Current Economic Scenario

Transcription

1 LOK SABHA SECRETARIAT PARLIAMENT LIBRARY AND REFERENCE, RESEARCH, DOCUMENTATION AND INFORMATION SERVICE (LARRDIS) MEMBERS REFERENCE SERVICE REFERENCE NOTE. No.5/RN/Ref./2013 For the use of Members of Parliament Not for Publication Current Economic Scenario The reference material is for personal use of the Members in the discharge of their Parliamentary duties, and is not for publication. This Service is not to be quoted as the source of the information as it is based on the sources indicated at the end/in the text. This Service does not accept any responsibility for the accuracy or veracity of the information or views contained in the note/collection.

2 Contents 1 Introduction 1 2. Economy in GDP Growth Profile 1 Per Capita Income 2 Agriculture 3 Industry 4 External Sector 6 Money 7 Inflation 8 Exchange Rate 8 Foreign Investment Inflows 8 3. Central government s Finances 8 4. Global Economic Situation and Prospects Implication for India of Global Risk Scenarios Prospects for Indian Economy in

3 Current Economic Scenario Introduction After a promising start to the decade in with achievement like GDP growth of 8.4 per cent, bringing down fiscal deficit to 4.7 per cent from 6.4 of GDP in , as well as containing current account deficit to 2.6 per cent from 2.8 per cent in GDP growth decelerated sharply to a nine year low of 6.5 per cent during The slow down was reflected in all sectors of the economy but the industrial sector suffered the sharpest deceleration which decelerated to 2.9 per cent during from 8.2 per cent in The centre s finances for experienced considerable slippage as key deficit indicators turned out to be much higher than budgeted due to shortfall in tax revenues and overshooting of expenditure. The gross fiscal deficit (GFD)-GDP ratio moved up to 5.8 per cent in compared to the budgeted ratio of 4.6 per cent. The substantial increase in subsidies during on account of high crude oil prices further impacted the deficit of the Government. The year , especially the second half, was characterised by a burgeoning current account deficit (CAD), subdued equity inflows, depletion of foreign exchange reserves, rising external debt and deteriorating international investment position 1. Inflation remained elevated at over 9 per cent in the first eight months of , before softening moderately in December and remained sticky in the range of per cent 2. Economy in GDP Growth Profile: According to the first advance estimates of national income for the year of the Central Statistics Office (CSO), the Indian economy is expected to grow at its slowest pace in a decade at a mere 5 per cent in , on the back of dismal performance by the farm, manufacturing and services sectors, The estimate is 1 Reserve Bank of India (RBI), Annual Report , p. 58, 66 2 Ibid, p. 31

4 -2- lower than the 6.2 per cent growth clocked in and is the lowest since , when the economy grew by 4 per cent only According to the CSO s advance estimates, the growth in agriculture and allied activities are likely to lowered to 1.8 per cent in , compared to 3.6 per cent in and manufacturing growth is also expected to drop to 1.9 per cent in this fiscal, from 2.7 per cent achieved during the last year. Services sector, including finance, insurance, real estate and business services are likely to grow by 8.6 per cent during this fiscal, against 11.7 per cent in the last fiscal. Meanwhile, mining and quarrying is likely to be slightly better at 0.4 per cent, compared to a negative growth of 0.6 per cent a year ago. Growth in construction is also likely to be 5.9 per cent in , against 5.6 per cent last year 3. Advance Estimates of GDP at Factor Cost by Economic Activity (at constant prices) (Rs. in crore) Source: Press Information Bureau (PIB) Release on Advance Estimates of National Income dated 7 February 2013 Per Capita Income The per capita income at current price during is estimated to be Rs. 68,747 as compared to Rs. 61,564 during India s per capita income, a 3 Press Information Bureau (PIB) Release on Advance Estimates of National Income dated 7 February 2013

