Economic Survey 2012-13: Reflects India's Grim Reality, Cautions Against Growing Taxes

Finance Minister P. Chidambaram presented the pre-Budget Economic Survey for 2012-13 to Parliament on February 27. The Survey reflects the grim reality that India is facing a severe slowdown and must act fast to spur investment, restart stalled projects, cut interest rates and contain its fiscal deficit.

Growth Rate

The Survey made it clear that this fiscal’s five per cent growth, the slowest in the past decade, could no longer be blamed on external factors alone, and the government will have to act on the domestic front to come out of the slump.

The Economic Survey, while projecting an optimistic growth rate of 6.1-6.7 percent for 2013-14, stated that to contain the fiscal deficit the government should widen the tax base and cap subsidies, particularly through better targeting and plugging leakages. It also claimed the downturn was more or less over, and that the economy was looking up. Claiming that the downturn was “more or less over” and that the economy was looking up, the Survey projected a cautiously optimistic growth rate of 6.1-6.7 percent while conceding that the Gross Domestic Product (GDP) growth for the current fiscal was likely to slip to the decade’s low of five per cent — compared to the estimates by the Central Statistical Organisation (CSO) of 6.2 percent for 2011-12 and 9.3 percent the year before.

Fiscal Deficit

The Survey had pegged the fiscal deficit at 5.1 percent for the GDP for 2012-13, which the finance minister later revised to 5.3 in view of the rising expenditure and subdued revenue collection. For the new fiscal, the finance minister has committed to bring it down to 4.8 per- cent.

The 2012-13 Survey notes that the government needs to contain the fiscal deficit especially by shrinking wasteful and discretionary subsidies. The Survey said: "Controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG need to be raised in line with their prices prevailing in the international market.

In addition, delays in getting permissions for projects need to be curbed so that investment can pick up. Implementation of GST, if approved, would create an integrated market and bring more producers in the tax net. Also, the direct benefit transfer scheme recently rolled out on the AADHAAR platform will target subsidies better.

Agriculture Reforms

Economic Survey states that with agriculture growth rate falling short of the four per cent target in the past five years, the country’s annual economic report card (the first since the beginning of the 12th Five-Year Plan period), calls for increase in yields and reforms like a suitable sustainable strategy to maximize agricultural income and make it a viable option.

The farm sector achieved 3.6 percent growth during the 11th Five year Plan (2007-12) – higher than growth of 2.5 and 2.4 percent during ninth and 10th Five-Year Plans but lower than expectations of 4 percent growth target.

Therefore, in the face of stiff challenge of feeding its growing population, the Survey has sought urgent reforms to boost crop yield and private investment in infrastructure to motivate farmers.

Economic Survey for 2012-13 has emphasized putting in place a strategy for farm development in the eastern and northeastern regions amid saturation in crop yields in Green Revolution belt, especially in the States of Punjab and Haryana.

Tax Rate

In what may bring cheer to the well-heeled in the wake of a raging pre-Budget debate over squeezing more out of the super-rich class, the Survey suggested the government’s efforts to raise additional revenue should be through widening of the tax base and not by increasing the rates. The Survey stated: “It is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly — higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion.”

Several experts, including PMEAC Chairman C. Rangarajan, have pitched for higher rates of taxes on super-rich. The Survey, prepared by a group of economist led by Chief Economic Advisor Raghuram Rajan, said it is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in expenditure as it would only hurt development spending.

The Tax-GDP ratio touched a peak of 11.9 percent in 2007-08, but declined to 9.6 percent in 2009-10. It was 9.9 percent in 2011-12. “Raising the tax-GDP ratio to above the 11 percent level is critical for sustaining the process of fiscal consolidation in the long run,” it said.

Gross tax revenue in April-December 2012 has grown by 15 percent to over Rs. 6.81 lakh crore. However, the growth in tax collection was “significantly” short of the growth envisaged in Budget. The tax collection until December 2012, was 63.2 percent of Budget estimates, lower than the last five-year average of 69 percent.

Rate of Inflation

Predicting that headline inflation may fall to 6.2–6.6 percent by next month, the Survey stated that elevated food inflation would continue to remain an area of concern as it inched towards double digits in December 2012. While 2012, the inflation was driven by protein items, this year it has been due to increase in prices of cereals such as wheat, rice and maize.

Inflation which is one of the major areas of concern for the United Progressive Alliance (UPA) Government, has remained in the range of above seven per cent since December 2009, while to add to its woes food inflation, too, has remained on the higher side during the same period, and according to the Economic Survey for 2012-13, easy money policy of major developed and developing nations may further aggravate inflationary expectations in India.

The survey further added that inflation has remained muted in the current financial year and declined to a three year low of 6.62 percent in January 2013. The average wholesale prices-based inflation in 2012 (April-December) moderated to 7.55 percent from 8.94 percent in the corresponding period of 2011-12.

Industrial Production

With the spurt in factory output last October turning out to be an aberration in the wake of sharp downturns in the months after, the latest Economic Survey has sought to describe the industrial production scenario as a ‘mixed picture’ of sluggishness bottoming out as well as continuing for a little longer period.

What came as a surprise to the government while India Inc. maintained a ‘we said so’ stance to clamor for easing of interest rates, was that industrial growth, as measured by the Index of Industrial Production (IIP), witnessed a smart recovery with a robust 8.3 per cent expansion in October, 2012.

