007-08 (in agriculture, manufacturing, electricity, gas and water supply, construction, and trade, hotels and restaurants).

At the disaggregated level, within the manufacturing sector there was an increase in the rate of growth of gross capital formation in the registered manufacturing sector, whereas in the unregistered manufacturing sector the rate of growth of gross capital formation declined to 2.9 per cent in 2007-08 as against a growth of 21.9 per cent in 2006- 07. Within the trade, hotels and restaurants, trade recorded a decline in the rate of growth of gross capital formation to 1.2 per cent in 2007-08 as against a level of 41.7 per cent in 2006-07. Within the group transport, storage and communication, railways recorded an increase to 24.8 per cent in 2007-08 from a level of 14.7 per cent in 2006-07. However, storage saw negative growth in its capital formation in 2007-08.

Industry and Infrastructure

Though growth of the industrial sector started to slow down in the first half of 2007-08, the overall growth during that year remained as high as 8.5 per cent. The index of industrial production for the year 2008-09 points towards a sharp slowdown with growth being placed at 2.4 per cent. Manufacturing growth was placed at 2.3 per cent in 2008-09 as compared to 9.0 per cent in 2007-08. Mining grew at 2.3 per cent in 2008-09 as against 5.1 per cent in 2007-08 while electricity showed a deceleration in growth from 6.4 per cent in 2007-08 to 2.8 per cent during 2008-09. Slower growth in all use-based categories, except consumer durables, contributed to the deceleration in the industrial sector.

The performance of six core industries, comprising crude oil, petroleum refinery products, coal, electricity, cement and finished steel (carbon) grew at 2.7 per cent as compared to 5.9 per cent in 2007-08. The growth in index for crude oil turned negative 1.8 per cent as compared to positive 0.4 per cent in 2007-08. There was a deceleration in the growth of cement and finished steel reflecting the negative sentiments in the construction and manufacturing sectors.

Agriculture production

For three consecutive years (2005-06 to 2007-08), foodgrain production recorded an average annual increase of over 10 million tonnes. The total foodgrain production in 2007-08 was estimated at 230.78 million tonnes as against 217.3 million tonnes in 2006-07.

As per the third advance estimates, the production of foodgrains in 2008-09 is estimated to be 229.85 million tonnes. In the third advance estimates, there is an improvement of 1.97 million tonnes over the second advance estimates for 2008-09 but the estimates are still lower than the target of 233 million tonnes set out for the year and also the final estimates of 230.78 million tonnes for 2007-08.

The production of rice during 2008-09 is expected to be 99.37 million tonnes and that of wheat 77.63 million tonnes. The estimates for rice production are 2.68 million tonnes higher than the final estimates for 2007-08. However, the estimates for wheat production are marginally lower than the final production figures for 2007-08.The production of coarse cereals is expected to be 38.67 million tonnes, which is lower than the final estimates for 2007-08 by 2.1 million tonnes. The production of pulses is expected to be 14.18 million tonnes, which is 0.58 million tonnes lower than the final estimates for 2007-08. The production of oilseeds (9 oilseeds) during 2008-09 is placed at 28.1 million tonnes, which is lower than the final estimates of 29.7 million tonnes for 2007-08 and short of target of 31.7 million tonnes set out for the year.

The production of cotton estimated at 232.68 lakh bales is short of the final estimates of 258.84 lakh bales in 2007-08 but an improvement over the second advance estimates. The production of sugarcane during 2008-09 is estimated at 289.2 million tonnes, which is lower than the production of 348.2 million tonnes during 2007-08.

Balance of payments

The overall balance of payments (BoP) situation remained resilient in 2008-09 despite signs of strain in the capital and current accounts, due to the global crisis. During the first three quarters of 2008-09 (April-December 2008), the current account deficit (CAD) was US$ 36.5 billion (4.1 per cent of GDP) as against US$ 15.5 billion (1.8 per cent of GDP) for the corresponding period of 2007-08. The capital account balance declined significantly to US$ 16.09 billion (1.8 per cent of GDP) as compared to US$ 82.68 billion (9.8 per cent of GDP) during the corresponding period in 2007-08.

A positive development was higher private transfers and software earnings and increase in non-resident deposit flows and foreign direct investment vis-à-vis the corresponding period last year. Higher FDI flows in 2008-09 were also a reflection of the confidence of foreign investors in the growth prospects of the Indian economy.

