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Indian economy on right
track
Kunal Kumar Kundu
The Indian government released the
second-quarter GDP (gross domestic product)
numbers on December 31, virtually unnoticed in the
aftermath of the devastation caused by the
tsunami. Economic growth, according to the figures
released by the government, slowed to 6.6% during
the second quarter ended September from 7.4% in
the previous quarter due to a negative growth in
the agriculture sector, once again reflecting the
Indian economy's dependence on the vagaries of
monsoon. The agricultural slowdown was so
pronounced that even the robust performance of the
manufacturing sector - 9.3% against 8% in the
previous quarter - failed to contain the fall in
overall GDP growth.
Consolidated growth in
the first six months this fiscal (April-September)
stood at 7%, against 6.9% in the same period last
year, recording a minor improvement. The
agriculture sector registered a negative growth of
0.8% compared with 3.4% in the first quarter this
fiscal. Apart from agriculture, other sectors
contributing to the economic slowdown were mining,
financial, real estate and insurance services. The
construction sector, however, grew by a healthy
5.2%, against 3.6% in the previous quarter. GDP at
factor cost on constant prices (1993-94) stood at
Rs3.47308 trillion (US$79 billion). For the six
months ended September, GDP grew to Rs6.99427
trillion from Rs6.53699 trillion in the same
period last year.
One remarkable part of
last quarter's development is the clear pickup in
overall industrial activity, probably indicating a
turnaround in its fortune. With manufacturing
showing a growth of 9.3% during the quarter, the
overall growth of the industrial sector has been
as much as 8.02%, slightly lower than the growth
in service sector - 8.25%. After a long time,
industrial activity has shouldered the burden of
GDP growth in India. It's the service sector that
generally does so. However, only the coming
quarters will tell whether this becomes a trend.
 The
trend,
however, continues to be positive. Even during
October, the Index of Industrial Production showed
a growth of 10.1%, buoyed by the 11.3% growth
recorded by the manufacturing sector (chart below).
Even if one goes by the performance of the
capital-goods sector, there is clear indication
that India is possibly experiencing resurgence in
industrial activity. Every month in the
April-October period
saw the capital-goods sector recording a
double-digit growth against only twice during the
same period in the previous year. The corporate
sector is clearly in a bullish mood.
India's balance of payments
(BoP) slipped into a deficit - the first time
since September '02. According to the Reserve Bank
of India (RBI),
the deficit stood at $634 million as of September
'04 against a BoP surplus of $7.5 billion at the
end of June '04 and a surplus of $13.5 billion in
September '03. The BoP is a combination of current
account - which captures India's imports, exports
and services transactions with the rest of the
world - and the capital account - which comprises
various debt, aid and equity flows, a part of
which could be hot money.
After posting a
surplus for four consecutive quarters, the current
account ended in a deficit on September 30, thanks
to lower remittances and higher imports. The
current account showed a deficit of $6.4 billion
compared with a surplus of almost $2.1 billion a
year ago. However, the capital account showed a
surplus of $5.8 billion - the same as it was in
the year-ago period.
In the second
quarter, merchandise imports surged by 53.5%, more
than doubling the 24.6% growth in the previous
quarter. Crude oil and petroleum products were the
key drivers of the surge in import payments.
Volume of oil imports was up by 12.7% in the
second quarter, with prices ranging $32-$41 per
barrel as against $29-$35 in the first quarter.
The trade deficit stood at $12.3 billion during
the second quarter as against $5.1 billion in
first quarter. For the first half of 2004-05, the
trade deficit was at $17.4 billion, higher by 86%
on a year-on-year basis and already running above
the level of the full year 2003-04. During this
period, non-oil imports also showed a steady
growth, indicating a pickup in economic activity.
Foreign
direct investments (FDI) into India rose by 26.83%
to $2.04 billion in the first half of the current
fiscal ending September 2004, as against $1.61
billion in April-September 2003. FDI rose by $1.27
billion in July-September 2004 (Q2) as against the
April-June quarter (Q1). While the numbers are not
earth-shattering, there is clear indication that
India is becoming a more attractive FDI
destination. In the FDI Confidence Survey, 2004, A
T Kearney rated India as the third-most-attractive
investment destination (behind China and the
United States), compared with its 15th position
two years ago and sixth last year. It also ranked
India as the best BPO (business process
outsourcing) destination. Even according to the
United Nations Conference on Trade and Development
(UNCTAD) and Corporate Location, India is among
the top three investment "hot spots" for the next
four years. The latest World Economic Forum's
"Global Competitiveness Report" ranks India 41st
out of 102 countries in terms of restrictions on
foreign ownership. In comparison, Malaysia is
ranked 65th, Thailand 72nd and China 81st. None of
the major developing economies is ranked higher
than India.
There is now more evidence to
suggest that the Indian economy may be entering a
phase of sustained investment-led growth. Major
capacity expansions are being planned in the
manufacturing sector. The last time such big
investments took place in the industry was during
1993-96. There are clear signs that most industry
segments are operating at full capacity. Further
capacity building exercise has begun in sectors
such as steel, cement, aluminum, paper, textiles
and automobiles.
An overall growth of
8%-plus in the service sector seems achievable
going by the quarterly trend. Similarly, the
manufacturing sector could just about touch 8% if
the current momentum is maintained for the rest of
the financial year. Thus the service and
manufacturing sectors alone could propel the GDP
growth to more than 6%.
For the first time
in many years, private power projects are being
funded by banks and financial institutions. This
is happening possibly because the new electricity
laws allow private producers to sell power to
anyone they please. Steel manufacturers are
planning capacity expansions to the tune of Rs100
billion over the next three to four years. Auto
majors are planning new units, either for the
domestic market or for exports. Suzuki Motors
expects the Indian car market to grow from 1
million a year to 2 million by 2008. So Maruti
Udyog Ltd, which has a 55%-plus share in the
passenger-car market, has decided to double its
own capacity to 1 million over the next four to
five years. This will entail an additional
investment of Rs60 billion. Clearly, the Indian
economy is on the right track.
Kunal
Kumar Kundu is a senior economist with a
leading bilateral Chamber of Commerce in India. He
has a master's in economics with specialization in
econometrics from the University of Calcutta.
(Copyright 2005 Asia Times Online Ltd.
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