INDIAN ECONOMY

PROJECTION REGARDING INDIAN ECONOMY STATUS

The presentation by NCAER team is summarised below:

GDP growth for 2011-12 is projected around 7 per cent.  Industrial output growth is projected at 5.9 per cent as compared to October 2011 forecast of 7.8 per cent. Services sector growth is projected to grow by 8.9 per cent in 2011-12, which is lower by 0.3 percentage points as compared to October 2011 projections. WPI based inflation has been revised upward from 7.9 per cent in October 2011 to 9 percent in current forecast for 2011-12.

Agriculture, Industry and Services The prospects for agricultural sector for 2011-12 have shown a steady improvement as agricultural GDP for the first half of the current financial year has witnessed a growth of 3.6 per cent. The first quarter of the year witnessed 3.9 per cent growth and the second quarter recorded a growth of 3.2 per cent over their respective quarters of previous year. The changes in prices of almost all food articles barring the exception of vegetables have registered small increases compared to double digit growth experienced during the same period last year. Some of the food items such as pulses and vegetables have, in fact, experienced a fall in prices. Similarly, prices of manufactured food products like dairy and sugar have also witnessed much lower levels of inflation compared to the same period last year. Prices of manufactured food products like dairy and sugar have also witnessed much lower levels of inflation compared to the same period last year. The Index of Industrial Production (IIP) recorded a 5.9% growth in November 2011, relative to the 6.4% growth in November 2010. The IIP growth was led by a healthy expansion of consumer durables (11.2% in Nov 2011; 7.2% in Nov 2010), consumer non-durables (14.8% in Nov 2011; contraction of 4.4% in Nov 2010) and electricity generation (14.6% in Nov 2011; 4.6% in Nov 2010), which together account for around 40% of the IIP index. However, capital goods displayed a de-growth of 4.6% in November 2011, following an adverse base effect, with a robust 25.7% growth in November 2010. External Trade India’s merchandise exports at $250.1 billion had posted year-on-year growth of 39.9 per cent in 2010.  The target for 2011-12 was estimated at $300 billion. While the exports performed well during the first half of 2011-12 there was significant deceleration in the third quarter. Total exports touched $173 billion during April-December 2010 posting growth of 36 per cent. There was slowdown in the corresponding period of 2011 when India exported goods worth $217.6 billion thus registering a growth rate of 25.8 per cent. The target of $300 billion worth exports may not be met in 2011-12. The growth of world trade in goods and services is expected to be below 4 per cent. The exports have posted growth deceleration in Q3-2011-12. Import demand has remained strong despite rupee depreciation in view of the inelastic crude oil demand. Public Finance As per the January issue of IMF’s Fiscal Monitor, overall fiscal deficit in advanced countries fell by about 1 percent of GDP in 2011. The overall fiscal deficit for emerging countries including China, India, Russia, and Brazil was 3.6 percent of GDP in 2010 and is projected to fall to 2.6 percent of GDP in 2011. . According to the IMF, while China had a fiscal deficit of about 2 percent of GDP in 2011, India’s combined fiscal deficit is projected to be 9.5 percent of GDP in 2011.  The odds are low that India will loosen fiscal policy in the forthcoming union budget in response to a growth slowdown and the fiscal deficit would remain high. The central government’s fiscal position remains weak despite some recovery in the second quarter of the current fiscal. The poor performance is mainly due to 1) substantial amount of direct tax refund in the order of Rs 46,847 crore in Q1:2011-12 as compared to Rs 15,758 crore in the corresponding quarter of last fiscal, 2) foregone amount of revenue on account of tax cut on petroleum products, and 3) dismissal performance of non-tax revenue due to slippage of revenue on account of disinvestment of state run companies. The quarterly growth rates of fiscal and revenue deficit also decreased considerably during the second quarter of 2011-12. Overall, there has been significant fall in deficit to GDP ratio in the second quarter of current fiscal as compared to a moderate rise in previous two quarters. Money, Credit and Prices After a period of more than 18 months of sustained high rate of WPI based inflation, December 2011 marked a dip in the inflation rate below 8 per cent. The decline was marked by a sharp decline in the rate of increase in the primary articles: the year-on-year rate of increase in WPI of primary articles dropped from 11 per cent in October 2011 to 8.5 per cent in November and 3.1 per cent in December 2011. While the sustained increase in policy interest rates led to higher cost of capital and an adverse impact on spending on investment or consumer durables the weak global demand conditions also affected investment outlook. A combination of these factors led to reduced demand for credit even as the inflation rate declined in December. The quarterly results from 2011-12:Q3 shows ray of hope.  After seven straight quarters, the year-on-year WPI (Wholesale Price Index) inflation rate came down below the 9 per cent mark. Both the Consumer Price Indices – Industrial Worker (CPIIW) and Agricultural Labourer (CPIAL) show similar trends and have dropped below 9 per cent too with CPIAL lowest at 8.21 per cent.  CPIIW inflation rate is really close to the WPI at 8.67 per cent.   The close co-movement of all the three inflation rates observed since 2010-11:Q2 continue.

Forecast

The revised forecast is presented in Table 1.

GDP forecast for 2011-12 2009-10 2010-11 NCAER Forecast for 2011-12 October 27 2011 NCAER Forecast for 2011-12 Jan 2012 % Change YOY Real GDP  - Agriculture 0.4 6.6 3.2 3.2  - Industry 8.0 7.9 7.8 5.9  - Services 10.1 9.4 9.2 8.9  Total 8.0 8.5 7.9 7.2 Exports ($ value) -3.5 37.8 16.8 15.4 Imports ($ value) -5.0 21.8 23.7 20.3 Inflation (WPI) 3.7 9.4 7.9 9.0 % of GDP at Market Prices Current Account Balance* -2.9 -2.6 -3.1 -3.1 Fiscal Deficit (Centre) 6.4 5.1 5.1 5.4 Note: Forecast Based on Annual Model. * Surplus (+)/deficit (–)