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Indian economy looking
up
MUMBAI - There was
skepticism about India's growth prospects as the
new financial year began in April. But things have
changed dramatically, particularly because of an
amazingly good monsoon. Though delayed, it has
been a little too generous this season, raising
the prospects of good crop even as it caused
floods in some parts of the country. What is
significant is that the areas that are usually
prone to drought have received copious rains this
year, improving the prospects of good crop for the
next two to three years.
Agriculture seems
to have been a drag on the economy in the last
year or two after near double-digit growth in
2003-04, which pushed the overall growth of the
economy to 8.2%. But though agriculture recorded
very low growth of around 1% in 2004-05, GDP
growth was quite comfortable at 6.9% on the back
of high growth in the previous year because of the
buoyant industrial and services sectors, which
recorded growth near 10%. With the business
confidence index at a 10-year high, riding on the
back of strong monsoon, growth prospects can only
improve this year.
Both Prime Minister
Manmohan Singh and Finance Minister P Chidambaram
are confident of achieving at least 7% growth this
financial year, and expectations are that it could
reach well over 7%. With sales volumes and profits
seen rising, there is optimism all around and
companies are upbeat about the outlook despite
higher oil prices. What is more significant is
that inflation is under control - hovering around
4%, notwithstanding upward pressure from crude
prices. This has helped the Reserve Bank of India,
the country's central bank, to maintain stable
interest rates, ensuring growth prospects are not
dampened.
The Dun and Bradstreet Business
Optimism Index survey conducted recently showed
that basic goods makers, service sector companies,
consumer durable producers and capital equipment
suppliers are the most optimistic on growth. This
survey was conducted when the stock market hit
record highs following a sharp rise in foreign
fund investment, and reflected an optimistic
outlook for the economy. India's stock market has
continued to soar and surge past 7,700 after
breaching the 7,000 mark in June. India Inc
anticipates a faster growth rate due to liberal
trade pacts with Singapore, lower interest rates,
relaxation of FDI (foreign direct investment) caps
and improved macroeconomic parameters, besides
higher levels of industrial efficiency. Huge FII
(foreign institutional investor) inflows and
promised deregulation, apart from rosy plans like
gas pipelines, have also helped boost the
investment climate.
One major indicator
for buoyancy in the economy is the upswing in the
prices of real estate in major metropolises, which
have been pushed up by at least 10-20%. In cities
like Delhi and Mumbai, they have gone up by over
40%. Prospects of exports in the current year have
also risen. The proportion of companies expecting
higher exports is up by 2.9%. Even the outlook on
pre-tax profits is bright as the number of firms
expecting higher profits has risen by 5.9%.
Revenue collections are good. After the
first-quarter figures, the revenue department is
confident of exceeding collection targets for
customs duties, service taxes and corporate taxes
despite lowering of rates as part of the tax
reforms in the budget this year. Excise duties as
well as income tax collections, too, are expected
to be right on target.
With exports
recording over 20% growth in the first quarter of
this fiscal year, Commerce Minister Kamal Nath has
already revised the merchandise exports target
from US$88 billion to $92 billion for 2005-06.
Service exports, too, are recording unprecedented
growth this fiscal year and could cross $50
billion for the first time. FII flows have surged,
and so have FDI inflows. In 2004-05, FDI flows
recorded a 42% increase, and in the first two
months of the current financial year, the inflow
registered a growth of 117% as compared to the
corresponding period of the previous year.
The key steel sector is looking up. South
Korean major Posco has inked a memorandum of
understanding (MoU) with the Orissa government for
a $12 billion project to set up a 10 million ton
capacity steel plant. Non-resident Indian steel
tycoon Lakshmi Mittal is also negotiating with the
Jharkhand state government for setting up a 10
million ton plant.
The automobile sector
is zipping ahead. Most of the major carmakers are
in expansion mode. Commercial vehicle
manufacturers are also planning big investments.
Toyota and Suzuki have planned new plants in
addition to the existing ones. Ashok Leyland may
also enter the car segment, while Mahindra and
Mahindra is coming out with a car in collaboration
with Renault. Volkswagen is negotiating with the
Andhra Pradesh state government for setting up a
plant, while BMW is setting up shop near Chennai.
The quarterly results of most companies,
especially IT firms and public sector banks, are
extremely encouraging. The country has not had
such a good showing in the recent past. Energy
appears to be one area of concern, given surging
oil prices. But the US visit by Prime Minister
Manmohan Singh has opened new vistas of
opportunity, with President George Bush
recognizing India as a nuclear power and agreeing
to lift restrictions and cooperate in the area of
civilian nuclear energy. Also, India is moving
ahead with the $7.1 billion Iran-Pakistan-India
gas pipeline. Besides, there have been rich gas
finds in the Krishna-Godavari offshore area. All
these augur well for energy security, which is key
to the country's economy given that 70% of its oil
requirements are met through imports.
But
for the recent oil rig fire in Bombay High, which
could pose a temporary setback, overall there seem
to be positive developments in the energy sector.
India is also exploring the possibility of coal
gasification and its conversion into oil. The
country has one of the largest coal reserves
worldwide, but oil conversion has never been
attempted due to high costs - a barrel of oil from
coal is expected to cost $40. With oil prices
surging to around $60 a barrel, coal gasification
has now become a viable proposition and talks are
on with South Africa, which has developed
expertise in this area.
With strong
macroeconomic fundamentals, the prospects look
genuinely good for the economy for now. But it
could also turn out to be just a short-term boom
unless the government makes serious efforts to
push reforms.
Infrastructure is still a
major constraint. The government needs to speed up
modernization of major airports, ports, highways
and railways, which will require huge investments
and political will. Over $150 billion of FDI is
required in the infrastructure sector in the next
5-10 years. The power sector is yet another area
where huge investments are required. There have
been some developments in this area of late with
power reforms, and investments are pouring in. But
most private sector investments are still only on
paper. The resolution of the Dabhol power project
augurs well as this could encourage private sector
and foreign investments in the power sector. But
more importantly, the state electricity boards
need to be reformed, without which private
investment flow into the sector could only be
minimal.
(Asia
Pulse/PTI) |
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