HEALTH OF INDIAN ECONOMY: Analysis of some basic parameters:
GDP (Gross Domestic Products):
The Indian GDP growth has been very consistent and outperforming all the revised estimates. The YOY growth rate of more than 8 % for consecutive 5 years along with rapid capacity expansion has brought India at the forefront of high economic growth ushering an era of economic prosperity and development.
The respective growth rates for past couple of years has bee as follows: 9.0 (2005-06),9.2 (2006-07),9.3 % (2007 half yearly ).
GDP at factor cost at constant prices (1999-2000) has been 9.2% in 2007-08 (half year).
Recent data from CSO: The recent data released by Central Statistical Organization showed that India's economy grew at 9.4% in FY2007.This is the highest growth rate achieved in last 18 years for India and second highest growth rate since Independence (1947).Q4 (2007) growth was 9.1%.Most of the growth for India is coming from services and manufacturing sectors. Agriculture is lagging far behind.Manufacturing sector grew at 12.3% and services sector grew at 11% for FY2007. Agriculture performed poorly with only a 2.7% growth.The central bank has raised interest rates five times in last one year, in order to remove excess liquidity from the economy and avoid overheating of certain sectors like real estate.
5 year plans:
11th 5 year plan target was 9% compared to 8% in 10th plan.10th plan could achieve only7.6% due to disappointing 3.8% growth in first year and subsequent 8.6% on average in last 4 years.
Contribution of service to GDP: 68.6% in last 5 year from 2002-03 to 2006-07
Share of agriculture dipped to 18.5%, Share of industry and services improved to 26.4 % and 55 .1 % respectively.
The lower contribution of industry to GDP growth relative to services in recent years is partly because of its lower share in GDP, and does not adequately capture the signs of industrial resurgence (Base effect).
The evidences of Industrial resurgence in India (A comparison with services):
Growth of industrial sector:
2.7% 2001-02
7.1 % 2002-03
7.4 % 2003-04
Over 9.5% (2004-05 to 2005-06)
10.0% 2006-07.
Growth of industry, as a proportion of the corresponding growth in services(Ind growth/Service growth) 78.9% between 1991-92 and 1999-2000,88.7% in the last seven years.
Within industry, the growth impulses in the sector seem to have spread to manufacturing.
Disappointing performance of the other two sub-sectors, namely, mining and quarrying; and electricity, gas and water supply.
Since 1951-52, industry has never consistently grown at over 7% per year for more than three years in a row before 2004-05.
Year-on-year, manufacturing, according to the monthly Index of Industrial Production (IIP) available until December 2006, has been growing at double digit rates every month since March 2006, with the solitary exception of the festive month of October.
Optimism/Confidence:
The rate of investment in the economy reflects the degree of business optimism.An economy with higher investment indicates a higher confidence level. The GDCF(Gross Domestic Capital Formation) ,a lead indicator of economic health is rapidly zooming up. The GDCF for year 2004-05 was at 31.5% which went up to 33.8% for fiscal 2005-06.
This sharp increase in the investment rate has sustained the industrial performance and reinforces the outlook for growth.
Service sector growth:
Services sector growth has continued to be broad-based.
Trade, hotels, transport and communication services’ has continued to boost the sector by growing at double-digit rates for the fourth successive year .
Impressive progress in information technology (IT) and IT-enabled services
Both rail and road traffic
Fast addition to existing stock of telephone connections, particularly mobiles
Growth in financial services (comprising banking, insurance, real estate and business services), after dipping to 5.6 percent in 2003-04 bounced back to 8.7 percent in 2004-05 and 10.9 per cent in 2005-06. The momentum has been maintained with a growth of 11.1 per cent in 2006-07.
Agriculture sector growth:
For the period 2000-05, agriculture grew by meager 3.0 and subsequently dropped down to 2.7% in 2006-07 on a base of 6.0% in 2005-06.
