Indian Economy projected to grow at 8.7% in 2007-2008

Domestic investment and savings drive growth

Inflation projected to decline to 4.1%

The Economic Survey 2007-08 presented by the Finance Minister, Shri P. Chidambaram in Parliament today says that the economy has moved decisively to a higher growth phase. With growth in GDP at market prices exceeding 8 per cent in every year since 2003-04 the projected economic growth of 8.7 per cent for 2007-08 is fully in line with this trend.

There was acceleration in domestic investment and saving rates to drive growth and provide the resources for meeting the 9 per cent (average) growth target of the Eleventh Five Year Plan. Macroeconomic fundamentals continue to inspire confidence and the investment climate is full of optimism. Buoyant growth of government revenues made it possible to maintain fiscal consolidation. Inflation flared up in the last half of 2006-07 and was successfully contained during the current year, despite a global hardening of commodity prices and an upsurge in capital inflows.

Expressing concern over slowdown in the consumer goods segment of industry and infrastructure constraints, the Economic Survey calls for additional reforms to raise growth to double digit.

Growth in 2006-07 initially estimated at 9.2 per cent in February 2007 was revised upwards to 9.4 per cent in May 2007 and further to 9.6 per cent on January 31, 2008, suggesting that upward adjustments in the 2007-08 projections are possible. GDP at current market prices is projected at Rs. 46,93,602 crore in 2007-08. Thus, in the current fiscal year, the size of the Indian economy at market exchange rate will cross US$ 1 trillion.

The growth in the services sector continued to be broad based with “transport and communication� being the fastest growing with an average of 15.3 per cent per annum during the 10th Five Year Plan followed by “construction�. The contribution of the construction sector increased to 10.8 per cent while that of telecom to 11.4 per cent. There was 13.9 per cent growth in the financial services comprising banking, insurance and business services in 2006-07.

A notable feature of the recent GDP growth has been a sharply rising trend in gross domestic investment and saving with the former rising by 13.1 per cent of GDP and the latter by 11.3 per cent of GDP over five years till 2006-07. Both private and public savings have contributed to higher overall savings while the increase in investment has been driven by private investment.

The Economic Survey observes that with rising per capita consumption, simple Engel curve analysis would predict a decline in share of food consumption and an increase in luxuries, which in our context include entertainment and durable goods.

According to the Economic Survey, the overall inflation is projected to decline from 5.6 per cent in 2006-07 to 4.1 per cent in 2007-08. The projected decline is due to the deceleration in investment goods prices from 5.5 per cent growth in 2006-07 to 4.3 per cent growth in 2007-08. This, the Economic Survey says should have a positive effect on investment.

Annual average growth of Money reached a trough of 13 per cent in 2003-04 and has been on an accelerating trend since then, reaching 19.5 per cent in 2006-07. However, in contrast to money supply, average credit growth slowed marginally to 26.8 per cent in 2006-07 and has decelerated further in 2007-08.

On balance of payments the Economic Survey says that there is considerable uncertainty in quantifying the downside risk to global growth arising from the downturn in housing market and the sub-prime mortgage market crisis in the United States. Monetary policy actions by the United States and other developed countries seem to have contained the immediate impact, though more surprises in the next six months cannot be ruled out.

Noting that the composition of capital flow is also changing, the Economic Survey says that the most welcome feature of increased capital flows is the 150 per cent increase in net foreign direct investment inflows in 2006-07 to US$ 23 billion. The trend has continued in the current financial year with gross FDI inflows reaching US$ 11.2 billion in the first six months.

India’s greater integration with the world economy was reflected by the trade openness indicator, the trade to GDP ratio, which increased from 22.5 per cent of GDP in 2000-01 to 34.8 per cent of GDP in 2006-07. The exports and imports grew by 22.6 per cent and 24.5 per cent respectively in 2006-07, recording the lowest gap between growth rates after 2002-03. In the first nine months of the current year, exports reached US$111 billion, nearly 70 per cent of the year’s export target. Imports grew by 25.9 per cent during April-December 2007 due to non-POL imports growth of 31.9 per cent, implying strong industrial demand by the manufacturing sector and for export activity.

The industrial sector witnessed a slowdown in the first nine months of the current financial year. The growth of 9 per cent during April-December 2007, when viewed against the back drop of the robust growth witnessed in the preceding four years, suggests that there is a certain degree of moderation in the momentum of the industrial sector.

The Economic Survey states that the share of the Central Government expenditure on social services, including rural development, in total expenditure (plan and non-plan), has increased from 10.97 per cent in 2001-02 to 16.42 per cent in 2007-08. The demographic dividend will manifest itself as a rise in the working age population aged 15 to 64 years from 62.9 per cent in 2006 to 68.4 per cent in 2026. To tap this dividend, the Eleventh Five Year Plan focuses on ensuring better delivery of healthcare, skill development and encouragement of labour intensive industries.

Agricultural growth, dependent as it is on the monsoon, continued to fluctuate. The overall food grains production in 2007-08 is expected to fall short of the target by 2.2 million tonnes, though it is expected to be 10.1 million tonnes higher compared to the second estimates for 2006-07. While the production of Kharif food grains is expected to be 5.3 million tonnes (4.8 per cent) higher than the production in 2006-07, rabi production is expected to be lower by 3.3 million tonnes.

Expressing concern over the loss of dynamism in the agriculture and allied sectors in recent years the Economic Survey emphasizes the need for the second green revolution, particularly in the areas which are rain-fed, to improve the income of the persons dependent on the agriculture sector.

Stock markets are an important instrument of financial intermediation. They saw increased activity in 2007-08. The Bombay Stock Exchange (BSE) Sensex rose from 13,072 at end-March 2007 to 18,048 as on February 18, 2008, while the National Stock Exchange (NSE) index Nifty 50 rose from 3,822 to 5,277 during the same period. Both the indices gave a return of around 38 per cent during this period.

The Economic Survey acknowledges the importance of issues like Global warming and climate change. It however emphasizes the need to balance the harmful effects of human activity on global warming against the need for poverty reduction and economic growth in developing and least developed countries.

Source : Press Information Bureau

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