Economic Survey: Walking the tightrope

The Economic survey, highlighting the progress made by the domestic economy in FY09 and some of the challenges facing it, was tabled in the parliament today by India’s Finance Minister. Let us have a look at the key takeaways from the same.

GDP down but by no means out
Braving one of the worst recessions in recent times, the Indian economy managed to log in a respectable GDP growth of 6.7% during FY08-09. Although this was lower than the average growth rate of 8.8% achieved for the previous five years (FY04-FY08), it was nevertheless higher than the 5.5% growth achieved during the preceding five year period from FY99 to FY03. At 4.6%, the growth in per capita income was also lower than the previous five year average growth of 7.3% but higher than the 3.3% average growth logged during the five years from FY99 to FY03. Important to add that during the first half of FY09, India’s growth stood at 7.8% whereas it declined to 5.8% during the second half, when the economic crisis was at its peak.

The manufacturing sector had its worst performance in recent years with growth slowing down to a mere 2.4% in FY09. Both fall in exports as well as decline in domestic demand contributed towards the poor performance of the sector. Infact, it would be fair to say that all the sectors, except mining and quarrying and community social and personal services, witnessed a deceleration in growth during FY09.

As far as aggregate demand is concerned, private consumption fell during FY09, accounting for 55.5% of the total GDP growth as opposed to 57.2% in the year before. Fortunately, this fall was compensated by increased government spending as it unleashed a wave of stimulus measures.

Inflation: A volatile ride
After remaining at a benign 4.7% during FY08, a sudden spurt in international commodity prices saw inflation raising its head again. However, appreciation of the rupee against the dollar during the last quarter of FY08 managed to provide some cushion. But once this cushion subsided and commodities continued with their upward march, the headline WPI inflation rate touched double digit levels by the middle of June 2008. It remained there for the next 21 weeks, touching a high of 12.9% in early August 2008. As per the survey, nearly two thirds of this rise in inflation was due to three sets of commodities namely, edible oils, iron and steel and mineral oils and refinery products.

The Survey is cognizant of the fact that there is a need to provide ample liquidity in the system so that economic growth is not hampered. However, it is also aware of the potential negative consequences of the same in the form of a potential inflationary threat once the economy is back on its feet. Hence, rolling the excess liquidity back in in orderly manner is going to be the next big challenge for policymakers.

Savings & investments: The game changers for India
Among the most salient features of India’s record high growth rates from FY04 to FY08 have been the country’s savings rate and investment rates. While investment rate increased from 25.2% in FY03 to 39% in FY08 as a percentage of GDP, gross domestic savings as a percentage of GDP increased from 26.3% in FY03 to 37.7% in FY08. This in turn reduced India’s dependence on external capital and made it extremely resilient. Although capital inflows also remained strong, they were used mainly to accumulate foreign assets as the domestic investment needs were mostly met through internal savings.

Summing up…
While factors like strong rural income and consumption, high domestic savings rate, government focus on infrastructure and a reputation of being one of the most favored destinations for FDI are likely to emerge as key strengths for the economy, the country will have to also watch out for some adverse factors like drop in private consumption, reduced availability of risk capital and poor export demand. To conclude, it will be the interplay between the country’s strengths and weaknesses that will determine how quickly the country will revert to the trendline growth that it achieved between from FY04 to FY08.

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