Despite the downward bias, the Survey has highlighted at least two factors which point to some optimism on the industrial front.

First is the data on frequency distribution of products/product groups within the IIP basket which indicates that the number of products with negative growth has declined from 182 in the fourth quarter of 2011-12 to 160 in October-November 2012.

The second positive factor is the Reserve Bank of India’s ‘Business expectation index’, which showed moderately positive growth during the third quarter of the current fiscal after posting persistent negative growth for the previous six quarters. Since the RBI business index tracks IIP growth fairly closely, the change in trend suggests a possible bottoming out of IIP growth moderation.

Foreign Direct Investment

According to the Economic Survey, Foreign Direct Investment (FDI) in India slumped by 43.3 percent at $15.85 billion in April-November period of the current financial year as compared to $27.93 billion in the corresponding period previous year. The overseas investment flows in top five services declined by 9.7 percent at $8.19 billion during the period under review.

The Survey stated that overall FDI inflows increased by 33.6 percent in 2011-12. Overseas investment inflows in services surged by 57.62 percent in the financial year ended March 31, 2012.

The document presented a day ahead of the Union Budget 2013-14 pointed out that the government has taken many policy initiatives to liberalize FDI policy for services sector. This includes increasing FDI limit from 49 percent to 74 percent in teleports and DTH and cable networks, permitting FDI up to 74 percent in mobile TV, up to 49 percent in scheduled and non-scheduled air transport services and up to 50 percent in multi-brand retail trading.

The Survey stated that the government has also amended the existing policy on FDI in single brand product retail trading.

Health Sector

The country’s spending on health remains abysmally low with the Survey revealing that the spending on health, as compared to the spending on the rest of social services, has actually been declining in the country. Raising alarm over the decline, the survey has called for increased focus on health and education if India's demographic dividend is to be used to its advantage. Between 2011 and 2016, as many as 63.5 million workers, mainly aged between 20 and 35 years, will join India's pool. For this segment to be productively engaged, spending on health and education must remain consistent, the survey says.

But the ground situation paints to a sorry picture. The combined central and state expenditure on social services as a proportion of total expenditure increased from 22.4 per cent in 2007-08 to 25.1 per cent in 2012-13 and the spending on education among all the social services also increased over this period from 43.9 to 46.6 per cent.

However, the combined general spending (federal and states) on health has fallen over the past five years from 21.5 per cent to 19.2 per cent.

Petroleum Subsidies

The 2012-13 Survey has called for addressing the key issues of petroleum subsidies, clarity on gas pricing policy, petroleum price distortion and concerns over various disputes pertaining to the New Exploration Licensing Policy (NELP). It stated that addressing the key fiscal risk of petroleum subsidies is critical in better fiscal marksmanship.

It stated further that the overall subsidy bill of the government, it said, was likely to overshoot the target of Rs.1.79 lakh crore this financial year due to higher crude oil prices. The government had put the petroleum products subsidy at Rs.43,580 crore, food subsidy at Rs.75,000 crore and fertilizer subsidy at Rs.60,974 crore, taking the total subsidy bill to Rs.1,79,554 crore for 2012-13.

Employment Rate

The 2012-13 Economic Survey stated that the employment rate between June 2011 and June 2012 went up by approximately 7 lakh led mainly by the IT and BPO sector which accounted for almost half of the increase. It stated that upward trend in employment since July 2009 continues despite the economic slowdown.

A sector wise analysis shows that the textiles sector including apparels saw 1.70 lakh job additions, followed by transport sector (0.45 lakh), metals (0.26 lakh), gems and jewelry (0.19 lakh) and automobiles (0.11 lakh) in June 2012 over June 2011.

The survey said that employment in handloom/power loom and leather sectors has marginally declined during this period.

It said that there has been a sustained and consecutive increase in employment in both the public and private sectors covered at overall level during the last eleven quarters with a total addition of 30.73 lakh employment during this recovery period.

According to the Survey, India is on the brink of a demographic revolution with the proportion of working-age population between 15 and 59 years likely to increase from approximately 58 per cent in 2001 to more than 64 per cent by 2021. Moreover around 63.5 million new entrants to the working age group between 2011 and 2016, the bulk of whom will be in the relatively younger age group of 20-35 years.

The Survey added that the annual growth rate of employment in the private sector in 2011 was 5.6 per cent whereas that in the public sector was negative.