Together with lower crude oil prices and decline in imports, the overall impact on the balance of payments was somewhat muted. This is reflected in reserve decline of only US$ 20.4 billion on BoP basis (excluding valuation change) during 2008-09 (April-December 2008). The total foreign currency assets (FCA) had declined from US$ 299.2 billion on 31.3.2008 to US$ 241.4 billion on 31.3.2009, reflecting a fall of US$ 57.8 billion. However, more than two-thirds of the decline in FCA was due to a valuation change, i.e. appreciation of US dollar against the international currencies in which reserves are maintained. The foreign exchange reserves stood at US$ 252 billion at end-March 2009.

Trade

The adverse effect of the global financial crisis was also felt on the export sector, first, on account of the drying up of international financing and trade credit, followed by a fall in global demand. During 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year. The continued decline in export growth was due to the recessionary trends in the developed markets where the demand had plummeted. For the year as a whole, the growth in merchandise exports during 2008-09 was 3.6 per cent in US dollar terms and 16.9 per cent in rupee terms (compared to 28.9 per cent and 14.7 per cent respectively in 2007-08). The large difference in growth in terms of the US dollar and in terms of the rupee was on account of the depreciation of rupee vis-à-vis US dollar during the year.

Import growth began to decline from October 2008 (with one month lag from the decline in export growth) and was negative over the period January to March 2009. For the year as a whole i.e.2008-09, the overall import growth was subdued at 14.4 per cent in US dollar terms and 29 per cent in rupee terms.

The impact of global recession was relatively less on India’s services exports till December 2008, though the growth rate of services export moderated to 16.3 per cent during April-December 2008-09. A negative growth in insurance and a sharp fall in the growth of travel services was registered during this period. Software services grew at 26 per cent, while financial services registered a robust growth of 45.7 per cent despite the global financial crisis and fall in growth rate in world financial services exports. Business services growth was, however at a lower rate of 3.9 per cent.

Inclusive Growth

Some of the major social sector initiatives for achieving inclusive growth and faster social sector development and to remove economic and social disparities in the Eleventh Five Year Plan include: the Bharat Nirman programme, Mid-day Meal Scheme, National Rural Health Mission, Jawaharlal Nehru National Urban Renewal Mission and the National Rural Employment Guarantee Scheme (NREGS). Central support for the social programmes has continued to supplement efforts made by the states.

Under NREGS, over four crore households were provided employment in 2008-09. This is a significant jump over the 3.39 crore households covered under the scheme during 2007-08. Out of the 215.63 crore person-days of employment created under the scheme during this period, 29 per cent and 25 per cent were in favour of SC and ST population respectively. 48 per cent of the total person-days of employment created went in favour of women. The agriculture debt waiver and relief scheme implemented during the year was able to restore institutional credit to farmers and helped to support demand and revive investment in the rural and the agriculture sector.

Key Recommendations of Economic Survey

·         Disinvest at least 10% of all unlisted PSUs, auction un-revivable loss-making ones, raise minimum Rs 25,000 crore a year through divestment.

·         Decontrol petro product prices, phase out subsidy on kerosene, limit cooking gas subsidy to 6-8 cylinders per household per annum.

·         Do away with government yes for retrenching workers in big units while increasing compensation; allow contract labour in non-core work.

·         Hike foreign equity cap in insurance and defence production to 49%, with 100% in special categories.

·         Allow private entry and 49% FDI in nuclear power.

·         Denationalize coal, sell old oilfields to private sector, make power supply competitive by allowing open access.

·         Let public hold more equity in PSU banks, gradually increase FDI limits in banks, and ease foreign entry.

·         Phase out commodities transaction tax, securities transaction tax and fringe benefit tax, rationalize dividend distribution tax to avoid double or zero tax.

·         Lift ban on futures contracts in financial markets, develop exchange-traded spot, futures currency markets.

·         Allow FDI in multi-format retail, starting with food.

·         Decontrol sugar and fertilizers, switch producer subsidies to consumer subsidies.

·         Limit drug price controls to essential drugs with less than five producers .

·         Set up environment regulator to give clearances, let ministry deal only with policy; keep housing and real estate development out of central environmental regulation.

·         Increase work week to 60 hours and daily limit to 12 hours to meet seasonal demand.

·         Have single regulator for all forms of transport—highways, rail, ports, air.

·         Scrap indirect taxes on buses, allow private players to improve public transport.

·         De-link spectrum from telecom licences; auction it and make it tradable among licence holders.

·         Allow private sector to run trains to tourist destinations.

·         Corporatize departmental enterprises providing commercial services, convert port trusts into listed firms with min 49% public equity.

·         Link small savings rates to govt bonds/bank deposits.

·         Enact new bankruptcy law for speedy, effective re-deployment of assets.

·         Streamline land use conversion from rural/semi-rural to urban communities.

·         Bring all financial markets under SEBI regulation.

·         Implement police reforms, review old laws.