5 -3- gauge for measuring living standard, is estimated to have gone up by 11.7 per cent to Rs per month in Agriculture: In the advance estimate of GDP for , the CSO had pegged farm growth at a three-year low of 1.8 per cent against last year's 3.6 per cent. Production of foodgrain is expected to decline by 2.8 per cent as compared to the growth of 5.2 per cent in the previous year. According to the 2 nd Advance Estimates of Production of foodgrains for , estimated foodgrain production in the crop marketing year (beginning June) is million tonnes (mt), a little over nine mt less than last year owing to erratic monsoon in many parts of the country. The output of all crops, barring pulses and mustard, is expected to be less than last year. Production of wheat in the ongoing rabi sowing season is expected to be 92.3 mt from mt in last year. Production of rice, mainly grown during the kharif sowing season, is estimated to be mt from mt in last year Coarse cereals' production in at 38.5 mt, as against 42 mt last year. Production of protein-rich food crops such as pulses is estimated to be better this year, especially that of gram. Production of all pulses this year is estimated to be 17.6 mt, about 0.5 mt more than last year. Oilseed production is expected at 29.5 mt, marginally less than last year's 29.8 mt. Among cash crops, production of cotton this year is expected to 33.8 million bales (a bale is 170 kg), about 1.40 mb less than last year. Sugarcane is expected to be mt from mt in last year. Jute is pegged at million bales (a bale is 180 kg) in , down from 11.4 million bales last year 5. Area Sown As per reports received from different States, sowing of rabi crops is progressing well in different parts of the country. Wheat has been sown in lakh 4 Ibid 5 India, Department of Agriculture and Cooperation, 2 nd Advance Estimates as on

6 -4- hectare as compared to lakh hectare in rabi Total sown area stands at lakh hectare as on February 2013 against lakh hectare last year. While wheat and rabi rice lag behind last year, pulses, coarse cereals and oilseeds have been sown in more area than last year. Total rabi sown area crosses 616 Lakh hectares exceed crop coverage at this time against 615 lakh hectares Last Year 6. Industry: Industrial growth has remained subdued since July 2011 due to weak global demand, weak supply linkages, high import costs, and sluggish investment activities. During (April to November), industrial growth slowed to 1.0 per cent. The Industrial sector was mainly affected by the contraction in the output of capital goods and the mining sector. Excluding capital goods, the growth rate of overall IIP during April to November 2012 was 3.0 per cent. The slowdown in consumption demand has affected the growth of motor vehicles, food products and apparel industries. production. The subdued growth of the core industries has remained a drag on industrial Policy uncertainties in areas such as iron ore and coal mining have adversely affected the output of the steel and power industries. The recent initiatives taken by the government for the allocation of new coal blocks and commencement of production from Coal India Limited (CIL) s new coalfields are expected to boost coal output going forward. remain 7. However, in the interim, constraints in infrastructure sector Growth Rate (in %) Sector Apr-Dec Apr-Dec Coal Crude Oil Natural Gas Refinery Products Fertilizers Steel Cement Electricity Overall Index Source: PIB, Ministry of Commerce and Industry, Index of Eight Core Industries, dated Ibid 7 RBI, Macro Economic and Monetary Development, 3 rd Quarter Review , pp. 4-6

7 -5- Growth in eight core infrastructure industries decelerated to 3.3 per cent during April December 2012 compared to 4.8 per cent during the corresponding period of the previous year. While the production of coal, cement and petroleum refinery products accelerated during the period, it was offset by the deceleration in the production of electricity and steel 8. Coal production recorded a growth of 5.7 per cent during April-December compared to its negative growth at (-) 2.7 per cent during the same period of Crude Oil production recorded a negative growth of (-) 0.4 per cent during April- December compared to its growth at 1.9 per cent during the same period of Natural Gas production registered a negative growth of (-) 13.3 per cent during April-December which was (-) 8.8 per cent during the same period of Petroleum Refinery Products (0.93% of Crude Throughput)* Petroleum refinery production registered a growth of 6.9 per cent during April-December compared to its 4.0 per cent growth during the same period of Fertilizers production registered a growth of (-) 3.4% during April-December compared to its (-) 0.5% growth during the same period of Steel (Alloy + Non-Alloy) Steel production registered 3.6% growth during April-December compared to its 9.1% growth during the same period of The cumulative growth of Cement Production was 6.1% during April-December compared to its 5.8% growth during the same period of Electricity generation decelerated sharply due to a weak monsoon and shortages in coal supply. The cumulative growth of Electricity generation was 4.6% during April-December compared to its 9.3% growth during the same period of With investment activity remaining subdues, the prospects of a recovery in industrial growth appear weak. The export channel also plays an important role for industrial production. The revival of global growth is, therefore, crucial for industrial recovery in India. There is strong co-movement between domestic and global IIP Ibid 9 PIB, Ministry of Commerce and Industry, Index of Eight Core Industries, dated op.cit., 3 rd Quarter Review , p. 6

