In 2010-11 the Indian economy emerged from the slowdown caused by the global financial meltdown of 2007-09 with remarkable rapidity. As per the Advance Estimates of the Central Statistics Office, released on February 7, 2011, the turnaround was strong, with a rebound in agriculture and continued momentum in manufacturing. The deceleration in community, social, and personal services, as also industry, remained a cause for concern.
The medium to long-run prospect of the economy, including the industrial sector, however, continues to remain positive. On the demand side, a rise in savings and investment, and pick-up in private consumption resulted in strong growth of GDP at constant market prices at 9.7 per cent in 2010-11.
Food items largely drove inflation, which remained at elevated levels for greater part of the year, though the goods that were inflating at the beginning of the year were different from the goods for which prices had risen in the end part of the year.
The rise in the purchasing power owing to the rapid growth of the economy and inclusive programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) partly might have contributed to the upward trend in inflation.
Despite tightening of the money markets and moderate growth in deposits, the financial situation remained orderly with a pick-up in credit growth, vibrant equity market and stable foreign exchange market.
In last three years the Indian economy had been severely buffeted by two shocks in rapid succession—the onset of global financial crisis in 2007-09 and erratic monsoon resulting in drought in 2009-10. This period of economic stress severely tested the policymakers. Yet the Indian economy came through with resilience and strength, by following counter-cyclical macro-economic policies, structural measures to promote growth, and social spending to provide a stronger foundation to protect the poor.
The estimated level of growth in the GDP at constant 2004-05 prices at factor cost (real GDP) in 2010-11 was composed of: growth of 5.4 per cent in agriculture, growth of 8.1 per cent in industry, and a decelerated growth of 9.6 per cent in services.
The service sector, with a share of 57.3 per cent in 2009-10, has, however, started to gather momentum and given the fact that it is the power house of the Indian growth story, this portends well for the medium-term prospects. The savings rate has gone up to a level of 33.7 per cent and investment rate is up to 36.5 per cent of the GDP in 2009-10.
The fiscal policy being followed is now on the consolidation path with revenues doing well on the strength of the rebound in economic activity and, going forward, this is likely to yield growth dividends in the medium to long term.
Headline inflation, year-on-year, as measured by the wholesale price index (WPI), remained at elevated levels from December 2009, even though it has, by and large, been on downward trajectory since April 2010, when the WPI inflation peaked at 11 per cent year-on-year. Inflation in primary articles, particularly food articles, was the main contributor to the elevated levels of WPI inflation. Inflation in food articles remained in double digits for 76 weeks from June 5, 2009.
The inflationary pressures on the domestic front are likely to be exacerbated by the high levels of global commodity prices and also the easy money policy being followed in several industrial nations trying to jump-start their own economies.
The growth of agriculture and allied sectors continues to be a critical factor in the overall performance of the Indian economy. For four consecutive years from 2005-06 to 2008-09, food-grains production registered a rising trend and touched a record level of 234.47 million tonnes in 2008-09. The production of food-grains declined o 218.20 million tonnes during 2009-10 (4th Advanced Estimates) due to long spell of drought in various parts of India in 2009.
The agricultural sector, however, is today at a crossroads with rising demand for food items and relatively slow supply response in many commodities, resulting in spikes in food inflation. The technological breakthrough achieved in 1960s is gradually waning. The need for a second green revolution is being recognized more than ever before. There is a need to significantly step up both private and public investment in the agricultural sector to ensure sustained growth so as to achieve the target growth of around 4 per cent per annum.
Six core industries that have a large bearing on infrastructure registered a growth of 6.6 per cent (provisional) in December 2010, compared to 6.2 per cent in December 2009. The investment in infrastructure reached 7.18 per cent of GDP in 2008-09. Rapid reduction of the infrastructure deficit holds the key to competitiveness in an increasingly globalized economic environment.
In 2010-11, the achievement under various phases of the National Highway Development Project (NHDP), up to November 2010, was about 1007 km of road. About 25 per cent of the total length of National Highways continues to be single lane; about 52 per cent is two-lane standard; and the balance 23 per cent is four-lane standard or more.
In the civil aviation sector, the scheduled domestic passenger traffic at 51.53 million clocked a growth rate of 19 per cent during January-December 2010, as compared to a level of 43.3 million during the corresponding period in 2009. The total number of non-scheduled operators stood at 121 in December 2010 with 360 aircraft in their fleet. 12 scheduled airlines are operational (10 passenger and 2 cargo).
Total telephone connections increased to 84.5 per cent in November 2010 as against a meager 5 per cent in 1999. Tele-density, an important indicator of telecom penetration, rose to 64.34 per cent. In rural areas the tele-density rose to 30.18 per cent while in urban areas it has risen to 143.95 per cent at the end of November 2010.
The services sector has played a dominant role in the Indian economy with a 57.3 per cent share in the GDP. The sector showed a growth rate of 10.1 per cent in 2009-10. It has a high share in FDI equity inflows with the financial and non-financial services category alone contributing 21 per cent during April 2000 to November 2010; and a 35 per cent share in total exports with 27.4 per cent export growth in the fist half of 2010-11.
