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  • : Economy: Rough with the smooth
  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  JULY 7, 2004

    Economy: Rough with the smooth

    Backed by robust economic activity in the last fiscal, the country's GDP grew at an impressive 8.1%. This is only the third time in independent India's history that the country has recorded growth of over 8%. The economic survey announced by the government today outlines the various factors contributing to the growth.

    Sector-wise performance

    The GDP growth of 8.1% was mainly boosted by a strong recovery in the agricultural sector (9.1%), which had witnessed negative growth of 3.2% in FY03. The industry and services sector also maintained the momentum posting growth rates of 6.5% and 8.4%, respectively in FY04 as compared to 6.4% and 7.1%, respectively in FY03. Broad based activity in mining, electricity, gas and water supply, hotels, transportation and communication and financial services led to high growth in the services segment.

    From the above graph, it can be comfortably said that India continues to be driven by agricultural performance. Normal forecast for monsoons in FY05 is likely to result in robust Kharif crop production. This augurs well for the economy in the current fiscal as historically, industrial performance has always traced the agricultural growth.

    The services sector too, continued to witness strong growth on the back of a revival in global economy, especially in the US and UK in FY04. The sector is likely to witness strong growth in the years to come on the back of skilled and cheap labour and an economic recovery on the global stage.


    Inflation for the fiscal averaged at 5.5% with the manufacturing sector contributing nearly 80% of the inflation. Increase in the prices of sugar, edible oils, textiles, leather and metals such as iron and steel led to high inflation. Inflation, infact crossed 6% in January on the back of high crude oil prices. However, abundant foodgrain stocks helped in maintaining stability in food prices. Although the rupee appreciated by 5.3% in FY04 against the dollar, given the inflation differential between the two nations, in terms of the real effective exchange rate, the rupee appreciated by only 2.2%. Also, burgeoning forex reserves resulted in the RBI selling government securities in the open market thereby sucking out additional liquidity. To put things in perspective, reserves grew by US$ 36.9 bn in FY04 as against US$ 21.3 bn in FY03 and this surge is largely due to the fact that foreign inflow in the form of Foreign Institutional Investors (FIIs) investments increased from US$ 0.3 bn in FY03 to US$ 10 bn in FY04.

    Money matters

    Bank credit during the fiscal picked up during the latter half of the year. Total bank credit increased by 14.6% in FY04 as compared to 16% during FY03. A significant factor to be noted is that food credit for the fiscal fell sharply by 27% while non-food credit witnessed 17.6% growth, which was encouraging. Drop in food credit is on the back of lower procurement and higher off-take of foodgrains.

    Interest rates continued their downward trend during the fiscal with the Reserve Bank of India (RBI) reducing the Bank rate and the CRR by 25 basis points each (6.25% to 6% in case of the Bank rate and from 4.75% to 4.5% in case of CRR). However, lending rates remained more or less unchanged in relation to a steep fall in deposit rates. Banks therefore, improved their profitability on account of higher treasury income and higher interest rate spread. Further, mechanisms such as corporate debt restructuring, recovery through Lok Adalats and debt recovery tribunals significantly led to lowering of the NPAs. The RBI has now advised to Scheduled Commercial Banks (SCBs) to announce benchmark prime lending rates based on actual costs.

    Capital markets

    On the back of lower interest rates, the yields on government securities dropped with the short-term paper drawing 4.72% during end-March 2004 as compared to 5.63% during the corresponding period last fiscal, while the long-term paper yield dropped from 6.5% to 5.4% during the same period. At an inflation rate of 4.5%, the real rate translates to around 20 basis points on the short term paper and 90 basis points on the long-term debt. A significant and rare feature during the last fiscal was that the government borrowings were lower than the actual budgeted borrowings. This was due to the high revenues generated by the previous government's disinvestment plan.

    While debt market yields softened during FY04, equity market return was 85%, the second highest in Asia. With good corporate earnings, the investor confidence returned to the markets. This period also led to the revival of the primary markets, where almost Rs 232.7 bn was raised during the fiscal. Market capitalization of the listed companies rose from Rs 7.2 trillion to Rs 13.8 trillion during the fiscal.


    The Budget for FY04 undertook to provide a major thrust to infrastructure, principally, roads, railways, airports and seaports at a total projected cost of Rs 600 bn. This was supposed to be completed in partnership with the private sector. Implementation on these works is in progress and the National Highway Authority of India (NHAI) has invited bids for 622 kms of highways. The restructuring of the Mumbai and the Delhi airports is also underway.


    Expectations of a decent monsoon, growing services sector and improved corporate scorecard are likely to help sustain economic growth rate at 6.5%-7% in FY05. Coming from the lows of 4% GDP growth in FY03, such expectations are highly enthusing, that too on a larger base.

    However, the question is, is this enough? Have we breached the Hindu growth rate, and are entering a sustained new growth trajectory?

    We believe that although large power projects being lined up are good for the infrastructure development of the economy along with the development of railways, roads and airports, the country is going a step backward as far as protectionism is concerned. Subsidies by way of free distribution of power and providing fertilizers at cheaper rates to the agricultural sector and also the subsidies on LPG and kerosene are likely to create a major dent in the government's hopes to curb fiscal deficit. All in all, we believe that the government will have to take some harsh measures in the time to come in order to see longer-term sustainable economic growth at the cost of short-term benefits.

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