8 -6- External Sector: India s balance of payments which have deteriorated sharply in , showed some improvement in the first half of , the merchandise trade deficit in the first half of has remained at the same level compared to the first half of as fall in exports due to sluggish global demands almost equally matched by import ontraction mainly reflecting slow down in domestic economic activity. Exports (including re-exports): India s export performance continued to show the adverse impact of low growth and uncertainty in the advanced as well as major emerging markets and developing economies 11. Cumulative value of exports for the period April-December was US $ million (Rs ) as against US $ million (Rs crore) registering a negative growth of 5.50 per cent in Dollar terms and growth of 9.35 per cent in Rupee terms over the same period last year 12. Imports Import growth has surged since September 2012, mainly due to a pick-up in the quantum of petroleum oil lubricant (POL). With the uptrend in the international price of gold in recent months, gold imports stayed at an elevated level in recent months. On the other hand, non-oil non-gold imports registered a decline, reflecting a slowdown in domestic economic activity 13. Cumulative value of imports for the period April- December, was US $ million (Rs crore) as against US $ million (Rs crore) registering a negative growth of 0.71 per cent in Dollar terms and growth of per cent in Rupee terms over the same period last year. Crude Oil and Non-oil Imports Oil imports during April-December, were valued at US $ op.cit, 2 nd Quarter Review , p India, Ministry of Commerce and Industry, Department of Commerce, A Press Release on India s Foreign Trade dated op.cit., 3 rd Quarter Review , p. 17

9 -7- million which was per cent higher than the oil imports of US $ million in the corresponding period last year. Non-oil imports during April - December, were valued at US $ million which was 6.37 per cent lower than the level of such imports valued at US $ million in April - December, Trade Balance With imports growth turning positive from September 2012 and export growth remaining subdues, concerns regarding a deteriorating trade deficit have been reinforced. The trade deficit for April - December, was estimated at US $ billion which was 7.2% higher than the deficit of US $ billion during April - December, Policy attempts so far has been to deftly balance the genuine interest of the gold business, as also the need of the savers to hedge against inflation, against the overwhelming need to dampen gold imports with a view to preserving current account and macro-financial stability 15. Money Broad money (M3) for up to January 11, 2013 (Rs. 81,115.7 billion) increased by 10.2 per cent as compared to 10.5 per cent during the corresponding period of the last year. The year-on-year growth, as on January 11, 2013 was 12.9 per cent as compared to 15.7 per cent in the previous year. Reserve money (M 0 ) during the financial year up to January 11, 2013 (Rs. 14,795.4 billion) increased by 3.7 per cent as compared to 5.4 per cent in the corresponding period of the previous year. The year-on-year variation revealed an increase of 2.0 per cent (as on January 11, 2013), compared to 12.7 per cent on the January 13 of the previous year op.cit., A Press Release on India s Foreign Trade dated op.cit., 3 rd Quarter Review , p RBI Monthly Bulletin, February 2013, p. 38

