Economic Outlook 2010-11

Growth Prospects
The performance of the Indian economy in 2009/10 greatly
exceeded expectations. The farm sector which was expected to
contract showed resilience, growing by 0.2 per cent despite the weak
South West monsoon.The non farm sector also did well. It is the
assessment of the Council that the Indian economy would grow at
8.5 per cent in 2010/11 and 9.0 per cent in 2011/12.In the current fiscal
year,agriculture will grow at 4.5 per cent,industry at 9.7 per cent and
Global Prospects
The global economic and financial situation is recovering
slowly.The large fiscal deficits and high debt ratios coupled with
slow economic growth have created unsettling conditions for
business and have potential for causing great volatility in financial
markets.It is hard to visualize strong economic growth in the advanced
economies in 2010 and to a large extent in 2011. The implications of
this,for India ’s strategy to return to the 9.0 per cent growth
trajectory,are that public policy must promote business confidence
and facilitate increased
Structural Factors
In 2008/09 the investment rate fell on account of the drawdown
of inventories. This trend has reversed and the Council expects the
investment rate to be higher at 36 per cent (of GDP)in 2009/10,rising
to 37 per cent in 2010/11 and 38.4 per cent in 2011/12.Similarly we
expect the domestic savings rate to pick up and reach 33.4 per cent in
2009/10,34.3 per cent in 2010/11 and 35.5 per cent in 2011/12. These
rates should enable the economy to grow in a sustained manner
Private corporate investment and total investment in fixed
assets is expected to recover strongly but will not reach the previous
high levels. Government Final Consumption Expenditure to GDP
which hit a peak of 12.3 per cent in 2009/10 is expected to fall to 10.33
per cent in 2011/12. On the contrary, Private Final Consumption
Expenditure which declined in 2008/09 and 2009/10 is expected to
increase in the current and next fiscal year.Since 2001-02 the
progressive decline in the Private Final Consumption Expenditure
has been accompanied by a matching increase in the investment
expenditure component of GDP.
Sectoral Growth Projections
In the backdrop of a weak South West (SW)monsoon in
2009,the Council had expected the farm sector GDP to decline by 2
per cent. However, the actual loss in farm sector output was less.
The strength in horticulture, animal husbandry as well as higher
cotton output,helped farm sector GDP to ultimately register a
marginally positive growth of 0.2 per cent.
On the basis of a normal SW monsoon forecast by the
Meteorological Department, one may reasonably expect a strong
rebound in crop output in Kharif and Rabi in 2010/11.The better seed
and fertilizer availability and the construction of a large number of
water harvesting structures through the MNREGA lend strength to
these expectations. Moreover, the expansion in horticulture and
animal husbandry and a low base effect should generate a farm
sector GDP growth of around 4.5 per cent in the current fiscal.
Industrial sector recovery became evident in June 2009 and by
August 2009 the General Index of Industrial Production (IIIP)
registered double digit growth rate driven by similar growth rates
in output in the manufacturing and mining sector.
Overall,we expect GDP arising in the industrial sector to expand
9.6 per cent in 2010/11 rising to 10.33 per cent in 2011/12. The
expansion in the services sector is expected to approach 9 per cent
in 2010/11 and inch up to 9.6 per cent in 2011/12.Over all,the nonfarm
sector is expected to grow by 9.2 per cent in 2010/11 and 9.8 per
cent in 2011/12.
Trade & External Sector
According to the DGCI&SS report the merchandise trade
exports touched $176.6 billion in 2009/10 which was 4.7 per cent less
than 2008/09.Engineering and electronic goods were the hardest
hit declining by more than 20 per cent. Because of currency
fluctuations,the rupee value of exports showed practically no decline
in 2009/10.The value of merchandise imports in 2009/10 in doller
terms was 8.2 per cent lower at $2278.7 billion and 4 per cent
lower in rupee terms.
In 2010/11 we expect the value of crude oil imports to be high
due to increase in crude prices by almost 15 per cent and an
increase in the quantities imported. The oil import bill is expected to
rise to $1103 billion in 2010/11 $1120 billion in 2011/12.
Amongst the non oil imports we expect a comparatively slower
growth in the case of gold, silver imports and a stronger growth in
the remaining segments. The overall merchandise imports on
balance-of-ppayments basis are expected to rise to nearly $3354 billion
(uup 18 per cent) in 2010/11 $4414 billion (uup 17 per cent) in 2011/
12.
On the export side, the Council is projecting that in 2010/11
growth of petroleum products would be slightly higher than that of
imports at 24 and 16 per cent in 2010/11 and 2011/12 respectively.
The value of exports of gems & jewellery would show growth of 25
per cent.
Export of non-oil, non-jewellery products would rise by 20 per
cent in 2010/11 and moderate slightly in 2011/12. Our projections for
exports on balance-of-ppayments basis for 2010/11 amounts to
$2216 billion and for 2011/12 to $2254 billion.
Overall,the merchandise trade deficit on balance-of-payments
(BoP)basis in 2010/11 estimated at $1138 billion which is 18 per cent
more than the previous year.The projected trade deficit in 2011/12 is
$160 billion,an increase of 16 per cent over the 2010/11 In both
years, we are expecting the merchandise trade deficit to be around
9 per cent of GDP.
