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Economic Survey 2005-2006

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According to the Economic Survey 2005-06, India is likely to post 8.1% growth. The Survey has asked to speed-up tax and labour reforms and measures to remove infrastructure bottlenecks to sustain high growth. Power shortage has been identifies as the single most impediments to growth. It has highlighted need to unburden Indian industry from high level of taxes and exemptions that provided perverse incentives. It has favoured levying user charges and cutting unwanted subsidies. The survey has also advocated simplification and digitisation of tax administration and taxpayer facilitation measures to shore up revenue.

In a robust demonstration of its nascent strength, the Indian economy, after growing at 8.5 per cent and 7.5 per cent in the two previous years, is projected to grow at 8.1 per cent in the current year 2005-06. Some significant dimensions of the dynamic growth in recent years are: a new industrial resurgence; a pick up in investment; modest inflation in spite of spiraling global crude prices; rapid growth in exports and imports with a widening of the current account deficit; laying of some institutional foundations for faster development of physical infrastructure; progress in fiscal consolidation; and the launching of the National Rural Employment Guarantee (NREG) Scheme for inclusive growth and social security.

According to the Economic Survey for 2005-06 presented by the Finance Minister, Shri P. Chidambaram in Parliament on 27th February 2006, the growth trend for the last three years appears to indicate the beginning of a new phase of cyclical upswing in the economy from 2003-04. The initial momentum to this new phase of expansion, in 2003-04, was provided by agriculture, though in later years performance of this sector remained subdued. In contrast, industry and services have continued to expand steadily. These sectors have acted as the twin engines propelling overall growth of the economy.

Overall industrial recovery that commenced from the second quarter of 2002-03 continues. After an acceleration of growth of industrial GDP at constant 1999-2000 prices from 7.0 per cent in 2002-03 to 7.6 per cent and 8.6 per cent in the next two years, the industrial resurgence is manifest in the projected step up in its growth to 9.0 per cent in the current year. Industrial growth is driven by robust performances from manufacturing and construction sectors. Substantive commercial bank credit flows to the housing and real estate and retail sectors continue to provide support to the boom in construction and consumer durables.

Services sector growth continued to be broad-based. Among the sub-sectors of services, ‘trade, hotels, transport and communication services’ continued to lead by growing at double-digit rates for the third successive year. Impressive progress in expanding railway passenger network and production of commercial vehicles, and fast addition to existing stock of telephone connections, particularly mobiles, played key roles in such growth. Growth in financial services (comprising banking, insurance and real estate services) also maintained the momentum with progressive maturing of Indian financial markets and the ongoing construction boom.

A pick-up in investment, reflecting the high business optimism, not only strengthened industrial performance but also reinforced the growth outlook itself. The rally in gross domestic capital formation (GDCF) that had commenced in 2002-03 continued and as a proportion of GDP it reached a high of 30.1 per cent in 2004-05. Stock market index returns of 11 per cent in 2004 followed by 36 per cent in 2005 provide a good measure of investor sentiments.

The increasing trend in gross domestic savings, which provided most of the resources for investment, as a proportion of GDP observed since 2001-02 continued with the savings ratio rising from 26.5 per cent in 2002-03 to 28.9 per cent in 2003-04 and further to 29.1 per cent in 2004-05.

Bank credit disbursal during 2004-05 was well diversified across different sectors of the economy, with flows to housing and retail sector particularly strong and a substantial pick up in flows to agriculture. Total outstanding credit to priority sectors on March 31, 2005 was Rs. 3, 45,627 crore. Credit to small-scale industries increased from Rs 76,114 crore at end-March 2005 to Rs. 78,780 crore at end-October, 2005.

From 1993-94 to 2003-04, net capital stock in industries (comprising mining, manufacturing and electricity sectors, and at constant prices), which proxies capacity addition, increased at an average rate of 6.7 per cent per annum.

The virtuous expansion in the current phase of economic upturn has been maintained without an undue escalation of domestic prices. Inflation measured by a point-to-point increase in the Wholesale Price Index (WPI) declined from 5.7 per cent on April 2, 2005, to a low of 3.3 per cent on August 27, 2005. Despite increasing thereafter, prices have remained at comfortable levels with the WPI-inflation at 4.1 per cent on February 4, 2006 vis-ŕ-vis 5.0 per cent on February 5, 2005. Price stability was maintained despite an increase of 44.5 per cent in average headline world price of Indian basket of crude petroleum from US$37.3 per barrel in April-November 2004 to US$53.9 per barrel in April-November 2005, and US$58.10 per barrel on February 13, 2005.

