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Economic Survey: Sectoral performance and prospects - Views on News from Equitymaster
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  • Feb 25, 2011

    Economic Survey: Sectoral performance and prospects

    The Economic Survey for 2010-11 (FY11) was tabled in the Parliament today. It highlighted the progress made by the Indian economy in FY11 and some big challenges it faces in the future. Let us have a look at the key takeaways from the same with respect to some key sectors:

    External Sector
    The crisis that had affected the world in 2008 and 2009 had a negative impact on the external trade for India as well. As a result, the trade slowed down to 13.6% in 2008-2009. And actually declined by 3.5% in 2009-2010.

    The Government had sought to reverse the situation in 2010 and had come up with various measures to achieve the same. The Reserve Bank of India (RBI) had reduced interest rates for pre-shipment rupee export credit. The Union Budget of 2010-2011 had also announced measures to boost external trade.

    These measures appear to have paid off as the trade growth from April to December 2010-2011 was at a robust 29.5% YoY. As per the Economic Survey, there are indications that India will not just achieve but actually surpass the target of US$ 200 bn during 2010-2011.

    Despite the robust growth till now, the challenge for India would now be to speed it up or to maintain the current growth momentum. 2010-2011The Economic survey recommends fundamental policy changes. For trade it recommends measures such as:

    • Market and product diversification and expansion of markets.
    • Support for technological upgradation by allowing the EPCG (Export Promotion Capital Goods) and SHIS (Status Holder Incentive Scheme) schemes to be extended by one year till March 2012.
    • Availability of concessional export credit.
    • To extend STPI/EOUs by one year.
    • To extend the DEPB (Duty Entitlement Passbook) scheme till June 2011.
    • Facilitation of Trade through Electronic Data Interchange initiatives to reduce transaction cost and time.

    The agriculture and allied sector accounted for 14.2% of the total GDP of the country. Though it is down from the 21.7% in 2003-04, it still forms an important part as it accounts for nearly 58% of employment in the country. The growth in agriculture and allied activities had witnessed a slowdown in 2008-2009 and a muted growth of 0.4% in 2009-2010. As per the advance estimates, the sector saw a healthier growth of 5.4% during 2010-2011.

    As per the advanced estimates of the ministry, the food grain production in the country has improved during 2010-2011. Total food grain production stood at 232.07 m tones, which is 13.96 m tones higher than that of last year. This is only marginally lower than the record production of 234.47 m tones seen in 2008-2009. This is despite the crop damage due to the cyclones, heavy rains and other natural factors.

    Outlook & Challenges for Agriculture
    • Despite the country making headway in food grains production since mid-sixties, however, the technological breakthrough of 1960s is dwindling and there arises the need for another green revolution.
    • Increasing crop yield is a challenge. This is a necessary condition for ensuring national food security.
    • To boost the capital investment in agriculture as a percentage of total GDP.
    • Incentivizing farmers to produce more by enhancing the returns that they get on their produce.
    • To boost the secondary food processing in India.
    • Addressing infrastructure requirements for the agriculture sector in terms of storage, communication roads and markets.
    • Long term strategy to boost the growth of milk, meat and poultry items.

    Bank credit to productive sectors of the economy has a critical role in sustaining economic growth. The last few quarters have been challenging for Indian commercial banks as they operated in a situation of tightening liquidity and steep borrowing costs.

    Non-food credit growth was up 24% from a year ago at the end of December 2010. This comes in higher than the RBI's target of 20% for the full year. Private sector banks led the thrust, growing their credit portfolios faster than public sector or foreign banks. The overall credit to GDP ratio rose to about 55%, continuing its upward progression. Credit to agriculture saw a 20% hike YoY in November 2010, industry (small and medium) saw a 29% surge YoY and priority sector credit saw a 21% growth.

    However deposit growth saw a slowdown, due to depressed real interest rates, clocking only a 15% growth. This unsustainable scenario caused a sharp increase in the credit to deposit ratio from 72% at the end of FY10 to 76% in mid-December 2010.