In 2009/10 the net FDI inflow at $20 billion was 11 per cent
more in 2009/10 compared to the previous year.Portfolio capital inflows
at $32 billion marked a big turnaround from (–)$14 billion in 2008/
09,reflecting the growth in domestic and world asset markets.The
portfolio inflows were primarily in the form of investments by Foreign
Institutional Investors (FFIIs) while the overseas equity issuance
(GGDR & ADR) by Indian corporates was quite subdued. Loan
capital inflows stood at $12 billion.
In 2010/11 and 2011/12 we see a continued expansion of net
FDI to $330 billion in both years,portfolio capital inflows of $25
billion and $35 billion and a steady increase in net loan capital inflows
to $17 and $25 billion respectively. Overall,our estimates for capital
inflows are $73 billion in 2010/11 and $91 billion in 2011/12.This would
be adequate to finance the large current account deficit in the two
years and leave a modest $31 and $41 billion (2.0 and 2.4 per cent of
GDP) to be absorbed in the foreign exchange reserves.
Prices and Inflationary Pressure
Since October 2008,the Indian economy has been experiencing
very high inflation in food prices.Initially this high inflation was
confined to only food articles – both primary and manufactured.
However as economic recovery began to stabilize it has,not
unexpectedly,manifested itself in the prices of manufactured goods.
The headline inflation rate which was 1 per cent in September
2009 has been rising since then reaching double digits in February
2010. Even in June the provisional headline rate was over 10 per
cent.Inflation in manufactured goods also jumped from less than 1
per cent in September 2009 to a high level of 6-8 per cent in April-
June 2010.
Inflation reflected in Consumer Price Indices has been running
in double digits.In July 2009,both CPI-IW (Industrial Workers)and
CPI -UNME (Urban Non-Manual Employees)surged from 9 per cent
to 12 and 13 per cent respectively. By December 2009,both indices
were reporting inflation of around 15 per cent, which increased further
to 16 per cent in January 2010. There has been a slight easing
thereafter,with both indices reporting inflation of less than 15 per
cent in March 2010.The CPI-IW inflation rate for May 2010 was less
than 14 per cent.
Inflation has remained a major source of concern in the economy
for more than a year.The overall WPI inflation rate has remained at
double digit levels for the past five months and the consumer price
inflation for much longer.Inflationary expectations,particularly food
inflation expectations,will be moderated because of the projected
normal monsoon. Food prices have already begun to soften.
Combined with the base effect,we expect inflation rate to fall to around
6.5 per cent by March 2011.
The available food stock must be released in a manner that
they have a dampening effect on prices.The behaviour of inflation
will also be a major concern for monetary authorities.Against the
background of inflation rates that are more than twice the comfort
level, monetary policy has to operate with a bias towards tightening.
This is essential to promote conditions for sustainable growth in the
medium term.
Monetary Conditions and The Financial Sector
In the October 2009 Economic Outlook,the Council had noted
that financial conditions had improved sharply across the world and
risk perceptions had turned more favourable. However the pace of
improvement has slowed down due to the heightened risk
perceptions on the sovereign debt,especially after the Greece episode.
In January 2010 as the Euro-zone initiative to support Greek
sovereign debt began to run into a range of obstacles,a generalised
lack of confidence developed with respect to sovereign governments
in general and weaker members of the Euro-zone in particular.
The Credit Default Swap (CDS) spreads increased not only
for public and corporate debt issued by Greece and the other
European economies perceived to be relatively weak but also for all
emerging and developing economies. However, currency exchange
rates did not show much movement till later.
Except for the Japanese Yen which strengthened against the
US dollar almost all other currencies declined – though the declines
were of varying orders.China had linked the Renminbi,to the US
dollar at the onset of the crisis.There was no change in the exchange
rate till the third week of June 2010, when Chinese authorities
announced that they were removing this peg. Since then the currency
has gained from a level of 6.83 to the dollar to 6.77.
While the monetary easing and the fiscal measures during the
crisis effectively limited the damage caused by the contagion, it was
always clear that these would have to be rolled back as the economies
gradually recovered.The European Union and the US continue to
face unsettled recovery conditions, with the possibility of recurrent
crisis being particularly pronounced in the Euro-zone.
In view of this exit from the accommodative monetary policy
and the reduction in fiscal deficit is only likely to materialize in
2011,perhaps in the middle of that year. 25 In those economies where
the effects of the crisis have clearly worn off and the recovery is
strong,an early exit from both the monetary and the fiscal stimulus is
called for.Australia,India,China,Brazil and Singapore have been
tightening their monetary policy by raising policy interest rates
and/or rolling back specific liquidity measures that were adopted at
the time of the crisis.
In India, the excess liquidity conditions created by an easy
monetary policy during the crisis, continued to prevail till May
2010, despite the tightening by RBI since October 2009.The situation
changed in June when banks at the margin began borrowing at the
repo window from the RBI. With the reversal in liquidity conditions,
overnight interest rates also reverted to levels that have approached
and even exceeded the upper end of the interest rate corridor i.e.,
the repo rate.