Mumbai, Feb 25 (Ajay Rawal)
Highlights
Economy is expected to grow at 8.6% in FY11 and at 9%
in the next fiscal
Savings and investment to be rising in FY12
Agriculture likely to grow at 5.4% in FY11. Production of
food grains estimated at 232.1 mn tonnes
Slowdown in Industrial growth is seen as temporary;
Industrial output estimated to grow at 8.6%
Inflation largely driven by
purchasing power has aided this.
Fiscal deficit gap stands at 4.8% of GDP in FY11; tax
buoyancy and 3G auctions improved the fiscal health in FY11
DTC proposed to be launched in April 2012 but states
consensus on GST yet to be achieved
Government implementing gradual exit from stimulus and
liquidity management a major challenge for RBI
Two types of banking licenses to be considered – basic
and full banking services
Need to keep all options open if forex flows hurt the
economy; slowdown in FDI partly offset by FII investment
Implications:
Monetary Policy stance
The Survey observes that the capacity addition in core
infrastructure industries has been lackluster coupled with
inflationary pressures in the core sector. As core inflation is a
concern according to the Survey, it would force the RBI to
maintain interest rates at higher level. It will hence, be a
challenge for the Government to maintain a balance between the
two. In this scenario, the growth rate of 9% would be difficult to
attain given fiscal stringency and relatively low investment, according
to a leading ecomic survey analysts .
Infrastructure
Government indicates rolling back of fiscal stimulus. This can
impact future investment in infrastructure from the government’s
side.
Fiscal Deficit
The fiscal deficit has come down to 4.8% in FY11 mainly on
account of high base effect of GDP and the buffer realized
through the 3G auctions. Going ahead the government has
indicated that they intend on reducing the fiscal deficit further
food prices
and hence they are likely to reduce their borrowings and
deregulate diesel prices in a staggered manner and also
move away from stimulus. We expect the fiscal deficit to be
targeted at 50 bps lower in the Union budget to be
announced on Monday.
Possible lower fiscal deficit
for FY12
The Survey talks of creation of two kinds of banks providing
basic and full services. This indicates a possible integration of
the present debates on new banks with corporate and foreign
interest as well as MFIs. We may hence expect the RBI to
come out with a discussion paper on the same as a prelude
to their creation.
The Indian economy has been characterized by robust
economic growth and steady fiscal consolidation in FY11. The
economy has emerged with remarkable rapidity from the
slowdown caused by the global crisis and is expected to
Growth broad based
revert to the pre-crisis level of growth by FY12. Asia’s third
largest economy is estimated to grow at 8.6% in the current fiscal
and at 8.75%-9.25% in the following year. This growth is
considered to be broader with the agriculture sector rebounding
to 5.4% in FY11 as against 1.3% in FY10, manufacturing is
estimated to continue its momentum at 9.1% in FY11, and
Services is picking up to 9.6% for FY11.
The Survey observed that a rise in savings and investment has
been a crucial factor. Savings rate went up to 33.7% while the
investment rate advanced to 36.5% of GDP in FY10.
Agriculture and Allied Activities
The Economic Survey sees that the growth of agriculture and
allied sector is a critical factor in the overall performance of the
Indian economy. Agriculture growth is estimated at 5.4% in the
current fiscal year on account of good monsoons and impressive
Kharif harvest.
The Survey observes that there has been an improvement in the
gross capital formation in the agriculture sector.
GCF in
agriculture and allied activities as a proportion of GDP has
improved 16.03% in FY08 to 20.30% in FY10.
The Survey says that increasing agriculture production and
productivity is a necessary condition not only for ensuring
national food security but also for sustaining the high levels of
growth. Considering the critical role of agriculture, there is need
to invest much more in agriculture, stepping up to a second green
revolution to address the yield gaps. The Survey identifies that
there is need to significantly step up investment in agriculture,
both by the private and public sectors to ensure sustained target
growth of 4% per annum.
Industry
IIP-based cumulative industrial output growth during April-
December 2010 was 8.6%, on par with the growth rate of the
corresponding months of the previous year. As per the Survey,
growth in the industrial sector was buoyant during the first two
quarters of the current financial year. Thereafter, industrial output
growth has begun to moderate partly due to higher base effect.
The Survey identifies capital goods and consumer
durables to be the major growth drivers. Weighted
contribution of these segments during April-December
2010 was about 29% and 21%. Due to poor
performance of the basic goods and consumer non-
durables segments the IIP growth has been moderate.
Manufacturing sector comprises approximately 79% of
the total Industrial Production Index. Manufacturing
output growth has dipped from a peak of 18% in April
2010 to 1.0% in December 2010. Despite volatility, the
April-December 2010 cumulative growth rate for the
manufacturing sector has remained robust at 9.1% and
8.6% for the IIP.
