Tuesday, November 13, 2007

Finance Minister P Chidambaram, at the Annual Economic Editors` Conference gave an overall economic performance of the economy.   He said, ``There has been a marked change in the way the Indian economy is viewed both within the country and in other countries of the world. This is largely due to the sustained, well-directed efforts of the Government that have resulted in globally acclaimed rates of economic growth, increased global competitiveness of Indian businesses, strong macro fundamentals, and above all, a highly favorable economic outlook.``   The growth rate during the first quarter of 2007-08 was an impressive 9.3% over the corresponding quarter of the previous year. ``If we can sustain this rate of growth, per capita income can double in about 9 years. This high growth is facilitated by an unprecedented increase in the rate of investment from 22.9% in 2001-02 to an estimated 35.1% in 2006-07, `` finance minister said.   The share of industry in GDP increased from 25.6%  in 2003-04 to 26.6%  in 2006-07, while there has been a decline in the share of agriculture and allied sectors from 21.7% to 18.5% during the same period. The decline in the share of agriculture in GDP is mostly appropriated by the services sector, which increased its share from 52.7% to 54.9%.   In 2006-07, the industrial growth was a splendid 11.5%, while the rate of growth of manufacturing was even higher at 12.5%. Though the growth of manufacturing  slightly decreased to 10.3% during April-August 2007, the growth in capital goods at 21.3% during the period is suggestive of significant addition to industrial capacity. The slackening is mainly on account of the poor performance of the consumer durables sector.   The growing business optimism is manifest in the robust growth of bank credit to industry and large industrial investments in the pipeline. Outstanding credit to the industrial sector by the Scheduled Commercial Banks witnessed a growth of 30% and 28.4% in 2005-06 and 2006-07 respectively. Year-on-year growth of outstanding credit as on October 12 at 23.5% exhibited some moderation from the strong pace of the previous three years. The CMIE data on investment in manufacturing in the pipeline for March 2007 showed a growth of around 50% over March 2006. Besides, net FDI into India grew from USD 4.7 billion in 2005-06 to USD 8.4 billion in 2006-07, an increase of around 79%. FDI flows in the current year upto Jun. 30, 2007 have been estimated at USD 6.4 billion. Indian manufacturing has come of age and is highly competitive in the global market. The growing interest to invest in Indian industry is best embodied in the BSE Sensex that touched an all time high of 19,977 at closing on Oct. 29, 2007. The business expectations index of the Federation of Indian Chamber of Commerce and Industry (FICCI) for July-December 2007 also showed an improvement. Nearly 70% of the respondents to the FICCI survey found the current overall economic conditions better than those in the preceding six months.   India`s external sector continued to be robust and reflected the strength of the economy during 2006-07. The current account shows a deficit of USD 4.7 billion primarily due to the relatively higher growth of imports vis-a -vis exports. Net invisibles, despite recording a robust level of USD 16.9 billion, fell short of the trade deficit of USD 21.6 billion, leading to the current account deficit. The capital account, however, had a surplus of USD 15.9 billion during the period. Foreign investment (net) inflows were particularly buoyant on account of robust portfolio investment inflows.   The exchange rate of the Rupee against the US dollar displayed reasonable stability during 2005-06 and 2006-07. However, the Rupee showed a mixed trend against other major global currencies like the Euro, Yen and Pound Sterling. During the first half of the current year, the exchange rate of the Rupee against the US dollar has appreciated sharply reflecting mostly the copious capital inflows, the strong fundamentals, higher returns on equity and even higher expectations. This surge in capital flows, apart from causing volatility in the forex market, has led to an accumulation of reserves. The foreign exchange reserves increased to USD 199 billion at end-March 2007 and further bourgeoned to USD 262 billion on October 26, 2007. In response to the widespread concern about the possible adverse effect of Rupee appreciation on exports, the Government announced three packages for exporters that included enhancement of 3% of the DEPB rates for 9 sectors, reduction in ECGC premium by 10%, release of around Rs 6 billion to clear all arrears of terminal excise duties and CST reimbursement, enhancement of the rate of duty drawback by around 10% to 40%, reduction in the rate of interest on pre and post shipment credit by 2% and refund of service tax to exporters for use of services not in the nature of `input services`. The total value of these packages is estimated at Rs.52 billion.   In 2006-07, the net capital inflows almost doubled from the level of the previous year to touch USD 46.2 billion. External commercial borrowings (ECBs) alone accounted for about 35% of total capital flows, enabled by ample liquidity and favourable interest rates in the global markets on the one hand and rising financing requirements for capacity expansion domestically on the other. By end-June 2007, the ratio of foreign exchange reserves to total external debt stood at a comfortable 129%.   