This is a cause of great concern for Indian economy because around half of the population is directly dependent on agriculture sector. Low agricultural growth has serious implications for the ‘inclusiveness’ of growth. Furthermore, poor agricultural performance, as the current year has demonstrated, can complicate maintenance of price stability with supply-side problems in essential commodities of day-to-day consumption.
The main reasons of agriculture sector’s underperformance:
Low investment,
Imbalance in fertilizer use,
Low seeds replacement rate,
A distorted incentive system
Low post-harvest value addition
The recent spurt of activity in food processing and integration of the supply chain from the farm gate to the consumer’s plate has the potential of redressing some of the root causes such as low investment, poor quality seeds, and little post-harvest processing.
Inflation:
Because of shortfall in production and spurt in demand vis-à-vis hardening of international prices, the inflation backed by prices of primary commodities has been rising for the entire fiscal of 2006-07 and the first quarter of 2007-08.
Wheat, pulses, edible oils, fruits and vegetables, and condiments and spices have been the major contributors to the higher inflation rate of primary articles.
As much as 39.4 per cent of the overall inflation in WPI on February 3, 2007 came from the primary group of commodities.
Within the primary group, the mineral subgroup recorded the highest year-on-year inflation at 18.2 per cent, followed by food articles at 12.2 per cent and non-food articles at 12.0 per cent. Food articles have a high weight of 15.4 per cent in the WPI basket.
Including manufactured products such as sugar and edible oils, food articles contributed as much as 27.2 per cent to overall inflation of 6.7 per cent on February 3, 2007.
Starting with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a general upward trend with intermittent decreases.
RBI, the apex monitory authority, to contain inflation has been continuously raising the interest rates and has been successful in its attempt to bring down inflation to as much as below 4 % in recent times (August 2007).However the easing out of inflation can also be contributed to softening of prices of primary commodities in both Indian as well as international markets backed by imports and better than expected production in this fiscal year.
A spurt in inflation like in the current year has been observed in the recent past in 1997-98, 2000-01, 2003-04 and 2004-05.
Crude oil prices:
The international annual average price of the Indian basket of crude (about 60 per cent of Oman/Dubai and 40 per cent of Brent), after remaining more or less stable in 2002-04 at around US$27-28 per barrel, increased by over 40 per cent annually in the next two years to reach US$75.2 per barrel on August 8, 2006.This has gone up to US $ 78 per barrel in last month (August 2007).
Demand side factors of Inflation:
Buoyant growth in money and credit
Growth of broad money (M3) from 12.3% (2004-05) to 17.0%(2005-06) and 21.1%(2006-07).
Growth of gross bank credit (as per data covering 90 per cent of credit by scheduled commercial banks).To industry (medium and large) at 31.6 % and for housing loans at 38.0%in 2005-06.Year-on-year growth of gross bank credit at 32.0 % in September 2006, albeit marginally down from 37.1 per cent in 2005-06.
Steps taken by RBI:
The twin needs of facilitating credit for growth on the one hand and containing liquidity to tame inflation on the other remained a challenge for RBI in fiscal year 2006-07 and first half of 2007-08.
· RBI put a restraint on the rapid growth of personal loans, capital market exposures, residential housing beyond Rs. 20 lakh and commercial real estate loans
· More than doubling the provisioning requirements for standard advances under these categories from 0.40 per cent to 1.0 per cent in April 2006.
· Simultaneously, it increased the risk weight on exposures to commercial real estate from 125 per cent to 150 per cent.
· Cap on ECB (External commercial borrowing) by Indian companies to 20 million US $.
Related Articles
India an economic superpower
Corruption: laggard in economic development of India
GDP (Gross Domestic Products):
The Indian GDP growth has been very consistent and outperforming all the revised estimates. The YOY growth rate of more than 8 % for consecutive 5 years along with rapid capacity expansion has brought India at the forefront of high economic growth ushering an era of economic prosperity and development.
The respective growth rates for past couple of years has bee as follows: 9.0 (2005-06),9.2 (2006-07),9.3 % (2007 half yearly ).
