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What Is India News Service
Friday, December 22, 2006



 

 

 

 Sustainable 9% GDP Growth

  Led by strong manufacturing growth, the economy grew at a robust 9.1% in the first half of fiscal year with exports clocking 34.9% prompting the government to claim that the growth pattern “reflected the ability of Indian manufacturers to meet international standards.”
 

 

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Led by strong manufacturing growth, the economy grew at a robust 9.1% in the first half of fiscal year with exports clocking 34.9% prompting the government to claim that the growth pattern “reflected the ability of Indian manufacturers to meet international standards.” This growth trend is qualitatively different than previous years as engineering goods emerged as the largest foreign exchange earner and the first seven months saw an export valued at USD 69.5 billion. The government also downplayed fears of economic overheating but acknowledged that maintaining macroeconomic stability was the key to investment promotion and further growth especially because of “large global macroeconomic imbalances and uncertainty in currency markets.”

Exports were also impressive across many theaters with US, UAE, Singapore, China, and UK making up the top five countries accounting for 42% of total exports. The imports were up 33% valued at USD 99.8 billion and chiefly due to high crude prices. The import surge caused a USD 18.5 billion trade deficit in the first quarter only to be offset by inflows of USD 12.4 billion mainly through remittances by Indians working abroad resulting in a current account deficit of USD 6.1 billion or about less than 1% of the GDP. Both the Committee on Fuller Capital Account Convertibility and the Approach Paper on 11th Five Year Plan have indicated that the nation is capable of financing current deficits of up to 3% of the GDP but have warned of need to initiate serious policy action if this number goes beyond 3%.

Inflation seems to be the main worry as seen by steep escalation of primary commodities (particularly wheat and pulses) largely due to supply issues. The government sought to minimize this concern saying that the “overall inflation measured in terms of wholesale price index in the first two quarters…averaged 4.81% compared to 4.64% in 2005-06 and 6.68% in 2004-05.” It said that this is despite “increase in price of crude oil” but did not explain why there was a “demand-supply mismatch” or how “hardening of international prices” is affecting Indian markets when most of the primary commodities are indigenous. The government often uses the wholesale price index as mechanism to claim low inflation because wholesale prices are measurable and its mix is manipulated by government agencies. Retail prices are way above this inflationary figure and are beyond government control. However, since a majority of the economy is below the radar with most transactions in cash with most retail establishments avoiding direct taxes, retail prices are not measurable nor is that economic activity counted. Finance Minister P. Chidambaram tacitly acknowledged this issue saying that the government has “to be ahead of developments and take pre-emptive action.” His ministry warned that the country’s "macroeconomic policy response has to be prospective rather than retrospective” and economic overheating can be avoided only “If investment continues to be buoyant” and “efficiency improves.”

With Prime Minister Manmohan Singh setting a growth target of 9%, Ministry of Finance (MoF) reiterated that despite strong growth, sustainability will depend on several key ailing components. Firstly, it pointed out that labor reforms and regulatory framework in different sectors and specifically mining is required to sustain growth. Secondly, the ministry also lamented the 2.6% growth in agriculture and observes that the minimum support price (MSP) mechanism has failed and is incongruous to the market price. Thirdly, it called for a separation of various policies-- “price support to farmers” from food security inspired “procurement” from subsidies for “poor citizens.” Fourthly, it also complained that the subsidy payments were largely ineffective as the payment “failed to reach the beneficiaries due to poor delivery” mechanisms and asked for a review of these processes. It suggested adoption of international best practices such as food stamps and smart cards. Fifthly, the MoF said that weak infrastructure was the "Achilles heel'' in an otherwise robust economy and suggested rapid policy changes to adopt a "user pays'' principle to promote greater investment. Sixthly, it asked for a rationalization of taxes because a slew of outdated exemptions and concessions were unproductive and distorted resource allocation.

With robust economic growth, continued inflows, and galloping investments, the government is still confident of meeting fiscal targets this year.

 

 

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