Monetary and Credit Policy: Repo and Reverse Repo Rates Unchanged

The Reserve Bank of India (RBI) has recently released its mid-quarterly review. It has clearly spelt out that monetary policy actions will be in terms of rate cuts going forward, given the moderating growth momentum and higher downside risks to growth.
The RBI kept repo and reverse repo rates unchanged at 8.5 per cent and 7.5 per cent, respectively, to fight rising inflation in Asia's third largest economy. The central bank left Cash Reserve Ratio (CRR–(money that banks must keep with the RBI) unchanged at 4.75 per cent. Recently, the RBI slashed CRR, the portion of deposits banks are required to keep with the central bank, by 0.75 percentage points, a step that was meant to infuse Rs 48,000 crore into the economy.
Earlier on March 9, the central bank cut CRR by a hefty 75 basis points, or three-fourths of one per cent, from 5.5 per cent to 4.75 per cent effective the fortnight beginning March 10.
The markets and the corporate sector were expecting the CRR cut on March 15 when the RBI is scheduled to announce its mid-quarter review. But the central bank said on Friday it feared a liquidity crunch due to the advance tax (to be paid before March 15) outflows; and this would have increased the already tight position of banks due to the usual frontloading of cash balances with the RBI.This CRR cut will inject around Rs. 48,000 crores of primary liquidity into the banking system. Earlier in January, the cut in CRR of half a per cent injected Rs. 31,500 crores into the banking system. The CRR cut was welcomed by banks and the corporate sector.
On January 24, RBI had cut CRR by 0.5 percentage points to 5.5 per cent, releasing Rs 32,000 crore into the system. Since then, the fund crunch has only worsened.
The strain on the system rose to high of Rs 1.02 lakh crore. And going forward it will only increase as by March 15 companies will have to make advance tax payments which will drive out Rs 60,000 crore from the system.
Another Rs 12,000 crore is likely to go out of banks due to the Oil and Natural Gas Corporation (ONGC) auction last week, and a similar amount will be drained out on account of excise duty payment by companies.
Rate of Inflation
Inflation rose to 6.95 per cent in February which is much above the Reserve Bank’s comfort level of 5-6 per cent. RBIs own forecasts of inflation is that it will go down to 7 per cent levels in March 2012 from November 2010 levels of 9.11 per cent. RBI has indicated that non food manufacturing inflation is still a worry as it has gone up from 7.6 per cent in October 2011 to 7.9 per cent in November 2011. However, it has reiterated that despite the rise in non food manufacturing index, headline inflation momentum is slowing down.
The market will now have to work out its own math on inflation. Inflation can surprise on the downside as much as it has surprised on the upside. It is going to be a difficult call on where inflation is headed in 2012, but considering the fact that prices are already at elevated levels with inflation as measured by the Wholesale Price Index (WPI) averaging over 9 per cent for the past two calendar years, inflation has the ability to come off sharply especially if global growth slows down dramatically.
GDP Growth
There are now serious concerns on the slowdown in the Indian economy as the Gross Domestic Product (GDP) growth figures for the September-December 2011 quarter came in a paltry 6.1 per cent, the lowest since the Lehman crisis that shook the global economy in 2009.
The economy has given mixed signals in the past few months with some green shoots being seen on inflation, foreign institutional investor inflows, stock markets, the rupee and policy action picking up.
However, the figures come as a dampener as they are well below estimates. It is clear the lag effect of problems seen last year of low investor confidence resulting in low investment, high inflation and high interest rates and policy inaction are playing out. The surprise is that GDP growth is now at the level seen during the Lehman crisis when the world economy was in a reset mode though the situation has improved since.
GDP growth decelerated to a low of 6.1 per cent in the third quarter of fiscal 2012, raising fresh concerns about the growth slowdown. Industrial sector continues to be the main laggard and grew at an anemic rate of 2.6 per cent due to falling domestic demand and faltering global recovery.
The magnitude of moderation has been a bit of surprise because advance estimates released earlier had pegged financial year 2012-13 growth at 6.9 per cent.
According to FICCI, it would be ironical if GDP growth in 2011-2012 goes below 6.8 per cent, would be lower than in the crisis that was achieved in 2008-09 — the year of the post Lehman crisis.
Foreign Trade
Indian imports continued to outpace exports in February as demand remained weak in major exports markets like the United States and Europe, nudging the government to revise up the full-year trade deficit projections.
A widening trade deficit will likely worsen India's current account deficit and further weaken the rupee. Merchandise exports grew an annual 4.3% to $24.6 billion in February, while imports grew 20.6 percent to $39.8 billion.
The trade deficit widened to $15.2 billion during the month, from $14.8 billion in January.

Economic Survey 2011-12: Inflation Pegged at 6.5 Per Cent, Maintained GDP Growth at 6.9 Per Cent

