Sunday, March 8, 2009

India’s Economic Growth

The Central Statistical Organisation (CSO) has recently released the Gross Domestic Product (GDP) data. According to it, India's economic growth slowed sharply in the third quarter to 5.3 per cent from the same period a year ago on contracting agricultural and manufacturing output. The reason was agriculture, which has been worst hit in the October-December quarter, falling by 2.2 per cent, the statistics showed. Manufacturing contracted marginally by 0.2 per cent compared to a growth of five per cent in the previous quarter.

Evidently, the two stimulus packages put in place earlier during the fiscal year, as also the measures announced in the interim budget to spur the economy, would take some more time to show effect and, therefore, the onus is now on the Reserve Bank of India (RBI) to provide the necessary impetus by cutting its key policy rates.

With the slide in GDP growth during the third quarter, the economy has notched up a growth of 6.9 per cent for the first nine months of 2008-09 as compared to a healthy nine per cent achieved during the same period in the previous fiscal.

Thus, unless the fourth quarter performance turns out to be markedly better — which seems unlikely in the grim global scenario — the official projection of 7.1 per cent for the entire fiscal appears to be a far cry. It is unlikely that the growth is going to be 7.1 per cent (for the entire 2008-09).

International rating agency, Moody’s has stated that India will have to revise its growth rates below the five per cent mark. Downgrading by international rating agencies will make borrowing more expensive and difficult for the Government, observe economists.

The Government, in the recently announced Interim Budget, stated that India's GDP would grow by 7.1 per cent for the fiscal year 2008-09, much lower than the nine per cent achieved in 2007-08.

Earlier, the Government had stated that the budget deficits would more than double to six per cent of the GDP, as it borrows record amounts to finance stimulus measures.

Positive Aspect
On the positive side, community, social and personal services posted a robust 17.3 per cent growth in the third quarter against 5.5 per cent in the like period a year ago. Financing, insurance, real estate and business services also grew by 9.5 per cent as against 11.9 per cent. Trade hotels, transport and communication, however, grew by a lower 6.8 per cent as compared to 11.6 per cent a year ago as tourist arrivals declined on account of the global crisis the Mumbai terror attacks. With the sharp slowdown in realty, construction growth also fell to 6.7 per cent during the third quarter as against nine per cent a year ago.

Alongside, domestic demand has remained buoyant even in the wake of the slowdown. Private final consumption expenditure at current and constant prices stood at 10.7 per cent and 10 per cent.

Declining Inflation
Despite the plunging rupee and declining inflation coming to their rescue, the exporters may find it hard to sell their wares in global markets clobbered by widespread job losses and falling incomes. The domestic export sector itself has lost five million jobs this fiscal.
Inflation for the week ended February 21 dropped to 3.03 per cent, a seven-year low, on the back of low prices of food items. This brings the annual inflation, as measured by wholesale price index, at 3.36 per cent.

Food prices, which have been hovering around 10-year high of 11.5 per cent in the beginning of the year, fell to 8.24 per cent in the week under consideration, on the back of higher base effect and easing of prices of fruits, vegetables and certain cereals. Prices of manufactured items eased over the week as metals and transport equipments became cheaper over the week.

Export-Import Growth
Even the truncated exports target of $175 billion for the fiscal would be hard to meet as the country's overseas sales dipped by 13 per cent in February — the fifth decline in a row. As per the quick estimates of the Government, imports also fell for second consecutive month by about 18 per cent during the period.
Exports in February 2009 contracted to $13.04 billion, while imports shrank by 18.1 per cent to $17.02 billion, reducing the trade deficit to $4 billion compared to $5.69 billion in the same period in 2008.

The cumulative exports during April-February 2008-09 were at $157.3 billion compared to $142.85 billion in the corresponding period in 2007-08. While imports in the same period grew by 21 per cent to $260.35 billion from $215.22 billion in the year-ago period. Even to touch the $175 billion exports target, the country requires about $18 billion in the next three weeks, which appears a toll order.

After registering a handsome growth of over 30 per cent in the first half of the financial year, Indian exports entered into the negative territory and plunged by 12.1 per cent in October 2008.

In November 2008 exports dipped 9.9 per cent dip, 1.1 per cent in December 2008 and 15.9 per cent in January 2009. Exports shrank an average 7.7 per cent a month last quarter and imports grew 8.5 per cent.

Worsening Situation
The economic situation is worsening faster than expected as the GDP figures for the third quarter, released on recently, confirm. A lower-than-estimated GDP growth of 5.3 per cent may unsettle Reserve Bank of India (RBI)/Government calculations for a seven per cent growth this fiscal. This means more pain for the poor and the jobless.

In this context, the hurried clearance of a Rs 5,000-crore scheme to build 10 lakhaffordable houses and some road construction projects, mostly in Naxalite-hitStates, are welcome. These will not only create jobs but also perk up demandfor cement and steel.

The previous Government plan for inaction on the plea of upholding constitutionalpropriety would not have served anyone’s cause. Even if motivated by electionsand stretching the budgetary limits a little harder, the giveaways will help infixing the economy

Foreign exchange reserves dropped to $245 billion as per the latest data released by RBI, from a record $316.2 billion reached in May 2008.

The rupee also fell against the dollar to a new low of Rs 51.17 on the concern of declining exports. This will widen the country’s current account deficit, increasing demand for dollars to fund the shortfall.

Future Ahead
As the world is passing through a major global recession the need for open trade is as great as ever. We should not forget that the given scale of the financial mess, situation could be a lot worse.

Of course, the economic situation will certainly not be rosy in 2009 but the country is better placed than many other economies to bounce back to higher growth trajectory with revival of the global economy. The recession is so severe that as was not expected by the economic think-tank. The recovery from this juncture could take longer.

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