10 -8- Inflation The inflation decelerated to 7.7 per cent in first half of (April-September) of WPI inflation was 8.07 per cent in September 2012, which was 8.01 per cent in August It has fallen to 7.32 per cent in October 2012, 7.24 per cent in November, 7.18 per cent December and stood at 6.62 (provisional) for the month of January Exchange Rate Slowdown in net capital inflows coupled with pressure in trade account balance strained the exchange rate leading to depreciation of Rupee from Rs (per USD) at end-september 2012 to Rs at end-november Pressure on Rupee continued in December and it closed at Rs at end-december As on January 23, 2013, the rupee showed lower depreciation over end-march 2012 compared to other major emerging market developing economies (EMDEs) like Brazil, South Africa and Argentina 20. Foreign Investment Inflow Foreign Direct Investment (FDI): FDI have declined during for the period April to December of the current fiscal, the inflows have been $16,946 million which were $29, 277 million during April to December Foreign Institutional Investors (FII): During (upto January 23, 2013), FII s made net investments of Rs. 1,190 billion in the capital market compared with that of Rs. 520 billion during the corresponding period in the previous year 22. Central Government Finances According to the data released by the Controller General of Accounts, during April to December 2012, fiscal deficit was 78.8% of the budget estimates substantially 17 India, Ministry of Finance, Mid-Year Economic Analysis, PIB Release of Ministry of Commerce and Industry dated and India, Ministry of Finance, Public Debt Management, October to December 2012, p RBI, Monthly Bulletin, February 2013, p India, Ministry of Commerce and Industry, A Fact Sheet on Foreign Direct Investment 22 op.cit., RBI, Monthly Bulletin, p. 48

11 -9- better than 92.3% in the same period last fiscal. Fiscal deficit stood at Rs 4.04 lakh crore during April-December, The government s total expenditure in the first nine months of the current fiscal stood at 66.5% of the budget estimate as against 71.3% in the corresponding period previous during The government s plan expenditure also squeezed and stood at 56.8% of the budget estimate in the period under review as against 62.7% in April-December, Non-plan spending was also marginally lower than the previous fiscal at 71.7% of the budget estimate in first nine months of the current fiscal compared to 75.9% in the last fiscal 23. Revenue collections remained sluggish at 61 per cent of budget estimates during April-December 2012 (63.1 per cent in the previous year). The growth in collection of corporation tax and excise duties remained modest due to continued growth moderation, while customs duty collections were adversely impacted, reflecting the deceleration in imports. Collections under personal income tax, however, remained buoyant partly due to lower refunds compared to previous year. Non-tax revenue receipts, at 52.5 per cent of budget estimates, were also significantly lower than the receipts of 62.2 per cent during the corresponding period of the previous year due to the poor response to spectrum auction and the reported staggering of auction receipts. During April-December 2012, the total expenditure of the government was lower at 66.5 per cent of the budget estimates (71.3 per cent in the previous year). The total expenditure of the government during , however, is likely to exceed budget estimates mainly on account of non-plan revenue expenditure 24. Various measures undertaken by the Government since mid-september, including liberalisation of FDI in retail, aviation, broadcasting and insurance, deferment of general anti-avoidance rules (GAAR), reduction in withholding tax on overseas borrowings by domestic companies and setting up of the Cabinet Committee on Investment have significantly lifted market sentiment which, in due course, should spur investment. Alongside, measures such as progressive deregulation of administered fuel prices, with concerted efforts to adhere to fiscal discipline and carry forward consolidation can potentially correct the twin deficits. These policy actions could help 23 India, Comptroller General of Accounts, Union Government Accounts at a Glance 24 op.cit., 3 rd Quarter Review , pp

12 -10- engender stable macroeconomic conditions and return the economy to its high growth trajectory. Further reforms to raise productivity, improve competitiveness and manage the supply constraints, including augmenting energy availability, are crucial for raising the potential growth path in the medium-term. Global Economic Situation and Prospects As per The United Nation s World Economic Situation and Prospects (WESP), 2013 report, four years after the eruption of the global financial crisis, the global economy is still struggling to recover. During 2012, growth of the world economy has weakened further. The global economy is expected to grow at 2.2 per cent in 2012, at 2.4 per cent in 2013 and 3.2 per cent in Weaknesses in the major developed economies are at the root of the global economic slowdown. The report stresses that most of them, but particularly those in Europe, are trapped in a vicious cycle of high unemployment, financial sector fragility, heightened sovereign risks, fiscal austerity and low growth. Several European economies and the euro zone as a whole are already in recession, and euro zone unemployment increased further to a record high of almost 12 per cent this year. The US economy slowed significantly during 2012 and growth is expected to remain meager at 1.7 per cent in Deflationary conditions continue to prevail in Japan. The economic woes in Europe, Japan and the United States are spilling over to developing countries through weaker demand for their exports and heightened volatility in capital flows and commodity prices. Economies in developing Asia have weakened considerably during 2012, as the region s growth engines, China and India, have shifted into lower gear. While a significant deceleration in exports has been a key factor behind the slowdown, both economies also face a number of structural challenges that hamper growth. Given persistent inflationary pressures and large fiscal deficits, the scope for policy stimulus in India and other South Asian countries is limited. China and many East Asian economies, in contrast, possess much greater space for countercyclical policy.