Finance Minister Pranab Mukherjee presented the Economy Survey 2011-12– a report card of the Indian economic scenario for current fiscal– in the Lok Sabha (lower house of the Parliament) on March 15.
Inflation Rate
The Survey pegged inflation at 6.5-7 percent by end of March and projected a further moderation in the next fiscal. Inflation in the current fiscal has largely been driven by high food prices. It had slipped to a low of 6.6 percent in January, but rebounded to almost 7 percent in February. The survey, however, said that fiscal consolidation was the only way to keep inflation down.
The survey said that monetary measures by the Reserve Bank of India (RBI) and its impact on curbing inflation needed to be studied further to improve efficiency of such actions in the future. Incidentally, the RBI in its mid-quarter review of the monetary policy left key rates unchanged, citing upside risks to inflation.
Growth Rate
The Economic Survey has maintained Gross Domestic Product (GDP) growth at 6.9 per cent. The growth in the financial year 2012-13 growth is expected to come in at 7.6 per cent and the financial year 2013-14 growth is pegged at 8.6 per cent.
Indian along with Indonesia showed strong growth despite a global economic slowdown in the final quarter of 2011, according to the International Monetary Fund (IMF).
IMF in its latest provisional report has said the GDP growth of G20 – a grouping of leading economies of the world – slowed to 0.7 per cent in the October-December quarter, compared with 0.9 per cent in the third quarter.
In the United States, GDP growth increased to 0.7 per cent in the fourth quarter, compared with 0.5 per cent in third quarter.
The IMF stated that in India and Indonesia growth increased strongly, but slowed in China to 2 per cent, compared with 2. 3 per cent in the third quarter.
In Japan, economic growth decreased to (-)0.2 per cent, following the strong rebound (+1. 7 per cent) in third quarter.
The Survey states that GDP fell by (-)0.3 per cent in both the European Union and the euro area in the fourth quarter of 2011, the first fall since the second quarter of 2009.
Fiscal Deficit
The Survey states that the fiscal outcome in 2011-12 is likely to be affected by the macroeconomic setting which indicates sharp slowdown in industry and rising costs affecting profits. In the first nine months of the current fiscal, gross tax revenue has grown by 12.2 per cent as against the budget estimate target of 17.3 per cent, it said.
On the other hand, as against a target of 4.9 per cent for the whole year, growth in total expenditure in the first nine months of 2011-12 was 13.9 per cent, which comprised 15.4 per cent growth in non-Plan expenditure and 10.8 per cent growth in Plan expenditure, the survey added.
Per Capita Income
According to the Survey, the per capita income of India stood at $ 1,527 in 2011. The Survey says that this is perhaps the most visible challenge. Nevertheless, India has a diverse set of factors, domestic as well as external that could drive growth well into the future.
The Survey further says that between 1980 and 2010, India achieved a growth of 6.2 per cent, while the world as a whole registered a growth rate of 3.3 per cent. As a result, India’s share in global GDP more than doubled from 2.5 per cent in 1980 to 5.5 per cent in 2010.
Consequently, India’s rank in per capita GDP showed an improvement from 117 in 1990 to 101 in 2000 and further to 94 in 2009. China, however, improved its rank from 127 to 74 during the same period.
Highlights
* India's economic growth estimated at 6.9 per cent in the current fiscal; growth momentum to pick up in next two fiscals to 7.6 per cent 2012-13 and 8.6 per cent in 2013-14.
* RBI expected to lower policy interest rates, as inflationary pressures expected to ease in coming months; A low interest rate regime to encourage investment activity and push forward economic growth.
* Steps required for deepening of domestic financial markets, especially corporate bond market and attracting longer-term inflows from abroad; Efforts at attracting dedicated infrastructure funds have begun.
* The growth rate of investment in the economy is estimated to have declined significantly; borrowing costs up due to a sharp increase in interest rates.
* High borrowing costs and increase in other costs affecting profitability and internal accruals.
* Slowdown in Indian economy largely due to global factors, as also because of domestic factors like tightening of monetary policy, high inflation and slower investment and industrial activities.
* Inflation high, but showing clear signs of slowdown by the year-end; Whole-sale food inflation down to 1.6 per cent in January 2012 from 20.2 per cent in February 2010.
* India remains one of the fastest growing economies of the world; Country's sovereign credit rating rose by a substantial 2.98 per cent 2007-12
* Farm sector growth pegged at 2.5 percent for 2011-12.
* Services sector to grow at 9.4 percent.
* Services sector share in GDP to go up to 59 percent in the fiscal ending March 31.
* Industrial growth pegged at 4-5 percent, expected to improve as economic recovery resumes.
* Inflation on Wholesale Price Index (WPI) was high but showed clear slow down by the year-end. This is likely to spur investment activities leading to positive impact on growth.
* WPI food inflation dropped from 20.2 percent in February 2010 to 1.6 percent in January 2012.
* Calibrated steps initiated to rein-in inflation on top priority.
* India remains among the fastest growing economies of the world.
* Fiscal consolidation on track - savings and capital formation expected to rise.
* Exports grew by 40.5 percent in the first half of this fiscal and imports grew by 30.4 percent.
* Foreign trade performance to remain a key driver of growth.
* Forex reserves enhanced - covering nearly the entire external debt stock.
* Central spending on social services goes up to 18.5 percent this fiscal from 13.4 percent in 2006-07.

