Mid Year Review Presented in Parliament

INDIA HAS STRENGTHS TO HELP MITIGATE ADVERSE EFFECTS OF GLOBAL FINANCIAL CRISIS: REVIEW 

The Minister of State for Finance, Shri P.K. Bansal presented the Mid Year Review of India Economy 2008-09 in Parliament, here today. This mid-year review is the second quarterly review as required under Section 7(1) of the FRBM Act, 2003. It reports the developments in the economy and presents the finances of the Central Government in the first half of the fiscal 2008-09. 

The Mid Year Review states that compared to other emerging economies, India has several strengths that can help mitigate the adverse effects of the global financial crisis and OECD recession / depression, provided appropriate policy action is initiated. To begin with, India has a relatively high share of services in GDP than many other emerging economies and developing countries. Historically, across countries, services tend to be less affected by cyclical downturns than manufacturing. This factor is likely to moderate the negative effect on overall GDP growth. Secondly, five years of nearly 4 per cent agriculture growth followed by a projected 2.5 to 3 per cent growth along with scaling up of the NREGA program means that rural income and consumption are strong and likely to remain so. Thirdly, like other high growth Asian economies India’s domestic saving rate remains high and has risen sharply with higher growth during the last five years. In fact the increase in the gross domestic saving rate over the last five years was greater than the increase in gross domestic investment rate over the same period. The saving rate of 36 per cent in 2007-08 was sufficient to maintain a growth rate of 9 per cent. Fourthly, the ambitious programme of infrastructure investment designed for the Eleventh Five Year Plan period, provides the basis for offsetting some slowdown in corporate investment in manufacturing by increased investment in infrastructure by government and by the private sector through PPP. This will require greater urgency in removing the policy and institutional hurdles to investment by private sector as well as government agencies. Fifthly, having run a tight monetary policy during H1 2008-9, there is considerable scope for monetary policy easing over the next 6 to 12 months to offset the global increase in demand for money that is being transmitted to India. A pro-active monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing. Finally, the available data for H1 2008-09 suggests that the investment rates may have increased by about 1 per cent over H1 2007-08. This means that the investment rate for the fiscal 2008-09 may not be very different from that in 2007-08. 

In the face of global slowdown and a moderation in private investment demand, accelerating the pending policy reforms is the answer to flagging business sentiments and brining the economy back to the 8.5 to 9 per cent growth path. 

Fiscal 2008-09 started off on a positive note with the economy decidedly on a higher growth path with macro-economic fundamentals inspiring confidence and a general optimism about the medium to long term prospects of the economy. High oil prices and domestic inflation were areas of concern, as was the possibility of a worsening of the international financial crisis which had surfaced in 2007. As it happened, the global situation deteriorated dramatically after mid September 2008. There has been a massive choking of global credit since then and a global crash in stock markets. The slowdown that was expected in the global economy became much worse with the US, Europe and Japan moving into recession. 

A crisis of this magnitude in industrialized countries is impacting economies around the world and India has also been affected. GDP growth in real terms in the first half of the fiscal year has been 7.8 per cent, which is fairly robust. However, it is likely to be significantly slower in the second half as the impact of slower export growth and weaker domestic demand, including a possible dampening of private investment, begin to be felt. It is difficult to make a precise forecast about growth prospects for the whole year at this stage because of uncertainty, though the expectation is that it would be in the range of 7 to 8 per cent. We have to be prepared, however, for growth to be around 7 per cent in 2008-09 as a whole. 

In respect of agriculture, as per the first advance estimates of kharif production for 2008-09, production of foodgrains, oilseeds, cotton and sugarcane is estimated at 115.3 million tonnes, 17.9 million tonnes, 23.9 million bales and 294.7 million tonnes, respectively. With respect to the First Advance Estimates of 2007-08, this represents an increase of 2.8 per cent in foodgrains production, but in comparison to the Fourth Advance Estimate, it shows a decline of 4.7 per cent. This decline is across most coarse cereals and pulses. Rice output, however, is expected to record modest gains. Output of kharif oilseeds, cotton and sugarcane is also expected to decline. 

As per the index of industrial production (IIP) data for April-September 2008 released by CSO, the overall growth in April-September 2008 is estimated at 4.9 per cent year-on-year basis compared to a growth of 9.5 per cent in April-September 2007. The growth in manufacturing GDP during this period was slightly higher at 5.3 per cent. The moderate growth phase which kicked in towards the second half of 2007-08 has continued in the 2008 H1. Deceleration in growth was significant for manufacturing and electricity sectors, and somewhat moderate for the mining sector. 

There has been considerable increase in inflation in the first half of 2008 as against the corresponding period in 2007 on all the indices, WPI as well as the various consumer price indices. The headline WPI inflation rate for the 34th week ending November 22, 2008 was 8.4 per cent compared to 3.1 per cent in the corresponding week last year (week-ending November 24, 2007). Since then it has come down further to 6.8 for the week ending December 6, 2008. From the beginning of November 2008 inflation is in single digit after remaining in double-digit territory for 22 weeks since June 2008. It is expected that this decline in inflation rate will continue for the remaining period of the current fiscal year. 

Merchandise exports during the first seven months of 2008-09 (April- October) valued at US $ 108 billion was higher by 23.7 per cent (in US dollar terms) over the previous year. However, exports during October 2008 registered a negative growth rate of (-) 12.1 per cent over October 2007, mainly due to a spike in the growth rate to 48.8 per cent registered in October 2007. For the same period, total value of imports was US $ 181 billion registering a growth rate of 36.2 per cent over the corresponding period of the previous year. The trade deficit, for this period is estimated at US$ 73 billion, which is 60 per cent higher than the deficit of US $ 45.6 billion during April-October, 2007. In the current financial year, as per the data on BOP released by the RBI the current account deficit was at US$10.7 billion. Foreign exchange reserves (excluding Gold, SDRs and Reserve Tranche Position in the IMF) stood at US $ 244.0 billion at the end of October, 2008. 

In the first six months of the current year (April-September 2008), gross tax revenue increased by 25.3 per cent over the corresponding period of the last year. During the same period total expenditure grew by 23.6 per cent (after netting the onetime expenditure of Rs.35,531 crore for the acquisition of RBI’s stake in SBI) and plan expenditure grew by 25 per cent. After similar adjustment for the acquisition of RBI’s stake in SBI, the non-plan expenditure grew by 23 per cent and the capital expenditure grew by 11.1 per cent over the corresponding period of the last year. The fiscal deficit during the first six months of the current year was higher as compared to the corresponding period of last year, but well within the target set in 2008-09 budget. However, revenue deficit was higher both as compared to corresponding period of last year and the target set in the 2008-09 budget. 

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 mandates a review of trends in receipts and expenditure in relation to the Budget on a quarterly basis. The Mid Year Review outlines issues and emerging challenges that have a bearing on the prospects of the Indian economy in the short to medium term.