13 -11- According to the report, present policy stances fall short of what is needed to spur economic recovery and address the jobs crisis. While policy efforts have been significant, especially in the euro zone, in trying to redress sovereign debt distress, the combination of fiscal austerity and expansionary monetary policies has had mixed success so far in calming financial markets and even less so in strengthening economic growth and job creation. It is essential to change course in fiscal policy, the UN report says, and shift the focus from short-term consolidation to robust economic growth with medium to longterm fiscal sustainability. Premature fiscal austerity should be avoided and, while necessary, fiscal consolidation should focus on medium-term, rather than short-term adjustment. The report stresses that the reorientation of fiscal policies should be internationally coordinated and aligned with structural policies that support direct job creation and green growth. It further recommends that monetary policies be better coordinated internationally and regulatory reforms of financial sectors be accelerated in order to stem exchange rate and capital flow volatility, which pose risks to the economic prospects of developing countries. There is also a need to secure sufficient development assistance to help the poorest nations accelerate progress towards poverty reduction goals and invest in sustainable development. As per the report, the prospects for the next two years continue to be challenging. A worsening of the Euro area crisis, the fiscal cliff in the USA and a hard lending in China could cause a new global crisis. Implications for India of Global Risk Scenarios According to the IMF Staff Report India 2013 Article IV Consultation, a continued or broadened stagnation in global growth would weigh heavily on Indian growth. India s diversified trade patterns would not insulate it from global stagnation. India s growth, though not as export-dependent as that of Emerging Markets (EMs) in other regions, would remain sluggish. IMF s staff estimates indicate that for every percentage point of lower global growth, India s growth would be 0.5 percentage point

14 -12- lower. The current account deficit would widen slightly due to growth differentials, while slower growth would weigh heavily on India s large fiscal deficit. The impact of a euro area crisis would likely be similar to that of the global financial crisis, but the quick rebound of 2009 is unlikely, given the weaker macroeconomic environment and more constrained policy space. Given India s greater dependence on capital inflows compared to countries in the region, the financial channel would have strong negative effects. The growth effect, mostly through the effect of financing constraints on investment, would be large compared to regional EM peers, weighing on the fiscal deficit, though import compression due to financing constraints would likely bring down the current account deficit. Prospects for Indian Economy in A slow recovery is likely to shape up in with progressive implementation of some of the reforms announced since mid-september These include, inter alia, liberalisation of FDI in multi-brand retail, amendment of the Banking Regulation Act and the setting up of the Cabinet Committee on Investments chaired by the Prime Minister to expedite decisions on approvals/clearances for implementation of mega projects. The setting up of debt funds to provide long-term resources for infrastructure projects would help in reducing financing constraints currently facing the sector. Financing is also expected to improve with the government accepting the major recommendations of the Expert Committee on General Anti-Avoidance Rules (GAAR) that will bring about greater clarity on taxation aspects. Global risks may have temporarily reduced in terms of part resolution of the US fiscal cliff issues and financial fragility issues in the euro area. However, going forward the euro area risks remain significant, as key economies in the region are contracting. In this milieu, it is imperative that reform measures continue to be executed efficiently and domestic inflation recedes further, to support sustainable recovery in India op.cit., 3 rd Quarter Review , p.20

15