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Indias Promising Economic Outlook

Guest , Last updated: 20 May 2010  

The fiscal year 2009-10 that has just gone by, has been a difficult period for India. The country had to bear the impact of the global financial crisis. What stood India in good stead was its strong economic fundamentals but despite that it could not save itself entirely from the impact. It, however, goes to India?s credit that while the world economies went into the red with negative economic growth, India continued to maintain a respectable growth rate. Though the final figures are yet to come out the estimates are that we will post a 7.2 percent growth for this period.

A sectoral analysis makes the picture clear. Take for instance the industrial production sector. The figures released by the Government show that the production slipped to 13.5 % in March compared to over 15.1% in February. But actually, the sector recorded a 10.4 % increase in the full financial year against just 2.8 % in the previous fiscal. That indeed is a big jump, considering the global economic down turn. This was possible largely because of the massive fiscal and monetary measures the Government took to boost both demand and the supply side.

In the agricultural field, the picture has been somewhat disturbing. That is because of a bad monsoon which affected agricultural production. The country received 22 % less rainfall during the year.

The latest advance crop output estimates indicate that there may be a shortfall of 7 % in grain output. Despite a poor monsoon, there has been a record wheat output but shortfall in rice and coarse cereals may bring down the total output from 229 mt. To 218 mt.- a shortfall of 11 mt.

What is gratifying, however, is that the Indian Meteorological Department has forecast a timely and normal monsoon for the current year. It has predicted that monsoon would hit Kerela on May 30 with an error of plus or minus four days. Fortunately, the forecasts of the Department about the arrival of monsoon have been correct for the last 4-5 years. The department has predicted a normal rainfall this year with precipitation of 98 % of the Long Period Average with an error of plus or minus 5 percent for the entire season and for the country as a whole. If the country actually receives a timely and good monsoon this year, we will be able to mitigate, to a large extent, the dreadful effects of the deficient monsoon that we experienced last year.

In the export sector, the story has been both encouraging and discouraging. Discouraging because this is the sector which bore the brunt of the economic slowdown leading to drastic fall in exports with consequent job losses and fall in foreign exchange earnings. Encouraging, because despite these odds, the sector put up a brave front and withstood the global challenges, firmly. As a result of this, exports have been posting a consistent increase for the last 6 months recording a 54 % increase in March this year. But the annual trade figures released by the Government show that there has been a shortfall of 4.7 percent in 2009-10 compared to the previous financial year. The total exports stood at $ 176.5 billion. There are also concerns about the side effects of a steady appreciation of the rupee, which affects the competitiveness of the exports. The rupee has gained 5 % against the dollar, this year.

But there is a silver lining too. The imports also fell by 8.2 % in 2009-10 on a year on year basis standing at $278.7 billion. Because of this, the trade deficit also came down to $102 from $118 billion in the previous year. The Commerce Ministry has now set an export target of $200 billion for the current fiscal.

But the most challenging area has been high inflation which is touching the double digit mark with annual food inflation going as high as about 19%. This has been the most worrisome factor for the Government as high inflation affects adversely the lowest and the most vulnerable sections of our society. As the Fiance Minister Shri. Pranab Mukherjee put it while addressing the National Conference on Implementing Inclusive Growth and Development in New Delhi recently, despite a high level of economic growth the benefits do not percolate to the bottom levels and a significant chunk of our population has yet to benefit from our growth story. He however expressed confidence that with a good monsoon this year, food inflation, would come down substantially in a few months. The trend seems to have already begun. In April inflation softened to 9.59 % against 9.90 % in March. It is estimated that inflation will continue to fluctuate for the next three months before it begins to fall. The Government is confident that it will be able to bring down the inflation rate to 5.5 % by the end of the current fiscal.

The stimulus packages given by the Government during the last year to boost demand have indeed done the trick, but it has also contributed to the inflationary pressures and the fiscal deficit. The Reserve Bank began the process of liquidity regulations last month by raising modestly, the Repo and Reverse Repo Rates and the Cash Reserve Ratio. But major steps could perhaps be taken only later.

The world Economic Outlook has projected India?s GDP growth to be 8.8 percent in 2011. In fact the Government is hoping to do even better and move up to a double digit growth rate in the subsequent years. The key to achieving this lies in right policies, timely action and above all a benevolent weather God.

Ashok Handoo

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