In a marked departure from the trend observed in recent years, the pace of accretion to foreign exchange reserves has slowed sharply during the current year so far. Until February 10, 2006, there was a reduction of US$1.1 billion from the end-March 2005 level of US$141.5 billion of foreign exchange reserves. Three key factors were instrumental behind this turnaround: an outgo of US$7.1 billion on IMD redemption; valuation losses from a weakened dollar vis-ŕ-vis other major currencies; and a widening deficit in the current account of the balance of payments (BOP).

During 2004-05, the Rupee had appreciated against the US dollar (2.2 per cent) in nominal terms, while depreciating against the Euro (-4.5 per cent), Pound (-6.3 per cent), and the Japanese Yen (-2.6 per cent). However, in the first ten months of 2005-06, on average, the Rupee has strengthened against all major currencies.

The embryonic deficit in the current account of the BOP, which emerged in 2004-05 after three consecutive years of surpluses, has assumed much larger dimensions during the current year. During April-September 2005-06, the current account deficit enlarged to around US$13.0 billion. While net invisibles continued to rise, it was not enough to neutralize the rapidly expanding trade deficit, which at US$31.6 billion during April-September 2005-06 was only around US$5.0 billion less than that recorded in twelve months of 2004-05. While the surge ahead in merchandise exports observed since 2002-03 continued, such growth was surpassed by an even faster rise in merchandise imports. The heavy demand for imports arising from increasing buoyancy and robustness of Indian industry may have led to a sustained rise in growth of merchandise imports.

During April-September 2005, foreign investment flows at US$7.4 billion were nearly US$5.0 billion higher than such flows of US$2.5 billion in the first half of 2004-05. Within foreign investment, portfolio flows, comprising mainly foreign institutional investor (FII) investment, were the dominant variety. At US$4.2 billion during April-September 2005, FII flows (net) were higher than not only the FDI flows of US$2.3 billion, but also the FII flows of US$339 million in April-September 2004.

Infrastructural inadequacies continued to constrain the full potential for industrial resurgence, pick up in investment and buoyant exports. The growth of power generation in April-December 2005 at 4.7 per cent was lower than not only the annual target but also the 6.5 per cent achieved in the same period of the previous year. In the first three quarters of the current financial year, the overall index of six core industries – coal, electricity, crude petroleum, refinery throughput, steel, and cement – having a direct bearing on infrastructure, registered a growth of 4.5 per cent, relative to the 6.4 per cent registered during April-December, 2004.

Overall investment in infrastructure continued to remain far below the requirement, and net capital stock, for example, in electricity, gas and water supply grew at a compound annual rate of 3.7 per cent between 1993-94 and 2003-04. The recently introduced public-private partnership (PPP) model had limited success in the area of electricity and mining, and the dominance of the public sector continued.

Indications are that the slower progress in fiscal consolidation at the Centre in the current year may be made up by faster progress on this front by the State Governments and result in an overall improvement in the financial health of the General Government, that is the Centre and the States combined. Buoyant revenues in the States and significant improvement in the combined fiscal position of States in 2004-05 (RE) indicate that the process of deepening of the fiscal reforms and restructuring of public finances as envisaged by the Tenth Finance Commission (TFC) have had a head start.

Total foodgrains production is projected to increase by 2.3 per cent from 204.6 MT in 2004-05 to 209.3 MT in 2005-06. The decline in the kharif output of coarse cereals since 2003-04 is expected to continue in the current year.

The pick up in industrial output observed since the second quarter of 2003-04 has continued. As per the index of industrial production (IIP), during the period April-December, 2005, growth was 7.8 per cent compared to a growth of 8.6 per cent in the corresponding period of 2004. The current year has been characterised by vigorous growth of manufacturing. Within manufacturing, a faster growth of the capital goods sector at 15.7 per cent in April-December 2005 relative to the growth in 13.8 per cent in the corresponding period of the previous year provided strong corroborative evidence on the investment rally in the economy. Consumer goods, both the durables and non-durables segments, recorded improved performance with double-digit growth in the last two years. Performance of 17 industries at the two-digit level during April-December 2005 underlined a fairly broad-based pattern of growth within manufacturing. Seven industries, accounting for almost 34 per cent of the total weight in IIP, grew at more than 10 per cent.

India’s relative global ranking on Human Development Index has remained at a low of 127 among 177 countries for three years in a row. In areas of education and health, there are some indications of progress, albeit slow. For example, between 1991-95 to 2001-06, life expectancy at birth is estimated to have improved from 59.7 years to 63.9 years for males and from 60.9 years to 66.9 years for females. Similarly, in education, gross enrolment ratio – the proportion of children in the 6-14 years age group actually enrolled in elementary schools – is estimated to have increased progressively from 32.1 in 1950-51 to 82.4 in 2001-02 and further to 84.9 in 2003-04.

While the results of the 61st round of the large-scale NSSO survey conducted during 2004-2005 are still awaited, the annual thin-sample surveys available for the period beyond 1999-2000 point towards a continued reduction in the incidence of poverty.


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