India’s Industrial Production Dips

The Reserve Bank of India (RBI) is in an unenviable position ahead of its monetary policy review meeting scheduled on 16 September. It has to take a call on interest rates -- whether to raise them further in the face of continuing inflationary pressures or pause temporarily based on the latest disappointing factory output data. To its credit, the central bank has been much more realistic in turning the spotlight on the Indian economy's blind-spots than North Block. In its successive policy reviews, the RBI has not simply focused on inflation's stubborn persistence, but even warned of business mood dips impacting investment and consumption growth declining as interest rate-sensitive sectors face increasingly reluctant buyers.
GDP Growth
In fact, while New Delhi has tended to exhibit a misplaced optimism about growth prospects with its eyes shut, the RBI was ahead in scaling down its Gross Domestic Product (GDP) growth forecast for 2011-12 by a full percentage point to below eight per cent.
India’s GDP increased 7.8 per cent in the three months ended March 31 from a year earlier, the weakest pace in five quarters, government data show. Still, the expansion is the quickest after China among major economies, bolstered by higher incomes in the nation of 1.2 billion people. All in all, the portents for the Indian economy are far from encouraging.
Overall IIP
The latest industrial growth figures for July suggest that the slowdown that many experts and most policymakers thought would be temporary and narrow is, indeed, broad-based. The overall Index of Industrial Production (IIP) registered a year-on-year expansion of only 3.3 per cent, the lowest in 21 months. Manufacturing and mining grew by 2.3 per cent and 2.8 per cent respectively, while the 13.1 per cent increase in electricity was mainly a result of the good monsoon, which has helped boost generation from hydel stations. More disturbing has been the 15.2 per cent dip in production of capital goods, a proxy for investment activity. Even if one discounts for the unreliability of data for this sector -- leading to extreme growth volatility -- the fact that investment sentiment has been vitiated by recent political developments and concerns over ambiguous laws and tangled procedures among foreign investors cannot be missed. If industrial growth is slowing, there is the possibility of weakening demand on account of high interest rates further dampening it.
Growth in Mining Output
The growth in mining production was 2.8 per cent in the month, down from 8.7 per cent in the same month last year. Production of intermediate goods fell by 1.1 per cent during the month under review against a growth of 8.5 per cent in July 2010.
Consumer durables grew by 8.6 per cent in July as compared to a growth of 14.8 per cent in the corresponding month of last year. However, electricity production improved witnessing a growth of 13.1 per cent in July this year as against a growth of 3.7 per cent in July 2010.
Non-durable consumer goods (FMCG) production also grew by4.1 per cent in July, compared to a decline of 0.9 per cent in the same month last year.
Rate of Inflation
Persistent increases in its key policy rates over the past 20 months may have somewhat dented non-food 'core' inflation resulting from excessive demand. But the problem is that while demand in the manufacturing segment may have dipped, general inflation has not. Agricultural production has been tardy for quite a long time now. The services sector has been a saving grace but it cannot prop up growth beyond a point.
The international business environment continues to be bad and in fact deteriorating and with the RBI raising lending rates and tightening liquidity so as to check rampant inflation, the negative impact on economic activity and growth was not inconceivable. For once the Finance Ministry may be right when its Chief Economic Adviser Prof Kaushik Basu, says inflation will stay high until December. So the RBI, in a way a victim of its own success, will now have to battle high inflation and the prospect of falling output driven by weakening demand.
For policymakers it would be tempting to pass off the slowdown as partly the outcome of global woes just as earlier they claimed that inflation was also stoked by global commodity prices. But unlike the United States and the European Union, India did recover from 2008 with a smart pick-up in 2009. The current slide actually began in the past six months or so. And that has been the result of very successful monetary and very slothful public policies.

World Economic Prospects

The issue of the US loss of AAA credit rating on last weekend is not over end yet. International credit rating agency Standard and Poor's warned that there is one-third probability that the agency will further downgrade the US credit rating in the coming half to two years. The US economic prospects are gloomy in view of the country's debt crisis. In addition to the spread of the European debt crisis, the global stock markets crashed again on 8 August. G7 and G20 finance ministers and officials called for emergency meetings to find ways to solve the problems.
Great Depression-Like Situation
The global stock market disaster has also caused turmoil in foreign exchange markets. Another round of depreciation of major currencies is expected. Moreover, the US credit rating may be further downgraded. Bad news comes one after another. Many are worried that the situation may be worse than what happened in the 1930s and that there may be a repeat of the Great Depression. What measures the Malaysian government would take to deal with this crisis? This is another matter of concern.
First of all, the current global economic problems, especially the US debt crisis, are very tricky. Almost all economists are at their wits' end as to how to solve these problems. One and a half year ago, with the exception of Prof Paul Krugman, almost no economist or research institute foresaw and warned the possible serious debt crisis in the United States. They also failed to predict that the United States would lose its AAA credit rating or have its credit rating downgraded to an even lower level. Europe, which is now plagued by the debt crisis, was the most severely stricken area in the first round; whereas Asia and Latin America were seriously hit in the second round. Almost none of the countries in the world can escape the crises.
Rise of Unemployment
The two rounds of financial crises have affected each other and now Asia is deeply plunged into the economic recession. The signs of this economic recession are the drastic fall of stock markets and depreciation of currencies. In medium and long term, we will see the decline of economic growth, rapid rise of unemployment rates, drastic drop of actual wages, and inflation. In other words, the degree of the current economic recession in the world, especially in Europe, is not far from the Great Depression in the 1930s, or even worse.
Finance ministers of G7 countries have recently met to discuss how to prevent the financial markets from plunging into turmoil as a consequence of the European debt crisis and the downgrade of the US credit rating. At this moment, an appropriate measure for the governments is to adopt expansive currency and financial policies in order to increase the total demands. However, Japan has already suffered economic downturn for seven years. During this period, the country suffered another severe setback caused by the earthquakes and tsunami. Japan has repeatedly adopted the measure of tax cut and expanding public spending. The country's interest rate has even dropped to the unprecedented 1 percent. Still, these measures have been to little avail. In other words, the economic problem of East Asia (Japan especially) has failed almost all economists. Both the governments and academicians have not been able to come out with any effective solution. At the same time, China may also find it hard to protect its own interests. Thus, it is not practical to expect China to come to the rescue. People are becoming more and more pessimistic over the economic prospects.
Second, the major economies in the world are now in different phases of the economic cycle. This is a rare and special phenomenon and has made the problems even more complicated. The United States has gone through more than seven years of expansion period since its economy started to recover in 2001 and has slowly declined from the peak. Now the United States is deeply plunge d in the debt crisis and its economic growth dropped drastically. The slowdown in the growth of the corporate surplus clearly proves this. The US debt crisis has also dragged the whole world into trouble. After this round of serious recession, the world economy may have to take a long time to gradually recover.
Third, the chaining effects in the current international trade and finance have increased a great deal. For example, the deterioration of the European debt crisis may cause serious losses to French bank Société Générale and the biggest bank of Italy and may be accompanied by the so-called ‘competitive’ depreciation. The plummet of the US stock market had also instantly led to the crash of stock markets worldwide. All these cannot be explained by fundamental economic theories. The European and US governments are still at their wits' end in handling their debt crises. As the interest rates, stock markets, and foreign exchange markets see drastic rise and fall, hindrance is expected in the financing of international trade and investment, and multinational capital because the risks have risen substantially.
International Policy Coordination
We can foresee that in the coming few years, there will be an obvious decline in international trade and investment as well as capital movement. This is of course greatly disadvantageous to the global economic growth. The turmoil and unrest in the global financial markets indicates the necessity for comprehensive reforms of the international financial system.
The key international currency, the US dollar, will become extremely unstable. Although governments of countries worldwide understand the importance of the ‘international policy coordination,’ they rarely walk their talk due to their selfish consideration. This has substantially weakened the stability of the international economic and financial system as compared to the past.
Future Scenario
We do not see any reliable and feasible solution for the debt crises in the near future, yet. The negative impacts on small economies like Malaysia are also obvious. One good example is that the economic growth of our country for this year is projected at 4.5 percent only. We foresee that various economic indicators will further decline in the second half of the year. It seems the recession is inevitable. As the demands from overseas declined drastically, expanding domestic demands will no doubt help to stabilize the economy in short-term. However, whether it is done through increasing budget for public projects or implementing incentives for rental cut, it will invariably lead to a soar of budget deficit. If the government rushes to implement some public projects, the quality and economic benefits of the projects may be affected easily.
Considering that the increase of the private investment had reached 24 percent in the first quarter of the year, it is indeed necessary to think twice on whether the government should introduce new measures in stimulating investment. In view of the bad and unfavorable external economic environment, economic stability is more important than economic growth.

