Date:03/01/2005 URL: http://www.thehindu.com/2005/01/03/stories/2005010300631500.htm

Business

Economy on new growth path

THE happenings in the external sector and indeed in the domestic sector have been heartening in the past three years and an impression is gaining ground that the economy is on a new growth path. With bumper food and cash crops, a big rise in industrial production along with creditable performance on the foreign trade front, the Gross Domestic Product (GDP) rose by 8.2 per cent in 2003-04 against only 4 per cent in 2002-03.

In the current financial year also, the trends in industrial production and the performance of the services sector have been impressive. Production of food and cash crops in the 2004-05 agricultural season is not expected to be much lower, even with insufficient rainfall in some regions during the kharif season. It is, therefore, estimated that the GDP will rise by 6.5 per cent in 2004-05.

The major industries have been reporting creditable performance as the demand for various products including capital goods has been on the upswing. As exports also have risen by 24.02 per cent in April-November, India's creditworthiness has improved considerably in world markets. The industrial sector has been improving its competitive ability while software exports will be rising at 30 per cent yearly in the foreseeable future.

Oil shock absorbed

It has, therefore, been possible for the economy to absorb without difficulty the oil shock and achieve in the bargain a current account surplus for the third year in succession. The increase in exports was 17.27 per cent in 2003-04 and the additional forex earnings of $9.11 billion could absorb fully not only the additional oil import bill to the extent of $2.52 billion but also 53 per cent of the increase in non-oil imports of $12.50 billion. The trade deficit got enlarged to $13.36 billion from $7.45 billion. This big gap, however, did not cause any worry to the Union Finance Ministry as invisible receipts increased significantly to $25.43 billion from $17.05 billion.

Huge invisible receipts

Allowing for an outgo on account of the bigger trade deficit, there was a current account surplus of $8.72 billion in 2003-04 against $4.14 billion comparably. The sizable current account surplus and bulging forex reserves were responsible for the sharp appreciation of the rupee against the U.S. dollar. This, however, did not have any adverse effect on the export effort as the Indian currency was still depreciating against the euro and other major currencies.

As there was no adverse development in the terms of trade with other developed countries and high prices prevailed in world markets for non-ferrous and ferrous metals and other products, the experience in April-November 2004 too has been gratifying. A good portion of the increase in the oil import bill could be taken care of by higher export earnings. Non-oil imports, of course, have been rising because of increased requirements of components, raw materials and finished products for the booming domestic industry.

With oil imports likely to be less costly in the remaining four months and continuing growth in software exports, it is estimated that there will again be a current account surplus notwithstanding the deficit of $3.3 billion in April-September 2004. The sustained growth in industrial production and improved profitability of industrial enterprises have encouraged foreign investors to bring in large funds for effecting sizable purchases of listed securities and investing also in a big way in worthwhile initial public offers.

Boom in bourses

The bullish trend in the secondary market has been responsible for the BSE index rising to an all time high of 6617.15 on December 29 from the low level of 4227.50 recorded on May 17. Despite the volatile behaviour of the bourses at some stages, it is now freely speculated that the BSE index will touch new high levels in the coming months. The Finance Minister, P. Chidambaram, has also been indicating that the tax reforms in the new budget will be investor friendly and that the new policies will also promote foreign direct investment in a big way in select sectors.

It is thus visualised that economic growth in 2005-06 and subsequent years will ensure a sustained GDP growth of 8-10 per cent in the next decade and more. The exchequer also will be benefited by the higher level of economic activity and there is now confidence that the Budget estimates of tax revenues for 2004-05 will be realised and it will be possible to avoid an undue enlargement of the fiscal deficit, despite the unexpected rise in non-plan expenditure due to the grant of relief to those affected in the drought-affected areas in Rajasthan and elsewhere. The latest tragedy caused by the tsunami also will be necessitating heavy expenditure in relief and rehabilitation operations in the severely affected regions in Tamil Nadu, Andhra Pradesh, Kerala and Andaman and Nicobar Islands. Even if it becomes necessary to spend Rs.5,000 crores on various relief operations, the budgetary position may not be seriously affected, as the contributions from non-resident Indians, industrial organisations and others has been overwhelming and the net outgo on this score from the exchequer may not upset earlier calculations.

The apprehended acute stringency in the money market has not materialised so far, as net borrowing by the Finance Ministry has been only Rs.58,684 crores (including Rs.25,000 crores under the Market Stabilisation Scheme) up to December 17 against Rs.77,316 crores. The Budget estimate for net borrowing excluding MSS operations for 2004-05 is Rs.90,365 crores. The reduced borrowing by the Central exchequer has enabled scheduled commercial banks to expand credit on a large scale while growth in deposits has remained fairly high. There has, of course, been a slight hardening in interest rates, as bank credit has risen sharply and even with smaller additions to investments in government and approved securities, it has become necessary to utilise surpluses of earlier years and also effect a reduction in investments in non-SLR securities.

With continuing inflow of funds into the banking system from various directions and the opportunity for the monetary authorities to release immobilised funds when needed with adjustments in CRR and repurchase of securities issued by the MSS operations, a further hardening of interest rates can be prevented. If the Central Budget can provide the necessary lead and the agricultural sector also acquits itself creditably in the 2005-06 season along with the other segments of the economy, the country can look forward to the future with confidence.

P. A. Seshan