India is ‘resilient’ in challenging year - Views on News from Equitymaster

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India is ‘resilient’ in challenging year

Aug 29, 2000

Kargil war, sanctions imposed by advanced nations and rising crude prices to boot. Nevertheless, the Indian economy, according to the Reserve Bank of India’s (RBI) annual report for FY00 continued to be resilient in FY00. GDP growth 6.4% reflected only a modest decline largely due to a sharp decline in growth in agricultural output. Download Annual Report of the RBI for FY00 (PDF)

Among the highlights for the year was a sharp resurgence in industrial output, where growth jumped from 3.8% in FY99 to 8.1% in FY00. The resurgence was led by the manufacturing sector. The infrastructure group (comprising among others power, steel, cement and petroleum) posted a sharp rise in growth to 8.7% in FY00 as compared to 2.8% in FY99. However, on the industrial front concerns still remain, as the intermediate goods and consumer durables have largely contributed to growth. The capital goods sector, which reflects the level of investment activity taking place in the economy, suffered a ‘significant slowdown’.

The services sector continued to post robust growth rates (8.7% as compared to 8.0% in FY99) especially due to the growth in the software sector. Agricultural output was however, a key disappointment with growth declining to 1.3% from 7.2% last year. This slowdown was primarily responsible for the decline in overall GDP growth.

Government finances however left a lot to be desired. The overall fiscal deficit was pegged at 5.6% of GDP as against the projected level of 4.0%. The situation is grimmer when one takes into account the combined deficit of the central and state governments, which has been pegged at 9.9% of GDP. This figure is 2.5% higher than projected. The RBI has rightly highlighted this and has drawn attention to the implications in terms of the size of the government, burgeoning borrowing programme, increasing debt and interest burden and varying tax to GDP ratio among others. It has also taken up the issue of disinvestment suggesting that the government ‘take into account the prevailing or the likely capital market conditions’.

On the external sector front, a turnaround in exports and rising capital inflows enabled India to post a surplus in the overall Balance of Payments for the fourth successive year. The trade deficit was however higher on account of the higher crude prices. Exports grew 13.2% as compared to a marginal growth of 2% in non-oil imports. The lower growth in non-oil imports also highlights the fact that the investment activity in the domestic economy has been sluggish. Capital inflows too were buoyant, rising to US$ 10.2 bn as compared to US$ 8.6 bn in FY99. The surplus in the BoP strengthened the country’s reserve position, which now covers imports for eight months.

On the external front, the RBI has highlighted certain concerns that need to be dealt with in order to further improve the scenario. Key among these is the creation of a conducive export policy environment, utilizing e-commerce, promoting FDI by taking the right policy measures and brand promotion among others. The RBI has also suggested that the destination of exports be diversified so as not to be over dependent on any country or group of countries.

The performance of the Indian economy in FY00 has been termed as ‘satisfactory’. It is anticipated that growth in FY01 will be marginally higher at 6.5%, owing to a better all round performance.

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