Inflation, measured by variation in the wholesale price index (WPI) on a year-on-year basis, declined from 5.94% at end-March 2007 to 2.97% as on Oct. 27, 2007. Inflation in the primary articles index came down from 10.72% to 5.10% during the same period while that of manufactured products declined from 6.11% to 3.88%.   Prudent measures adopted by the Government, including monetary measures that impacted the availability and cost of credit, selective reduction in import duties of supply-constrained items, measures for augmenting domestic availability, and other administrative measures have helped the Government to gain command over inflation.   Different constituents of infrastructure have shown improvement in the current financial year. In the power sector, power generation and plant load factor are on course to achieve their annual targets. In the transport sector, the total earnings of the railways have shown an increase close to 11% during April-September 2007, while passenger traffic handled at domestic air terminals grew by about 28% during April-August 2007. An ambitious National Highway Development Programme (NHDP), involving a total investment of Rs 2,200 billion upto 2012, has been established. In telecommunications, telephone connections have increased by 65% while cell phone connections have grown by 53% during April-August 2007. India Post launched its first aircraft, with a 15 tonne load capacity, in August 2007.   Needless to say, India must make enormous investments in its social and economic infrastructure in the near future. The Planning Commission has estimated that the total investment in infrastructure in the 11th Five Year Plan must increase from 4.5% to around 8% of the GDP. Under the governing rules of fiscal management in the FRBM regime, budgetary deficits are being strictly monitored, restricting the scope for unlimited fiscal expansion. Hence, the solution to the challenge of infrastructure is partly located in public-private partnerships, which not only bridge the gap in resources but also bring in private sector expertise and efficiency in the operation and maintenance of assets. During a decade of experience with PPPs in India, some sectors like ports and roads have shown greater progress than others. The Government of India has taken several initiatives like viability gap funding, Public Private Partnership Appraisal Committee (PPPAC) and India Infrastructure Finance Company (IIFCL) to promote PPPs.   The financial year 2007-08 has so far shown the expected revenue buoyancy. 40.7% of the budgeted revenue receipts have been realized by September 2007, as against 40% during April-September 2006-07 and 35% during April-September 2005-06. Revenue receipts and capital receipts, especially non-debt capital receipts, have shown improvement. On the revenue side, the gross tax collection has shown a 25% growth during April-September 2007. Customs duty has increased by 16%, taxes on income by 38.9%, corporation tax by 41%, service tax by 36.3%and union excise duty by 6.5%. Non-tax revenue went up by 19% during the period.   On the expenditure front, 42.3% of the budgeted plan expenditure has been realized by September 2007, as against 39.9% during April-September 2006-07. The growth of labour force increased from 1.60 to 2.54% during the period while the growth in the workforce (i.e. people actually employed) has increased from 1.57% to 2.48%. Accelerated growth in the work force is a sign of development and creation of more jobs.   Moreover, the short-term challenges on the external front are posed by the need to effectively manage an unprecedented influx of capital inflows and burgeoning foreign exchange reserves and to contain the adverse effects of appreciation of the rupee on Indian exports. These inflows are a test of the absorptive capacity of the economy. Further, domestic prices may also be impacted by international hardening of food grain, commodity and energy prices. The economy must also be insulated to the extent possible from the potentially adverse effects of the economic slowdown occurring in some of its major trading partners.   Another challenge is the slow-growing farm sector that still supports the livelihood of a majority of the population. Issues like stagnant yield rates in many important crops, declining per capita availability of food grains and need for additional public investment call for urgent policy attention. The Eleventh Five Year Plan targets a 4% growth in agriculture. Action points for the Centre and the States for achieving a 4% growth rate have been drawn up.   Rapid economic development is a huge opportunity for fulfilling many national objectives. There is an urgent need for improving the education and skills of the labour force, especially of those belonging to the lower strata of the society, in a planned and structured manner. Chidambaram concluded that the Government is alive to these challenges and the hard work that is required to achieve our objectives.

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