India Intelligence Report

India 4th World GDP Growth Engine


In continuing euphoria, the Indian economy was fourth largest contributor to incremental global GDP growth at 3.2% after the US, China, and Japan; it raced past Germany, France, and the UK in this key indicator. This was backed by a strong bull rush in the stock market taking the absolute number of the SENSEX above the Dow Jones Industrial Average (DJIA); the market cap of SENSEX is nowhere near the market-cap of DJIA.

For the first time in 2 years, there were actual market fundamentals to back this rise. Infrastructure grew by 5.6% compared to a paltry .8% in February last year and could have been higher but for dropping steel and crude oil production levels. This growth was reflected in allied segments where cement product grew 16.3% (1.3%), electricity generation 9% (-.8%), coal 9.3% (2.2%), and refinery output 6.2% (-3.5%). On the downside, crude oil production fell by 2% (-4%) and finished steel production dropped 1.1% (6%). Crude oil production dropped primarily due to the destruction of a major platform in Bombay High by a fire in July 2005. In a sign of production level catching up to the previous year, crude oil produced was 2.545 million tons (mt) compared to 2.596 mt. Actual coal production was 37.8mt (34.5mt), steel 3,280mt (3,179mt), cement 12,757mt (10,971mt). Total electricity generation last year was 50,137 billion units.


In a continuation of good financial management by Finance Minister P. Chidambaram, infrastructure sector budget has gone up by USD 23.2 billion or 106% to USD 97.90 billion. Almost all segments within this sector such roads; irrigation projects, airport infrastructure, port construction, power generation projects, railways, telecom, and urban infrastructure get large increases in their respective budgets. It is now up to individual Ministries to use the money judiciously and implement the programs as per the plan.

Extending good financial governance to the Public Sector Units, Prime Minister Manmohan Singh wanted to unshackle the profit-making PSUs so they do not have to seek the political Public Investment Board (PIB) approval to make investment decisions. The principal beneficiaries of this move will companies like ONGC, IOC, and GAIL who need to make quick moves to bid for oil and gas blocks worldwide to secure the flow of fuel to sustain the economic growth. Other large profit-making PSUs will also benefit, as they do not have to seek PIB clearance on expansion plans that cost for that USD 2.2 billion. If Singh manages to pull this off, he would have fulfilled a key promise in the Common Minimum Program (CMP) to grant fiscal autonomy to successful PSUs. However, he still needs to work on management autonomy as his Ministers use positions on the Boards of these companies as political-advancement tools by granting out positions to key patrons and supporters. Last year, former Oil & Petroleum Minister Mani Shankar Aiyar appointed many political sidekicks to positions on the ONGC Board that invited widespread condemnation and ultimate firing of Aiyar from that post.

In another key area to boost business and investment, the Government is trying to address the drug-patenting and generic drug issue. The Government had previously required all patented drugs negotiate a price when they applied for rights to market in India. Patent holders have long argued that this policy was counter to the principle of patenting where the inventor who had invested heavily to invent a drug would be denied returns based on Government-initiated controls. India has a unique problem where a majority of its citizens cannot afford expensive drugs and that sponsored this requirement. Following hectic lobbying by the US-India CEO Forum, the Government has withdrawn this requirement so the country does not appear to dissuade the flow of new drugs, investments, and research.