Is Indian economy turning around?

Wednesday, October 31, 2012
[GFX: ©
By Ashok Handoo*

For a few months now, the Indian economy appears to be on a recovery path. At least there are enough indications to that. Foremost is the performance of various sectors of the economy.

Industrial output has been gathering some pace since August. It rose by 2.7 % in August this year compared to a fall of 0.2 % in July. But the hike has been less if we compare it with August last year when it stood at 3.4%. The manufacturing sector grew 2.9% in August but again less than 3.9 % growth it recorded in the same month last year. The mining sector recorded an increase by 2.9% in August when it actually declined by 5.5 % in the same month last year. The growth recorded by the manufacturing sector is significant since it accounts for about 76 % of the index of industrial production.

There have been some down turns as well. Electricity sector grew by just 1.9% as against 9.5 % in August last year. Another area of concern is the exports sector which as per the Commerce Ministry figures fell by 11% in September last. The decline was consecutive for the fifth month. As against this, imports rose by 5% in the same month. For the first six months of the current financial year fall in exports has been 6.8% compared to the corresponding period last year. Though non-oil imports fell by 4.5% in September, the value of oil imports rose by over 30% to $14.1 billion in September compared to the same month last year when it stood at $10.8 billion.   

There are various reasons for this scenario. Global demand has been on the decline due to financial crises. It has led the World Trade Organisation to revise its estimate for global trade during 2012 from the earlier 3.5% to only 2.7. Domestically, high cost of credit is one important factor responsible for this situation.

But there are lots of silver linings. Of late the Foreign Direct Investment is showing an upward movement. Last financial year it reached $46.84 billion, compared to $34.84 billion in the previous year. In 2009-10 FDI accounted for $37.74 billion. More than the FDI, NRI inflows have been consistently rising for the last three years. The remittances stood at $ 53.64 billion in 2009-10 which reached $55. 62 billion in 2010-11 and 66.13 in 2011-12.  The remittances account for 4% of our GDP.

Overseas investors have poured in more than Rs.11, 000 crore in the stock market in October so far. Clearly this has been a fallout of the reforms initiatives taken by the government. As per SEBI data, Foreign Institutional Investors were gross buyers of shares worth Rs.40, 940 crore in the first 20 days of October. This takes the FII investment in the country’s equity market to Rs. 93,444 crore this year so far.

After Chidambaram took over as the Finance Minister, the government has embarked on a vigorous reforms path. It has cleared bills to open up insurance and pension sectors to foreign investment. Foreign investment in pension sector is to be raised to 49%. In the insurance sector, FDI will be raised to 49 % from the current 26%. Some other sectors including the aviation sector are also being liberalised.

The government is set to carry forward the reforms process in the days and months ahead. The idea is to make India an investment friendly country to boost growth. The reforms are important because the country would need about $1 trillion to modernise its infrastructure. Thus huge additional resource mobilisation is needed. This won’t be possible without streamlining the system and attracting much more foreign investment. Besides other measures further opening up of the insurance, pension and banking sectors would be needed. Reforms in energy sector, including restructuring of State Electricity Boards, is no less important. Other important areas include education and labour laws.

Of immediate concern is to narrow the fiscal deficit which has been rising to as much as 6 percent. The attempt is to limit it to this year’s budget estimate of 5.1 %.

All this is of utmost importance in the face of the warnings by the Finance Ministry commissioned Kelkar committee and the likelihood of S and P downgrading India’s rating if things don’t improve in next 24 months. But then 24 months is a long time and a lot is going to happen till then.

Investment rate in the first quarter of the current financial year has been at 32.8 % which is less by 1 percentage point compared to last year. Persistently high food inflation is also a big concern. How far will the current reforms spree allow us to reach the envisaged 8% growth is still an open question. The IMF has brought down it’s forecast for India to 4.9 % in the current year. But the planning Commission has put the growth target for the 12th Plan period realistically at 8.2 % since the current year growth is likely to end up between 6 and 6.5 %.

The plan’s thrust area is Health, education and infrastructure which are considered to be the centre of our growth engine. The plan size too has been increased 135 percent compared to the 11th plan. As the Prime Minister says, achieving 8% growth rate is not unattainable if we put in efforts to boost investment.

Soon after the current reforms process began a couple of months ago, sensex is flirting with 19000 mark and the slide of the rupee has been curbed. The currency market is thus in a better shape.

With plans afoot to phase out the current subsidy regime slowly and replace it by cash transfers through unique identification cards, things are set to improve. A roadmap for fiscal correction is in the pipe line despite, RBI’s cautious moves with regard to lowering of interest rates. There are thus credible indications that the animal spirits are on display in different sectors of the economy. This could signal better days ahead.

But as of now it is a long journey yet. (PIB Features.)

(*Ashok Handoo is a freelance writer. Views expressed by him in this article are his own and do not necessarily reflect the views of
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