There has not been significant capacity edition in some
of the core industries. Similarly, slow rate of capacity
edition in the infrastructure sector has adversely
impacted the IIP growth story. Capacity edition in core
sectors and renewal of bottlenecks would spur industrial
output in the medium to long term.
Low performance of consumer
non-durable goods and basic
goods
Manufacturing sector mood
illustrates robust growth
A sharp rise in food prices has been a major concern for
the economy in this fiscal year. Food inflation rose to
13.6% in December 2010 on account of unfavourable
agricultural supply conditions coupled with the waning of
base effects. Signs of crude oil prices spilling over to
general inflation prevail given the continued political
unrest in the Middle East. The financial year 2010-11
started with double digit inflation. The inflation which has
come down to 8.23% in January 2011 is expected to
remain in single digit in next two months. Among food
items sharp rise in prices was observed in onion, fruits,
eggs, meat, fish and milk. The prices of food grains,
however, remain low on the back of good monsoon.
The Survey points out that the rise in the purchasing
power owing to rapid growth of economy and inclusive
programmes like the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA) partly might
have contributed to the upward trend in inflation.
Inflation more on the food side
Rising Purchasing Power
The policy challenges of maintaining the growth momentum in
the economy with price stability is to be the key focus area for
monetary policy and macroeconomic management. The
measures taken during the year included selective ban on
exports, zero import duty on select food items and
distribution of imported pulses and edible oils through the
PDS.
The RBI also took several measures for monetary
management. It raised policy rates six times with the Repo
rate at 6.50% and RRepo at 5.5% at present. RBI retained
CRR at 6% of the net demand and time liabilities (NDTL) of
banks. As a result, the money market generally remained
orderly in FY11.
The Survey says that the inflation outlook will be shaped by
the food price situation and the demand side pressures in the
economy. The current growth and inflation trend warrant
persistence with and anti-inflationary monetary stance.
Infrastructure
The Economic Survey 2010-11 states that the infrastructure
structure is a mixed bag of performance; some like
telecommunications have done exceedingly well and in some
others there have been less than targeted achievement.
Out of the total 559 monitored Central sector projects costing
Rs. 150 crore and above, as on October, 2010, 14 were ahead
of schedule, 117 were on schedule and 293 were delayed. It
is observed that there has been a steady decline in the time
and cost over runs of Central sector projects which is
attributed to the closer monitoring and system improvements
as is noted by the Economic Survey.
Fiscal
India’s fiscal deficit is seen to narrow to 4.8% of GDP in the
current fiscal year. The reading is considerably lower than the
5.5% deficit that was budgeted by the government for the
year. The reduced fiscal deficit would permit greater
availability of credit to sustain growth. The government aims
to cut the fiscal deficit to 3% by 2014.
International trade declined in 2008 and 2009 on account
of the global financial crisis. However, the decline was
arrested in 2010, with the trade growth recovering faster
than real GDP growth. The recovery in trade growth has
been made possible, in part, by the fiscal stimulus
imparted by the governments and the low base of the
preceding years.
India’s cumulative export growth in April-December 2010-
11 stood at 29.5% with cumulative exports reaching US $
164.7 billion during this period. During 2010-11 (April-
December) import growth was at 19% accompanied by an
increase in petroleum, oil, and lubricant (POL) and non-
POL imports at 17.7% and 19.6% respectively. The
relatively higher import growth compared to export
growth in the first half of 2010-11, raised the alarm of a
possible unmanageable current account deficit. With
import growth slowing down from October 2010 and
exports picking up in November 2010, the fear that the
high current account deficit may be due to high
merchandise trade deficit is disappearing.
According to the Survey, Trade policy measures taken by
the Government and the RBI in 2009-10 and 2010-11
focused on reviving exports and export-related
employment besides mitigating the effect of inflation. The
Government followed a mix of policy measures including
fiscal incentives, institutional changes, procedural
rationalization, and enhanced market access across the
world, and diversification of export markets.
The current account deficit is largely financed by higher
capital flows. However, the volatile nature of FII,
deceleration in FDI and the risk of further slowdown in
advanced economies that may affect exports and put
additional pressure on BOP condition in the country.
India’s external debt has remained within manageable
limits, reflecting the impact of the prudent external debt
management policy of the Government. At the end of
September 2010, external debt stood at US$ 295.8
billion, recording an increase of 12.8% over the level of
end-March 2010.
inflation, tight liquidity and rising current account deficit. Unsustainable subsidies and a sense of policy paralysis as far as major reforms are concerned have been a drag on the economy. Mukherjee has the difficult task of putting the economy back on track as well as keep the masses or the aam aadmi happy.