Indian Farmers Produce Record Food Grains

Indian farmers have produced record grain in the just-concluded 2010-11 farm year, even as the world struggled with shortages. Food grains consist of rice, wheat, coarse cereals and pulses. In 2009-10, the total farm output was 218 million tons as compared to 234 million tons in the year before.
The food grain production witnessed an all-time record 241.56 million tons of food grain during 2010-11, surpassing the earlier record of 234.47 achieved during 2008-09, on the back of a good monsoon and higher support prices for farmers.
The record production shows that the sustained focus on food grains and pulses in recent years by the federation has paid off rich dividends. The output of pulses and oilseeds, two key consumption items India is not able to produce enough, also hit a record high.
Major Factors
However, sustaining the record output may be difficult this year because of the poor rainfall in July may affect sowing and eventually the output. By mid-July, the country had received 3 percent below normal rainfall with 13 Meteorological Department’s reporting a deficit. The record food grain output was largely because of a sharp rise in production of wheat to 86 million ton against 81 million ton in the year before.
India has now set a target of 245 million ton food grain for the 2011-12 crop year. The 2010-11 can be termed a very good year. The overall food grains production target is 245 million ton for the 2011-12 crop year.’
According to the fourth Advance Estimates for the year, the food grain production surpassed the previous record of 234.47 million ton achieved in 2008-09 with a good margin and is significantly higher than 218.11 million ton produced in 2010-11. However the estimate is still less than the target of 244.50 million ton set in the beginning of the crop year 2010-11.
All commodities in the basket, including wheat at 85.93 million ton, rice at 95.32 million ton, coarse cereals at 42.22 million ton, pulses at 18.09 million ton, oil seeds at 31.10 million ton have achieved an all time record. Among the coarse grains, maize with a contribution of 21.28 million ton, is significantly higher that the production of 19.73 million ton achieved during 2008-09.
Cotton and Kharif Output
Cotton production also increased from 24.23 million bales in 2009-10 to 33.43 million bales in 2010-11. For the 2011-12 crop year, the Agriculture Ministry has pegged rice production at 102 million ton, 87 million ton for kharif and 15 million ton for Rabi, wheat at 85 million ton, coarse cereals at 41 million ton, and pulses at 17 million ton taking food grain output to 245 million ton.
India will be able to meet the demand under the proposed National Food Security Act for which the requirement is around 60-65 million ton.
Food Inflation
The comfortable food grain stocks has kept a check on prices of cereals, but the rising demand for vegetables, milk and fruits had kept overall food inflation high. Inflation in food articles has dropped to 8.31 percent at the beginning of July from over 20 percent at the beginning of the year.
Minimum Support Price Increases
The sharp increase in Minimum Support Price (MSP), for a number of crops has allowed farmers to apply more inputs to their crop, helping lift output across crops. The MSP for pulses was raised up to 700 per quintal before the cropping season last year. In the case of some pulses, the increase more than 20 percent.

