Current year prospects for the Indian economy will look up if the monsoon behaves in the coming months. The meteorological experts have forecast a near normal monsoon. Recent reports of thundershowers, cyclones and rainfall in Assam portend timely onset of the southwest monsoon. With good rainfall, foodgrains production in the 2010-11 season may even surpass the record 234.47 million tonnes of 2008-09.
The Finance Minister anticipates a GDP growth of 8.5 per cent against 7.5-7.75 per cent in 2009-10. The Centre for Monitoring the Indian Economy (CMIE ) even places growth in GDP at 9.2 per cent aided by a contribution from agriculture and allied activities of 5.8 per cent against (-) 1 per cent.
Capacity constraints
The heartening performance of the past year was helped by high industrial output and good contribution from the services sector. Industrial output rose by 10.1 per cent in April-February against 3 per cent formerly with all core industries performing well. Even the export dependent textile industry has staged a smart comeback despite acute shortage of power in many regions. The industrial revival up to February was mainly helped by a smart pickup in domestic demand. The positive trend in exports since October last has also been helpful.
Growth in industrial production this year will be sustained as export earnings are expected to rise to $ 220 billion from $190 billion in 2009-10. Even with costlier oil imports and a rise in quantum and value of non-oil imports the trade gap may not be much higher than last year's $ 105 billion. Major industries however may have to face power and raw material constraints in raising output. They will also have to expand capacity in a short time. The rise in production may be less pronounced in percentage terms this time because of a larger base effect.
On the other hand, the services sector can raise its share despite a dearer rupee. Working results of software companies for 2009-10 are heartening and top managements are confident of further raising turnover and profits. Other segments in this sector such as medical services and tourism may not feel immediately handicapped by a costlier rupee.
Food inflation abates
There are distinct signs of abatement in food inflation. The drop in food index to 16.6 per cent in the week ended April 17 from 17.65 per cent earlier reflects the favourable impact of rabi crop arrivals and a softening trend in world prices for sugar, rice and even some types of pulses and edible oils. The monetary authorities reckon that the general inflation rate may decline to 5.5 per cent by March next year from 9.9 per cent last March. Monetary policies need not therefore be harsh. In fact there is the chance of a squeeze in the money market early next year with a keen demand for funds from industry and trade and also for funding sizable procurement. Food stocks stood at 47.44 million tonnes at the beginning of this year against 35.78 million tonnes comparably in spite of a shorter rice crop. Rice procurement in the current marketing season has been satisfactory while wheat purchases may exceed 26 million tonnes.
Repo and reverse repo rates have been hiked by an aggregate of 50 points each in two phases while the cash reserve ratio has been jacked up by 100 basis points. Banks however are not in a hurry to raise deposit and lending rates noticeably. There is no stringency in the money market now but this may change with keen demand for funds from industry and trade for working capital as well as investment along with the expanding requirements of the agricultural and micro sectors. The fiscal policies also will have to be helpfully conceived with no hasty withdrawal of stimulus packages.
Borrowing programme
The developments in October-March may be on different lines as the Central and State governments will have to borrow on a large scale. The Centre in particular has a challenging task it will have to raise a net amount of Rs. 3,42,300 crore against Rs.2,51,000 crore on the last occasion. The RBI had facilitated the exercise of the Centre and the States through a combination of active liquidity management measures such as front loading of the borrowing calendar, unwinding of securities under the Market Stabilisation Scheme (MSS) and Open Market Operations (OMO) purchases. The actual amount raised by the Union Finance Ministry was Rs.3,98,411 crore in the past year. At the same time an attempt has been made by the Central Exchequer to mobilise Rs.40,000 crore under the disinvestment programme while industrial enterprises in the public and private sectors will require funds for stepping up outlays.
The infrastructure sector too will have to raise huge funds by offering tax free bonds to institutional as well as individual investors. Copious inflows of forex resources will have to be encouraged if the dimensions of 2007-08 have to be ensured. Happily, developments in the external sector will be healthy as even net inflows in 2009-10 were $ 42 billion against only $ 7 billion previously. After making adjustments for current account deficit and other purposes foreign exchange assets increased by $ 11 billion to $ 279 billion against a decline of $ 20 billion. Addition in the coming months will be more impressive though it is not clear how much the Indian currency will appreciate and whether the RBI will have to intervene and ensure an optimum external parity for the rupee vis-à-vis other currencies.
