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Mid-term review: Key excerpts

Dec 16, 2004

The mid-term economic review of the Indian economy was released on Monday. Here the key aspects of the review for our visitors.

  1. Agriculture: Cumulative rainfall for the country as a whole was 13% below normal level till September 2004. The northwest and south peninsular monsoons have seen a much larger deviation than the national average at -22% and -15% respectively. On the back of this, the agricultural output is likely to be affected for 2QFY05 and 3QFY05. However, expectations of a good Rabi crop (the second half harvest) could partially offset the decline in kharif output.

  2. Industry: The average annual growth rate of the index of industrial production (IIP) was 7.9% (April-September 2004) as compared to 6.2% in the same period last year. What is encouraging is a 14.5% rise in capital goods sector, which clearly highlights the underlying strength of the manufacturing sector. Capital goods output and capital good imports are typically the lead indicators of economic recovery. Non-POL imports (excluding petroleum related product imports) were higher by 25.8% in the first half.

  3. Inflation: Besides the increase in prices of crude oil and petroleum products, rise in prices of metals also resulted in the wholesale price index touching 8.7% in August 2004. Despite the reduction in customs duty on petro-products and other key commodities, inflation has remained over the 7% levels. However, at the consumer price index level, inflation stood at 4.8% in September 2004. The RBI, in its mid-term review, has raised inflation target to 6.5% for FY05.

  4. Credit demand: Growth of bank credit (year-on-year basis) to the commercial sector was 22.1% as on November 12, 2004 compared to a growth of 11.0% on the corresponding date last year. Non-food credit increased by 14.5% (7.0 % in the same period last year). The increase in demand for money from corporates could be attributed to the rise in industrial production and augmenting funds for future expansion.

    Itís a mixed bagÖ
    (Rs bn)Budgeted estimate (BE)Apr-Sep'04Actual % of BE
    Corporate tax 884 203 23.0%
    Excise duties 1,092 366 33.5%
    Services tax 142 49 34.6%
    Total 2,118 619 29.2%
    Customs duties 543 252 46.5%
    Income tax 509 252 49.4%
    Other tax 8 6 78.7%

  5. Fiscal side: As far as the government collection goes, the table above highlights the budgeted estimates, the actual receipts from various taxes till 1HFY04 and the receipts as a percentage of budgeted estimates. While customs duty collection till 1HFY04 seems to be well on line with the budgeted estimates at 47%, the reduction in customs duty on petroleum products and other commodities like palm oil is likely to weigh on collections in the second half of the fiscal year. Besides, higher crude prices will increase government expenditure and the fiscal deficit target is likely to be overshot. As per the mid-term review "the trade deficit, which has been rising since 2000-01, is likely to be surpassed in the current fiscal."

What to expect?

On a balance scale, prospects for the Indian economy continue to remain promising. Though factors like increase in interest rates in the global economy, higher demand for credit in the domestic market and higher fiscal deficit are likely to put an upward pressure on interest rates, the same are likely to be lower as compared to the last ten years' average. This is cushion for the Indian economy. Having said that, the need for increased public-private participation in the areas of health, agriculture and education cannot be underestimated and it is high time the government initiates measures on the agricultural sector, which has been neglected for so long now!

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