High-growth services categories include financing, insurance, real estate, and business services and transport. Growth of trade, hotels and restaurants, which slowed down in 2008-09, has recovered moderately in 2009-10. Among other services, education and medical health are two important services in terms of relative share of the GDP. They had growth rate of 13.9 per cent and 5.3 per cent, respectively, in 2009-10.
In tandem with world trade volumes, India’s exports fell rapidly following the deepening of the global financial crisis through 2008-09. The exports, however, rose in the second half of 2009-10, which continued through 2010-11 until June 2010. Thereafter, growth decelerated till October 2010 and picked up subsequently to reach 36.4 per cent in December 2010, which is the highest growth in last two years. The cumulative export growth in April-December 2010-11 was 29.5 per cent and reached $ 164.7 billion during the period.
India’s merchandise imports, also affected by the global recession, fell to $288.4 billion with a negative growth of -5.0 per cent in 2009-10. Trade deficit (on customs basis) increased by 2.4 per cent to $82 billion in 2010-11 (April-December). The lower level of surpluses on the invisible balance, the relatively higher import growth compared to export growth in fist half of 2010-11 raised concerns of unsustainable current account deficit levels.
Foreign exchange reserves increased from $ 252 billion at the end of March 2009 to $279.1 billion at the end of March 2010. Of the total increase, $13.6 billion was account of valuation gain and remaining in account of Balance of Payment (BoP).
India’s external debt stood at $ 295.8 billion at the end of September 2010, recording an increase of $ 33.5 billion (12.8 per cent) over the level of end-March 2010. The rise in debt was largely due to higher commercial borrowings, short-term trade credits, and multilateral government borrowings.
In 2007-09, a surge in capital flows far in excess of the absorptive capacity and with implications for competitiveness had complicated monetary management on account of trade-offs involving the impossible objectives of open capital account, exchange rate stability and monetary policy independence. However, with the recovery in 2009-10 and 2010-11, the external sector broadly remained supportive as rising capital flows easily financed the elevated levels of current account deficits. The concerns of sustainability, however, remain.
On the monetary front, the Reserve Bank of India (RBI) raised the policy rates six times during 2010-11, wherein the repo rate under its liquidity adjustment facility was increased cumulatively by 175 basis points, raising it to 6.5 per cent, and the reverse repo rate was increased by 225 bps, raising it to 5.5 per cent. The cash reserve ration (CRR) was at 6 per cent of net demand and time liabilities (NDTL) of banks. The steps by RBI resulted in tightening of liquidity conditions.
With the clear evidence of economic recovery in 2009-10, the 2010 Budget resumed the path of fiscal consolidation with a partial exit from the stimulus measures. The fiscal outcome in the first nine months of 2010-11 remained broadly on the consolidation track chalked out by the Budget. With a much higher than budgeted realization in non-tax revenues, arising from telecom 3G/BWA auctions, there was headroom for higher expenditure at the given fiscal deficit targets.
The expenditure on social services, by Central and State governments combined, has increased to 25.2 per cent of GDP in 2010-11. Sector-specific priorities are reflected in the continued higher budgetary allocations in areas like rural development, education, medical and public health, family welfare, water supply and sanitation, housing, and welfare of Scheduled Tribes and Castes, as also Other Backward Classes.
On the employment front, India has been able to withstand the adverse impact of the global crisis. The upward trend in employment has been continuously observed since July 2009. During the quarter July to September 2010, the overall employment has been estimated to increase by 4.35 lakh. The progress under the MGNREGA that guarantees wage employment on an unprecedented scale has been satisfactory. During 2010-11, 4.10 crore households were provided employment under the scheme till December 2010.
As per the Economic Survey 2011, India’s real GDP is expected to grow by 9 per cent in 2011-12. The savings and investment rates had gone down a little during 2008-09 because of the deliberate decision by the government to encourage consumption as an antidote to the economic downturn. The 2009-10 data, however, shows that the savings rate has gone up from 32.3 per cent in previous year to 33.7 per cent. The investment rate has also increased to 36.5 per cent. Since savings and investments now are showing a positive momentum and the government is implementing a gradual exit from the stimulus package, the savings and investment rates are likely to rise further.
The point to note is that once an economy begins to operate close to its capacity, the savings and investment rates are no longer such effective drivers of GDP growth, which then depends much more on skill development and innovative activity in the country. Fortunately, there is awareness of this in India and efforts are afoot in terms of budgetary allocation and actual initiatives to boost the development of skill and human capital. As a consequence, the next two decades should see the Indian economy growing faster than it has done any time in the past.
However, forecasts, no matter how carefully they are made, are subject to many factors. A sharp deterioration in weather conditions or a disproportionate spike in the price of crude can lead to slower growth. Certain amount of uncertainty continues to prevail over economic conditions in Europe and USA. The fiscal situation and level of sovereign debt in a large number of industrialized nations are in a somewhat tenuous situation. India will be adversely hit in the event of a serious crisis in any of the industrialized nations.
No comments:
Post a Comment