The Hindu : Business : Rising industrial output, buoyant services sector aid growth

Online edition of India's National Newspaper
Monday, Jun 13, 2005

Business

Business

Rising industrial output, buoyant services sector aid growth

Massive resources will have to be raised from the primary market

The future prospects are promising as heavy outlays on mega projects in the steel, power and oil and natural gas sectors are contemplated in an unprecedented manner.

THE INDIAN economy is on a new growth path thanks to rising industrial production and a buoyant services sector. The increase in industrial output since 1998-99 was facilitated by the effective use of the expanding capacities of major industries.

With a creditable showing by the agricultural sector, except in 2002-03, the growth in the Gross Domestic Product (GDP) has been quite impressive and the peak of 8.5 per cent was reached in 2003-04, aided by bumper food and cash crops, sustained rise in industrial output and impressive performance of the services sector.

In 2004-05 too, GDP rose by 6.9 per cent, in spite of agriculture and allied industries making a contribution of only 1.1 per cent against 9.6 per cent in 2003-04. The 8.2 per cent growth in industrial output against 7 per cent was possible as all major industries raised their production with the export demand also for steel, textiles, non-ferrous metals, gem and jewellery and other products being brisk. World prices for the related items too were higher than domestic prices.

Boom in exports

Thus, exports improved by 24.40 per cent to $79.59 billion in 2004-05 from $63.98 billion. The increase in export earnings to the extent of $15.61 billion could meet fully not only the rise in the oil import bill of $8.49 billion to $29.09 billion but also a good portion of the increase of $19.39 billion in non-oil imports.

The trade gap got enlarged to $26.53 billion from $14.27 billion. In spite of burgeoning software exports, the current account surpluses of 2001-04 could not be repeated, as there was also a bigger trade deficit on the basis of data furnished by the Reserve Bank of India.

Comfortable BoP

The balance of payments position is, of course, comfortable as inflows of non-debt receipts were sizable and the slower growth in forex reserves latterly has been due mainly to a reduction in debt receipts, particularly NRI deposits.

Interest rates in the developed countries have been rising slowly without any corresponding adjustments in interest rates within the country.

Outlook for 2005-06

Even with the lacklustre behaviour of the monsoon in the 2004-05 agricultural season, the output of foodgrains is estimated at 206.40 million tonnes against 213.40 million tonnes, the decline being mainly on account of coarse cereals. But the yield of oilseeds and cotton constituted all time records and agricultural and allied industries could make a contribution of 1.1 per cent to the growth in GDP, as stated above.

The prospects for 2005-06 are viewed with cautious optimism, as it is expected that the monsoon will be normal though its onset has been slightly delayed.

On the assumption that agricultural production in 2005-06 will be higher than even in 2003-04 and the growth witnessed in industrial output in recent years will be sustained, it is estimated that the GDP will grow by 7.2 per cent in the current financial year.

It is, however, apprehended that shortages may emerge in particular directions and a more pronounced rise in the yield of food crops and manufactured goods will be necessary for realising the postulated growth of 8-10 per cent in GDP in the coming years.

The policy of the United Progressive Alliance (UPA) government for strengthening the agricultural sector, with a grant of liberal credit at reasonable interest rates to farmers and developing the allied industries may yield the desired results over a period, if the additional credit is utilised purposefully.

Low buffer stocks

Immediately, however, a piquant situation may arise on the food front as even with a satisfactory crop of 206.40 million tonnes in 2004-05 and a record output of 213.40 million tonnes in 2003-04, buffer stocks have been steadily declining, with the wheat content being not very much above the prescribed minimum.

There has thus been a speculative rise in prices of wheat particularly, and the Union Ministry of Food and Civil Supplies may have to change its distribution policies suitably for discouraging undue speculative activity.

In the industrial sector, of course, no difficulty will be experienced in sustaining the growth in textiles, steel, aluminium and cement.

But it is pointed out that there may be a shortage of coal to the extent of 12 million tonnes, even with higher raisings of 375 million tonnes in 2004-05 against 361 million tonnes earlier.

The availability of petroleum and petro-based products can be ensured only if crude imports can be increased by 4-5 million tonnes, as indigenous production has shown only a marginal rise around 34 million tonnes.

Huge projects under way

The future prospects, of course, are promising as heavy outlays on mega projects in the steel, power and oil and natural gas sectors are contemplated in an unprecedented manner.

With the burst of activity in the telecommunications, automobile and some other sectors, the complexion of the economy is likely to undergo a metamorphic change.

But it is becoming increasingly clear that massive resources will have to be raised from the primary market even while foreign direct investment is encouraged in the desired directions and Special Economic Zones also are coming up in different regions.

The new targets for many industries may not look utopian if the trends in consumption of all types of goods are any indication.

Indeed, studies by expert groups suggest that the middle-income group of 300 million alone will be increasing significantly their purchasing power due to higher incomes while there will be a rapid development of the services sector.

As it is also felt that India will be a proper base for expansion of capacity of many industries by multinationals and others for taking advantage of lower costs and the scope for increasing exports to neighbouring countries, the developments in the coming years may be on entirely different lines.

P. A. SESHAN

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