Hopes on faster growth

Robotic welding in progress at an automobile unit in New Delhi.

Robotic welding in progress at an automobile unit in New Delhi.   | Photo Credit: — FILE PHOTO

Heartening rebound in industry and many other sectors.

The prospects for the Indian economy in the current quarter and next year are being reassessed in government and industry circles. With sustained recovery in industrial production since April and reversal of the downtrend in exports in November, Finance Minister Pranabh Mukherjee is hopeful of expanded trade with European and other western countries in volume and value. The Prime Mister placed this year’s growth in GDP at over 7 per cent plus when he addressed the annual meeting of the Indian Economic Association recently. He said the resilience of the economy had been aided by a sharp rebound in several sectors.

Balanced development

It was emphasised that the government’s policies were yielding tangible results and with the developed economies on the recovery path, India’s GDP growth might be 8 per cent and more in 2010-11. The average growth in GDP since 2004 has been 8.5 per cent and heavy outlays in infrastructure and other core sectors will help better use of capacities in industry. Balanced economic growth can be ensured henceforth with renewed emphasis on irrigation and other facilities to raise agricultural production by 4 per cent on a sustained basis.

The contribution of agriculture will be better than expected. Procurement of rice in the 2008-09 marketing season (October-September) has been heartening at the previous year’s record levels. Punjab and Haryana accounted for bulk of the rice purchases as usual. Their output has not been adversely affected by a subnormal monsoon. It is also estimated that the rabi yield of wheat will set a new record and buffer stocks of foodgrains in July next may not fall much below last year’s level even with larger offtake through fair price shops and under the various welfare programmes. The contribution of agriculture and allied activities to GDP growth will be a positive 1-1.5 per cent and with the better functioning of industry and services, economic growth is likely to be 7.5 – 8 per cent.

Vibrant industry

The industrial sector remains vibrant with a 7.1 per cent improvement in April-October against 4.3 per cent comparably. What is significant is the recovery in manufacturing by 11.1 per cent in October against a drop of 0.6 per cent a year ago, in consumer durables 21 per cent (-1.6 per cent), mining 8.2 per cent (3.2 per cent) and power generation 4.7 per cent (4.4 per cent). Intermediate and basic goods have also fared better. The composite index for the whole year may rise by 7.5 per cent plus against 3.4 per cent and 8.5 per cent in the two previous years.

The revival in exports may gather pace in the coming months. These rose by 18.2 per cent in November with a pick up in readymade garments, gem and jewellery, manmade fibres and petroleum products. The improvement in exports has of course been exaggerated by the low base last year.

Sharp rise in FDI

The rupee too may harden against the dollar even as the latter firms up against other major currencies. The absence of any noticeable rise in foreign exchange assets is due partly to revaluation and slowdown in inflows of NRI and other funds with competing demand for recovery in developed countries.

However, the uptrend in reserves may resume with a pick up in foreign direct investments. FDI is bound to increase at an accelerated pace prompted by heavy outlays in nuclear power and other core projects.

With satisfactory arrangements for supply of nuclear reactors as well as enriched uranium by Russia, France, Canada and also the U.S. many nuclear power projects will come up in quick succession. There is also scope for manufacture of reactors and other equipment with France, Canada and Russia keen to provide requisite technology and financial assistance. The power sector will thus be entering a new growth phase. Efforts are also being made to minimise the use of fossil fuels through greater attention to the harnessing of solar and other renewable energy sources.

Comfortable BoP

The balance of payments position too will remain comfortable. The net rise in foreign exchange reserves up to December 25, even after taking into account the use of $ 6.5 billion for purchasing 200 tonnes of gold, has been $ 17 billion. This would have been larger but for the need to bridge the current account deficit.

The deficit for April-September was slightly higher at $ 18.62 billion against $ 15.85 billion a year ago, with a drop in net invisible receipts to $ 39.60 billion (48.55 billion) even with a reduced trade gap of $ 58.22 billion ($ 64.40 billion). However, the current account deficit for 2009-10 may not increase noticeably with likely rise in invisible receipts in December-March and improved outlook for the economy.

Active bourses

Indian bourses may witness hectic activity in the coming months. The past year has been rewarding for investors as the Bombay Stock Exchange sensitive index registered a net rise of around 80 per cent. The recovery is more impressive if it is borne in mind that the BSE index touched a low of 7697 in intra-day trading on October 27, 2008. The extent of further rise in the index in the near future is being discussed in stock market circles, especially as the working results of major corporates for October-December are expected to be encouraging in spite of cost push inflation. The peak touched by Sensex was 21206 on January 10, 2008.

The current acute inflationary pressures are mainly the result of shortages in essential commodities which may subside to a great extent after the rabi harvest though a return to normality will have to wait for a significant recovery in the 2010-11 agricultural season.

Larger imports of primary products in short supply, as indicated by the Finance Minister, will have an impact on domestic prices only if the cost of imports is not prohibitive.

However, there is the likelihood of oil inflation as the crude price has risen to around $ 79 a barrel. Selling prices for many petroleum products that are not controlled have been raised for offsetting the higher cost of oil imports. It remains to be seen whether there will be any queering effect on account of imported inflation.

The monetary and fiscal policies should remain helpful though the Finance Ministry is anxious to curtail government expenditure and minimise the fiscal deficit without affecting the growth process. The Finance Minister has also to give effect in the forthcoming budget to the recommendations of the 13th Finance Commission. While the budget proposals for 2010-11 will provide an indication of the new thinking of the UPA Government, the monetary policy should not seek to reverse the retreat from dearer money as heavier interest charges may have a retarding effect.

State Bank of India has allayed fears in this regard by announcing that there will be no increase in interest rates for six months as there is ample liquidity in the system. Though there has been keener demand for funds latterly, the pool of resources is also likely to grow with larger forex inflows.


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