    The RBI's hawkish stance on inflation caused the central bank to raise key policy rates 7 times, cumulatively increasing the repo rate by 1.75% and the reverse repo rate 2.25%. This forced banks to hike their deposit rates as well. The base rate system replaced the BPLR system in July 2010. This move helped show a convergence in base rates.

    Certain priorities are as below:
    • Financial inclusion needs to be accelerated
    • Domestic capital markets need to be deepened
    • Fiscal deficits need to be lowered
    • Needs to be a regulatory overhaul aimed at updating modern legislation underlying financial markets

    Public Finances: It was the budget 2010-11 that had set the path for the process of fiscal consolidation to address the long run sustainability concerns. It began with a partial withdrawal of stimulus measures as the economy started recovering. The revenues remained buoyant on the back of a much higher than budgeted realizations in non-tax revenues arising from the 3G/BWA auctions. This gave a substantial legroom for higher levels of expenditure at given fiscal deficit targets. The tax revenue as a proportion of the GDP as per the advance estimates of the CSO is at 9.5% for 2010-11. After the partial withdrawal of stimulus measures and surge in demand the union excise duties collections seem to have done exceeding well for 2010-11. The tax levels are estimated to go to the 2007-08 pre-crisis levels. In addition to this there were 3 major initiatives to contain expenditure.

    The significant reform initiatives in expenditure include:
    • Discontinuation of below-the-line issuance of bonds for financing under-recoveries of petroleum oil companies
    • Nutrient based subsidy policy for fertilizers was put in place.
    • The proposal to calibrate the level of administered prices for domestic petroleum products to the international prices.
    Trends in Deficits of Central Government
    Year Revenue Deficit Fiscal Deficit Primary Deficit Revenue Deficit as per cent of Fiscal Deficit
    2003-04 3.6 4.5 0 79.7
    2004-05 2.4 3.9 0 62.3
    2005-06 2.5 4 0.4 63
    2006-07 1.9 3.3 -0.2 56.3
    2007-08 1.1 2.5 -0.9 41.4
    2008-09 4.5 6 2.6 75.2
    2009-10(P) 5.1 6.3 3.1 80.7
    2010-11(BE) 3.5 4.8 1.7 72.5

    Outlook of public finances: The roadmap to achieve the reduction in deficit is laid out and there is a significant level of reduction sought to be achieved in both central and state government deficit. The Government Debt Report 2010 indicates that the proportion of total expenditure to GDP is to go down by 2.5% to 13.5% of the GDP in 2014-15 and the proportion of tax to GDP is set to rise by 1.4% to reach 12.2% of the GDP in 2014-15. The estimates level of growth in tax revenues is likely given the recovery in the economy and the fact that it was at the same levels before the crisis. Thus it is critical to anchor expenditure reforms to realize the projected deficit levels. A beginning has been made as reforms were announced in subsidies and going forward, deepening the reform process would hold key to sustain growth.

    Infrastructure: Preliminary assessment of the economic survey indicates a mixed performance across infrastructure sectors. While some sectors like telecom have done well there have been a few others like power and road where capacity addition has been below target. The survey has called for an investment requirement of US$1 trillion in the 12th five year plan (2012-17). It has also highlighted various innovative ideas and new models for financing the infrastructure projects. We believe that the private sector has to contribute meaningfully if the budgeted target has a realistic chance of being accomplished.

    Considering that execution across infrastructure sectors has been impacted due to procedural and bureaucratic delays the survey has suggested various remedial measures to overcome those issues. It has also given some suggestions to avoid the time and cost overruns which have been plaguing the sector. Some of them include:-
    • Eliminating unfit projects at the at the DPR stage itself
    • Streamlining land acquisition and environment clearance issues for infrastructure projects. For instance, a national forest land bank with clear paper work and titles can reduce approval time for forest clearances.
    • Addressing problems of inadequate availability of skilled and semi-skilled manpower
    • Reassessing the criteria of allocating funds to different infrastructure sectors
    • Working on remedial measures to reduce infrastructure deficit as financing infrastructure requirement will prove to be a key challenge in the future
    • Chalking out ways to increase capacity addition in the infrastructure sector in a time bound manner
    The above remedial measures suggested can significantly iron out the issues which have impacted the execution cycle in the infrastructure sector, per se.



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