Ensuring High Growth and Contain Inflation for Vietnamese Economy

Recently, Vietnamese Prime Minister Nguyen Tan Dung has requested that State Bank needs to have consistent measures of positive monetary policy solutions, ensure macroeconomic stability, control inflation increase and boosting economic growth rates as Congressed had proposed.

Ensuring Macroeconomic Stability
At the State Bank of Vietnam (SBV), Prime Minister Nguyen Tan Dung chaired a meeting with the SBV on the implementation of directions given by the government and the prime minister, which aimed to ensure macroeconomic stability, control inflation increase and achieve the economic growth level of approximately 6.5 percent in 2010.

In attendance at the meeting, were the State Bank Governor Nguyen Van Giau, Finance Minister Vu Van Ninh, Minister of Industry and Trade Vu Huy Hoang, leaders of the government office, the Ministry of Planning and Investment, the Committee of National Finance Monitoring and other State-owned commercial banks.

Economic Growth Rate and GDP
Prime Minister Nguyen Tan Dung highly praised the efforts of the entire banking sector, which have positively contributed to the economic growth rate with the Gross Domestic Product (GDP) reaching 5.83 percent in the first quarter of 2010, fundamental macroeconomic stability is firm, social security and people's lives have improved, and market rate premises are declining.

Emphasizing on future tasks, Prime Minister Nguyen Tan Dung requested the banking sector to continue to try harder, thoroughly and firmly manage in a timely manner, base on the foundation of having a firm grasp of the reality to uniformly coordinate so that economic targets proposed by Congress can be implemented.

Measures To Improve Efficiency
The SBV was asked to have consistent measures of positive monetary policy solutions to execute comprehensively, practically, uniformly and effectively, to ensure that credit growth rate at about 25 percent and liquidity growth at approximately 20 percent. In addition, the SBV was asked to proactively apply necessary measures to improve efficiency, credit quality and financial capacity of credit institutions.

The prime minister also asked SBV to actively and flexibly manage, be cautious in the use of monetary policy tools following market principles, to ensure that they are consistent with development objectives and realistic circumstances of the financial market, the currency and the economy of our country.

Furthermore, the SBV was requested to pay attention in directing and guiding commercial banks to process loans according to the interest rate mechanism in agreement with production projects and efficient trading as outlined in the Resolution of Congress.

The SBV was asked to flexibly manage exchange rates and the foreign exchange market in relation to interest rates of the Vietnam Dong and foreign currencies, the consumer price index, trade balance and channel investments towards stability, contribute to encouraging exports and limit imports over exports.

Stability and Safety
In addition, the SBV was requested to strengthen the strict control of business activities of credit institutions; strengthen inspection and supervision to assess actual operation of each credit institution and the entire system of credit institutions, to gradually improve the competitiveness of domestic commercial banks, to ensure stability and safety of the financial and banking system.

In adjacent to that, the SBV was asked to be more proactive and active in providing official information, especially the financial sector, currency and price to guide public opinion, to contribute to fulfilling the duty of propaganda about the guidelines, policies, direction and operation of the government in the economic and social development. The prime minister had requested a monthly report by the SBV to the government on implementing measures of monetary policy.

Vietnam's Economy Shows Positive Economic Growth Trend

While most economies worldwide suffered a negative growth rate in 2009, Vietnam managed to place itself among the few countries that attained a relatively high growth rate of 5.32 percent. This basic figure indicates the strong recovery of the economy.
Minister of Planning and Investment Vo Hong Phuc said this at the regular meeting of the government in December 2009. According to the minister, the trend in other fields is positive as well.

Industrial Output Grows at 7.6 Percent
Industry was seriously affected by the shrinkage of export markets, but factories, businesses, and corporations made a great effort. The government and authorities at various levels proposed timely and effective solutions, for example supporting interest rates, expanding domestic consumption, and encouraging people to respond to the campaign "the Vietnamese people use Vietnamese products." Industry recovered quickly as a result. Negative growth of 4.4 percent in January 2009 was followed by continuous increases through the last months of the year, when industry was growing 12-13 percent. Overall industrial growth in 2009 was 7.6 percent.
High growth rates were seen in some product areas such as air conditioners 41.8 percent, Liquefied Petroleum Gas (LPG) 39.3 percent, freezers and refrigerators 29.5 percent, cement 19.2 percent, and round steel 19.1 percent.
A number of provinces experienced high growth rates, including 15.8 percent in Quang Ninh, 13.9 percent in Thanh Hoa, 10.6 percent in Dong Nai, 10.3 percent in Binh Duong, 9.4 percent in Hanoi, and 7.9 percent in Ho Chi Minh City.

