• FEBRUARY 29, 2000

Industrial recovery seems to be underway - Economic Survey

  • The Indian economy is expected to grow by 5.9 per cent in 1999-2000. More importantly, an industrial recovery seems finally to be underway from the cyclical downturn of the previous two years. Growth of GDP from manufacturing will almost double to 7 per cent in 1999-2000 from 3.6 per cent in 1998-99. The growth in GDP from the construction sector is expected to accelerate to 9.0 per cent in 1999-2000 from 5.7 per cent in 1998-99. The performance of infrastructure sectors improved markedly. The inflation rate dropped to international levels of 2 to 3 per cent for the first time in decades. The balance of payments survived the twin shocks of the East-Asian crisis and the post-Pokhran sanctions with a low current account deficit and sufficient capital inflows. This was demonstrated by the continuing rise in foreign exchange reserves by over US $ 2.4 billion during the year until the end of January, 2000 coupled with a relatively stable exchange rate. Export performance has improved on par with the better performing emerging economies. The restoration of confidence in industry has been best reflected in the rise in the stock market during 1999. Primary issues have increased by almost half during the first nine months of 1999-2000.

  • Inflation dropped dramatically in 1999, surprising many observers by remaining at low levels. As of January 29, 2000, the annual inflation as measured by the WPI was 2.9 per cent (point to point), down from a peak 8.8 per cent on September 25, 1998. The inflation rate has been less than 4 per cent since April 1999, with the result that the average (52 week) inflation was 3.3 per cent (provisional) as on January 29, 2000. The decline in inflation as measured by the CPI for industrial workers has been even more dramatic, falling to zero in November 1999 from a peak of 19.7 per cent in November 1998. The strong agricultural growth in 1998-99, the increasing openness of the economy to manufactured imports along with the fall in international prices has contributed greatly to this decline. With the removal of import and export controls on agricultural products and their replacement by a rational, stable tariff structure, sharp fluctuations in agricultural prices arising from domesticsupply shocks could also be greatly moderated.

  • Exports showed a strong recovery in 1999, growing by 12.9 per cent in April-December 1999 in US $ value (DGCI&S customs data). Software exports, which are not captured in the customs data, also continued to show vigorous growth of over fifty per cent during April-September 1999. Despite a 57.8 per cent growth in the US $ value of oil imports in April-December 1999, overall import growth remained at a manageable 9.0 per cent. As a result the trade deficit was lower in value (US $) during April-December 1999 as compared to April-December 1998. Non-oil imports, however, grew by only 1.1 per cent in this period, as prices of non-fuel primary commodities were projected to fall in 1999 by over 11 per cent and unit values of manufactures by about half a per cent. The downturn in gold and silver imports and the sharp fall in imports of capital goods (by about 30 per cent for April-November 1999) also contributed to the slow growth of non-oil imports.

  • The current account deficit, which defied gloomy forecasts based on the presumed after effects of the Asian crisis and the economic sanctions, ended at 1 per cent of GDP in 1998-99. This was because international price declines affected both imports and exports. With the sharp rise in oil prices the current account deficit is expected to revert to a more normal level in 1999-2000. During April-September 1999 the current account deficit was higher than in the first half of 1998-99 and is expected to end the year at about 1.6 to 1.8 per cent of GDP. During the same period net capital flows have grown by over one-third. This suggests that the increase in the current account deficit will be financed quite comfortably. Both portfolio investment and non-resident deposit inflows have shown significant improvement. FDI flows, however, continue to be lower, and this is a source of serious concern, particularly given the medium term target of US $ 10 billion of FDI inflows. An expansion of the "automatic route" coupled with further liberalisation should help reverse this trend next year. ECB inflows also remain sluggish, but this is mainly due to weak domestic demand and easy liquidity available for corporations in the domestic market.

Source: Economic Survey 2000, Ministry of Finance

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