I now turn to the events that have so far marked 2008-09 and the prospects for the remainder of the year.
The financial crisis that has enveloped the world since 2007 has become worse. Many developed countries are, officially, in recession. Among them are Germany, Japan, the United Kingdom and the Netherlands. Many more, including the United States and France, are expected to slip into a recession shortly. A recession is defined as two successive quarters of contraction of the GDP. I wish to emphasize that India is nowhere near a recession. The growth estimate for the first quarter of 2008-09 is 7.9 per cent and the second quarter will, undoubtedly, show high positive growth. Therefore, we must banish the thought of recession. I also urge the media not to use the word “recession” while describing the Indian economy.
“liquidity conditions in India too have tightened in the last few weeks. Our authorities have responded to the situation. The Reserve Bank of India has taken steps to infuse more liquidity into the market.”
“India, like other developing countries, is experiencing the ripple effects of the financial crisis. However, we have taken a number of steps to minimize the impact.
“The Government is conscious of the fact that it is not enough to infuse liquidity. The liquidity must translate into expanded flow of credit to industry, trade and business.
“Nevertheless, we must be prepared for a temporary slowdown in the Indian economy……… Our effort will be to minimize the negative effect of the financial crisis and, once the global situation stabilizes, to return to the growth trajectory of 9 per cent. I would urge Honourable Members and the people of India to continue to repose faith in the fundamentals of the Indian economy.
“India has faced challenges in the past and has overcome them. We have the strength to overcome the current challenges too.“
Challenges facing the economy
Let me now share our assessment of the economic developments in the current year.
Prices and inflation management
The weeks ending November 1, 2008 and November 8, 2008 have recorded a significant decline in inflation measured by the WPI. As on November 8, 2008, headline inflation was 8.90 per cent. The monthly de-seasonalized inflation rate has been negative during September and October, suggesting a continuing moderation in WPI inflation in the coming months. These figures indicate that the measures initiated to tackle inflation are bearing fruit.
If the rate of inflation continues to decline, the policy rates may also moderate and the bias in favour of growth may deepen.
India’s external sector continued to be robust and reflected the strengths of the economy in 2007-08. In the current fiscal, merchandise trade data is available for April-September 2008. Exports and imports have registered an impressive growth of 30.9 per cent and 38.6 per cent, respectively. Oil imports, however, grew faster (59.2 per cent) than non-oil imports (29.3 percent). There has, however, been a deceleration in the growth rate of exports in September 2008. India is diversifying its exports to various other countries. For example, during the first quarter of this financial year there has been an increase in the share of India’s exports to China, Singapore, Netherlands and Saudi Arabia. China remained the major source of imports followed by UAE, Saudi Arabia and USA in the first quarter of this year.
India has evolved a liberal and transparent policy on foreign direct investment (FDI). Except for a small negative list, FDI is allowed mostly on the automatic route. A liberal investment regime is complemented by a tax regime that is moderate and stable. FDI equity inflows during April-September 2008 were US $ 17.21 billion, representing a growth of 137% over the previous year (US $ 7.25 billion). The sectors attracting the highest FDI equity inflows have been the services sector, construction activities including roads and highways, housing and real estate, and computer hardware and software.
Fiscal consolidation remains a priority of this Government. Although the Fiscal Responsibility and Budget Management Act, 2003 was passed in Parliament during the tenure of the NDA Government, it was only after the UPA Government took over that it was notified on July 2, 2004. Fiscal consolidation has been on course until the end of March, 2008. While buoyant tax revenues have helped, we have also maintained a strict watch over expenditure. However, there has been a deliberate and conscious shift in expenditure in favour of health, education and the social sector. This expenditure is classified as revenue expenditure. Besides, we have also provided for more expenditure in the current year as a counter cyclical measure. As a consequence, we may need one more year to achieve the FRBM target of eliminating the revenue deficit and containing the fiscal deficit to below 3 per cent of GDP.
Social Sector Development and Inclusive Growth
Faster economic growth has also begun to get translated into more inclusive growth, both in terms of employment generation and poverty reduction. The 61st Round of the NSSO Survey estimated that 47 million additional work opportunities were created during 1999-2000 to 2004-05, at an annual average of 9.4 million as against an annual average of 4 million job opportunities during 1993-94 to 1999-2000. The proportion of persons below the poverty line declined from around 36 per cent of the population in 1993-94 to 28 per cent in 2004-05 as per the uniform recall period. Based on the mixed recall period, the number of persons below the poverty line declined from 26 per cent in 1999-2000 to 22 per cent in 2004-05.
In pursuance of the objective of inclusive growth, Government has been implementing eight flagship programmes supported by sizeable outlays. These include National Rural Employment Guarantee Scheme (NREGS), National Rural Health Mission (NRHM) and Sarva Shiksha Abhiyan(SSA), Mid-day Meal(MMS), Integrated Child Development Services(ICDS), Jawaharlal Nehru National Urban Renewal Mission(JNNURM), Rajiv Gandhi Drinking Water Mission and the Total Santation Campaign. Together, these flagship programmes aim to improve the livelihood of people as well as provide them with easy access to basic facilities like education, health, clean drinking water and sanitation. Besides, Bharat Nirman, which is an important programme to improve the quality of life and mainstreaming of the rural population, has received high priority.