GDP at factor cost at constant prices (1999-2000) has been 9.2% in 2007-08 (half year).
Recent data from CSO: The recent data released by Central Statistical Organization showed that India's economy grew at 9.4% in FY2007.This is the highest growth rate achieved in last 18 years for India and second highest growth rate since Independence (1947).Q4 (2007) growth was 9.1%.Most of the growth for India is coming from services and manufacturing sectors. Agriculture is lagging far behind.Manufacturing sector grew at 12.3% and services sector grew at 11% for FY2007. Agriculture performed poorly with only a 2.7% growth.The central bank has raised interest rates five times in last one year, in order to remove excess liquidity from the economy and avoid overheating of certain sectors like real estate.
5 year plans:
11th 5 year plan target was 9% compared to 8% in 10th plan.10th plan could achieve only7.6% due to disappointing 3.8% growth in first year and subsequent 8.6% on average in last 4 years.
Contribution of service to GDP: 68.6% in last 5 year from 2002-03 to 2006-07
Share of agriculture dipped to 18.5%, Share of industry and services improved to 26.4 % and 55 .1 % respectively.
The lower contribution of industry to GDP growth relative to services in recent years is partly because of its lower share in GDP, and does not adequately capture the signs of industrial resurgence (Base effect).
The evidences of Industrial resurgence in India (A comparison with services):
Growth of industrial sector:
2.7% 2001-02
7.1 % 2002-03
7.4 % 2003-04
Over 9.5% (2004-05 to 2005-06)
10.0% 2006-07.
Growth of industry, as a proportion of the corresponding growth in services(Ind growth/Service growth) 78.9% between 1991-92 and 1999-2000,88.7% in the last seven years.
Within industry, the growth impulses in the sector seem to have spread to manufacturing.
Disappointing performance of the other two sub-sectors, namely, mining and quarrying; and electricity, gas and water supply.
Since 1951-52, industry has never consistently grown at over 7% per year for more than three years in a row before 2004-05.
Year-on-year, manufacturing, according to the monthly Index of Industrial Production (IIP) available until December 2006, has been growing at double digit rates every month since March 2006, with the solitary exception of the festive month of October.
Optimism/Confidence:
The rate of investment in the economy reflects the degree of business optimism.An economy with higher investment indicates a higher confidence level. The GDCF(Gross Domestic Capital Formation) ,a lead indicator of economic health is rapidly zooming up. The GDCF for year 2004-05 was at 31.5% which went up to 33.8% for fiscal 2005-06.
This sharp increase in the investment rate has sustained the industrial performance and reinforces the outlook for growth.
Service sector growth:
Services sector growth has continued to be broad-based.
Trade, hotels, transport and communication services’ has continued to boost the sector by growing at double-digit rates for the fourth successive year .
Impressive progress in information technology (IT) and IT-enabled services
Both rail and road traffic
Fast addition to existing stock of telephone connections, particularly mobiles
Growth in financial services (comprising banking, insurance, real estate and business services), after dipping to 5.6 percent in 2003-04 bounced back to 8.7 percent in 2004-05 and 10.9 per cent in 2005-06. The momentum has been maintained with a growth of 11.1 per cent in 2006-07.
Agriculture sector growth:
For the period 2000-05, agriculture grew by meager 3.0 and subsequently dropped down to 2.7% in 2006-07 on a base of 6.0% in 2005-06.
This is a cause of great concern for Indian economy because around half of the population is directly dependent on agriculture sector. Low agricultural growth has serious implications for the ‘inclusiveness’ of growth. Furthermore, poor agricultural performance, as the current year has demonstrated, can complicate maintenance of price stability with supply-side problems in essential commodities of day-to-day consumption.
The main reasons of agriculture sector’s underperformance:
Low investment,
Imbalance in fertilizer use,
Low seeds replacement rate,
A distorted incentive system
Low post-harvest value addition
The recent spurt of activity in food processing and integration of the supply chain from the farm gate to the consumer’s plate has the potential of redressing some of the root causes such as low investment, poor quality seeds, and little post-harvest processing.
