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Heartening GDP numbers

They bring greater reality to performance of different sectors

THE INDIAN economy is upbeat with buoyancy in the industrial and services sectors and expectations of a recovery in agricultural production following a satisfactory monsoon. It is estimated by the Central Statistical Organisation that the growth in Gross Domestic Product in 2005-06 will be 8.1 per cent against the Reserve Bank estimate of 7.5 per cent, with the manufacturing sector increasing its contribution by 9.4 per cent, community, social & personal services sector 7.9 per cent and the agriculture sector 2.3 per cent as compared to 8.1 per cent, 9.2 per cent and 0.7 per cent respectively in 2004-05.

With brisk demand for Indian products in overseas markets and a significant increase in domestic offtake, Prime Minister Manmohan Singh has even observed that the industrial output is registering a double-digit growth and the GDP can grow at 8-10 per cent in the coming years.

Foodgrains output this year may be higher at 208.50 million tonnes against 204.60 million tonnes with improvement mainly in rice. Later reports in fact suggest even higher yields of fine cereals, following bumper rabi harvests. However, with increased use of grain under the food-for-work programme and earlier exports of both rice and wheat, buffer stocks have been declining steadily and wheat availability is even below the prescribed minimum levels.

Even though procurement of wheat will be vigorous from mid-March and the wheat crop may be more than 74 million tonnes, the Union Ministry of Agriculture has decided to import five lakh tonnes of this cereal as a precautionary measure for the first time in eight years. This development highlights the need to raise the yield of fine cereals at a faster rate.

New base for GDP

The higher GDP growth estimate against the RBI forecast is partly due to the change in the base year to 1999-2000 from 1993-94, as the growth rate for 2004-05 also has been revised upward to 7.5 per cent from 6.9 per cent. The new estimate probably imparts greater reality to the performance of different segments of the economy. The growth in 2006-07 may be higher at 8.5-8.8 per cent if the monsoon is again favourable.

Buoyancy in tax receipts

The buoyancy in the economy has enabled the Central Exchequer to secure sizable tax receipts and there is confidence that the estimates of revenues from direct and indirect taxes in the whole of 2005-06 will be realised, if not exceeded. Details of tax receipts for April-January indicate that collections from direct taxes and revenues from customs duties were even better than Budget estimates, though excise collections have not been equally impressive.

Finance Minister Chidambaram has struck an optimistic note in spite of the likelihood of a shortfall in non-tax revenues and non-debt receipts in the capital budget. But there may be a drive for securing larger receipts under the disinvestment programme in the remaining weeks. In any case, it is asserted that the fiscal deficit will not exceed 4.3 per cent of GDP in the current financial year.

In the wake of sound performance of various segments of the economy and repeated indications of an investor friendly budget for 2006-07 along with streamlining of the tax structure, the secondary and primary markets have been witnessing buoyant conditions as never before. Though interest rates have tended to rise in developed countries and the discount rate of the U.S. Federal Reserve has been increased to 4.5 per cent recently, FII inflows into the secondary and primary markets have been heady and the BSE index has crossed the magical 10,000-mark and forged ahead to 10,110.97.

Banks may face crunch

The liquidity of the banking system noticeable till recently is disappearing gradually, as the growth in incremental bank credit in the current financial year up to January 20 is higher at Rs. 2,64,079 crore against the additions to deposits of Rs. 2,48,649 crore. Investments have come down by Rs. 24,651 crore against an addition of Rs. 34,366 crore. The credit-deposit ratio has, thus, zoomed to 70.02 per cent from 63.02 per cent with an abrupt decline in the investment-deposit ratio to 36.66 per cent from 42.84 per cent. The monetary authorities are concerned over the rise in short-term interest rates and the decline in banks' liquidity. But there is no disposition to discourage credit expansion as it is felt that there will not be any noticeable uptrend in long-term interest rates.

In the latest review of monetary policy, the reverse repo rate has been raised by 25 basis points to 5.50 per cent and the repo rate by a similar percentage point to 6.5 per cent. As the chief executives of banks are anxious to secure additional resources and avoid a credit squeeze, deposit rates have been raised modestly by many leading banks along with selective increase by 50 basis points in respect of housing and personal loans. The borrowing programme of the Union Finance Ministry has necessarily to be on a costlier basis. It remains to be seen whether the expectations in some quarters of a distinct improvement in money conditions after March turn out correct.

Whatever the nature of developments in the money market and in the external sector in 2006-07, the accent will have to be on mobilising investible resources in many ways with active encouragement to entrepreneurs in the private sector for executing new projects and for stimulating savings of the community as well as foreign direct investment.

P. A. SESHAN

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