Food Production Hits Record Level
In 2009, our country, particularly Tay Nguyen [Central Highlands] and the South Central Coast suffered severe damage from floods and storms, but because of efforts to promote production in other regions, particularly in the Red River Delta and the Mekong Delta, total grain production reached an estimated 43.33 million tons, including 38.9 million tons of rice, surpassing the 2008 record high by 0.4 percent in 2008, rice production reached the highest level in 12 years. Average rice productivity was 52.3 quintals per hectare.
Over the previous years, many localities had begun to replace old and stunted perennials with new varieties of higher yield and quality. Income from perennials was higher than other that of crops, so businesses and farmers continued to expand cultivated areas. Notably, more than 42,800 hectares of rubber were planted in the northern mountain provinces, Tay Nguyen and Binh Phuoc in 2009, and these provinces increased tea plantation by 2,600 hectares, and 6,100 hectares for coffee.
Animal husbandry continued to expand, particularly large-scale concentrated husbandry, and the number of farms increased more than 18 percent in compared to 2008.
Fishery and aquaculture production increased 5.4 percent over the previous year. The main reason was that localities continued to convert and expand cultivation areas in the direction of combining multiple cropping and polyculture. In addition the models of cage and raft aquaculture continued to develop, especially cage and raft aquaculture in the sea near the provinces of Kien Giang, Quang Nam, Ninh Thuan, Phu Yen, and Haiphong. Offshore seafood production increased due to a policy that supports purchases by fishermen of longer-range boats. Fishery services also improved, allowing boats more days at sea.

Posts, Telecommunication Revenue Increased 39.7 Percent
The number of new subscribers in 2009 was 41.7 million, an increase of 40.8 percent compared to 2008, including four million fixed-line subscribers, an increase of 43.1 percent, and 37.7 million cell phone subscribers, an increase of 40.5 percent. By the end of December 2009, the number of telephone subscribers in the country was 123 million, an increase of 51.3 percent over the previous year, including 18.1 million fixed line subscribers, an increase of 28.4 percent and 104.9 million cell phone subscribers, an increase of 56.1 percent.
By late December 2009, the number of internet subscribers had reached 3 million, an increase of 45.5 percent compared to 2008. The Internet users were estimated to be 22.9 million by late December, an increase of 10.3 percent over 2008. Total net revenue from post and telecommunication services in 2009 was estimated at 94.9 trillion Vietnam dong, an increase of 39.7 percent compared to 2008.

Lowest Consumer Price Index Increase in 6 Years
Consumer prices were fairly stable in 2009, apart from an increase of over one percent in February and December. The consumer price index in other months decreased or increased slightly. The consumer price index in December 2009 increased 6.52 percent in comparison with December 2008, much lower than the National Assembly's approved target of 10 percent.
The consumer price index in 2009 increased 6.88 percent from 2008, the lowest in the recent six years. The consumer price index increased 7.71 percent in 2004, 8.29 percent in 2005, 7.48 percent in 2006, 8.3 percent in 2007, and 22.97 percent in 2008.
In the context of the global financial crisis, our economy achieved a fairly high growth rate, and the inflation rate was not high. This indicates a big success for macroeconomic management and administration.

Exports Grow at End of Year
Because of the shrinkage of consumption in international markets, many commodity prices dropped sharply, so export turnover reached only about $41.4 billion in the first three quarters of 2009, a decrease of 14.8 percent from the same period in 2008. Exports for the whole year were estimated at $56.6 billion, a decrease of 9.7 percent from 2008.
However, in the later months, the situation noticeably improved. Export turnover in November reached nearly $4.7 billion, an increase of 10.2 percent over the same period in 2008.
December achieved the highest level of the year with $5.25 billion, an increase of 12 percent over the previous month and 12.5 percent over December 2008, mainly because of an increase in major commodity exports. Textile exports increased $90 million, rice $80 million, footwear $77 million, coffee $67 million, and crude oil $33 million.
Vietnam's economic changes during 2009, particularly in the last months, are a positive sign for new developments in 2010, the last year of 10-year 2001-2010 socioeconomic development strategy, the year of party congresses at all levels, and the 11th National Party Congress.

Credit and Monetary Policy Still Influenced by Effects of Recession

Nothing new happened on 27 October. The script of the Credit and Monetary Policy announced by Reserve Bank of India (RBI) Governor D. Subbarao was written by the RBI on 26 October itself during the quarterly review of Indian economy. Although it is being said for some time that India has now recovered from the shocks of economic recession, the RBI believes that it is still time to take steps cautiously.

CRR, Repo and Reserve Rates Unchanged
No change was, therefore, made in most of the rates. Neither was any change made in the bank rates, nor in Repo Rate, nor in Reverse Repo Rate, or in the Cash Reserve Ratio (CRR).

Obviously the RBI wants that steps that were taken during recession for relief to industries should continue. They should continue to get credit at lower rates.

Danger of Inflation
One thing became clear from the 26 October report that the RBI perceives the danger of inflation, in spite of the fact that the inflation rate was below zero until a few days ago, and is still quite low. But the RBI feels that it could go up in the coming days.

For that, by increasing the Prime Lending Rate (PLR) by one percent, the bank had already indicated that it does not want any more monetary expansion at the moment.

Common Man's Concern
However, the reason for the common man's concern is not this figure of inflation, but the inflation in food commodity prices, for which the RBI is also watching the Rabi (winter) crop like everybody else. Apart from price rise, the bank sees another danger in real estate business. It feels companies engaged in this trade could get into trouble, and has made provisions for disbursement of loans to housing companies more stringent.

One problem continues, which dashes the hopes of many. The kind of scene witnessed in the stock market after the announcement of monetary policy is the result of such sense of hopelessness of several trades.

While banking companies are troubled by some limitation on their business possibilities, housing companies are unhappy that they would not be able to get loans easily now. And when housing is jolted, it has to impact on steel and cement. If crops are good, everybody would recover from these shocks. And then, the economy would also be prepared for a progressive policy rather than the monetary policy for recession.