Inflation:
Because of shortfall in production and spurt in demand vis-à-vis hardening of international prices, the inflation backed by prices of primary commodities has been rising for the entire fiscal of 2006-07 and the first quarter of 2007-08.
Wheat, pulses, edible oils, fruits and vegetables, and condiments and spices have been the major contributors to the higher inflation rate of primary articles.
As much as 39.4 per cent of the overall inflation in WPI on February 3, 2007 came from the primary group of commodities.
Within the primary group, the mineral subgroup recorded the highest year-on-year inflation at 18.2 per cent, followed by food articles at 12.2 per cent and non-food articles at 12.0 per cent. Food articles have a high weight of 15.4 per cent in the WPI basket.
Including manufactured products such as sugar and edible oils, food articles contributed as much as 27.2 per cent to overall inflation of 6.7 per cent on February 3, 2007.
Starting with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a general upward trend with intermittent decreases.
RBI, the apex monitory authority, to contain inflation has been continuously raising the interest rates and has been successful in its attempt to bring down inflation to as much as below 4 % in recent times (August 2007).However the easing out of inflation can also be contributed to softening of prices of primary commodities in both Indian as well as international markets backed by imports and better than expected production in this fiscal year.
A spurt in inflation like in the current year has been observed in the recent past in 1997-98, 2000-01, 2003-04 and 2004-05.
Crude oil prices:
The international annual average price of the Indian basket of crude (about 60 per cent of Oman/Dubai and 40 per cent of Brent), after remaining more or less stable in 2002-04 at around US$27-28 per barrel, increased by over 40 per cent annually in the next two years to reach US$75.2 per barrel on August 8, 2006.This has gone up to US $ 78 per barrel in last month (August 2007).
Demand side factors of Inflation:
Buoyant growth in money and credit
Growth of broad money (M3) from 12.3% (2004-05) to 17.0%(2005-06) and 21.1%(2006-07).
Growth of gross bank credit (as per data covering 90 per cent of credit by scheduled commercial banks).To industry (medium and large) at 31.6 % and for housing loans at 38.0%in 2005-06.Year-on-year growth of gross bank credit at 32.0 % in September 2006, albeit marginally down from 37.1 per cent in 2005-06.
Steps taken by RBI:
The twin needs of facilitating credit for growth on the one hand and containing liquidity to tame inflation on the other remained a challenge for RBI in fiscal year 2006-07 and first half of 2007-08.
· RBI put a restraint on the rapid growth of personal loans, capital market exposures, residential housing beyond Rs. 20 lakh and commercial real estate loans
· More than doubling the provisioning requirements for standard advances under these categories from 0.40 per cent to 1.0 per cent in April 2006.
· Simultaneously, it increased the risk weight on exposures to commercial real estate from 125 per cent to 150 per cent.
· Cap on ECB (External commercial borrowing) by Indian companies to 20 million US $.
Related Articles
India an economic superpower
Corruption: laggard in economic development of India
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9 comments:
fantastic post and huge lot of home work on indian economy.
What is base effect?
In yr 2002 industry growth rate was meagre 2.7% then nest it shoots up to 7.1% may I know the reasons what happened in that year which increases our industry sector's growth by 4.4% or 2.5 times from last year.
As you have mentioned that with retail boom in country will help farmers and definetly help them to protect from regular hazards but another important issue we have seen in retail outlets is that they are buying fruits i.e. KIWI, ORANGES, APPLE from foreign countries at cheapest price and sell it here in our country from australia etc...
On one hand they are helping the farmers but on other hand they are curbing our fruit producing market i.e. kashmir, himachal, nagpur etc...
I hav just a phrase to say...
I feel dyutita.
Good day !.
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As per the Indian Economic Survey 2011-2012 the Indian Economy is expected to grow at 8.75% to 9.25% in the latest financial year 2012.
The growth rate is expected to be about 9% in the coming fiscal year as it has been 8.6% in 2010-11.
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