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India Trends 2007

India Trends 2007

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Published by api-3703947
The file gives a snapshot of India for 2007
The file gives a snapshot of India for 2007

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Published by: api-3703947 on Oct 14, 2008
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India

The Indian economy grew by \ue00b.\ue005\ue003 in FY\ue006\ue004\ue004\ue008, according to o\ue002cial estimates. Price pressure has been building as the authorities are unlikely to have the resources to cushion domestic \ue00cuel prices \ue00crom the \ue00cull extent o\ue00c \ue00cuel import price increases \ue00cor much longer. On the supply side, growth will continue to be \ue00cueled by the opening up o\ue00c space \ue00cor private investment. India \ue00caces two key policy challenges as the economy undergoes a structural trans\ue00cormation. First, it must continue consolidating its \ue001scal position. It will have to do so while ensuring both adequate hard in\ue00crastructure improvements to support industrial and high-skill services development, and public investment to advance rural productivity and human development. Second, it needs to improve the investment environment by lowering the cost o\ue00c doing business. Growth rates o\ue00c \ue00a.\ue009\ue003 in FY\ue006\ue004\ue004\ue009 and \ue00a.\ue00b\ue003 in FY\ue006\ue004\ue004\ue00a are \ue00corecast. The annual average growth rate over \ue006\ue004\ue004\ue009\u2013\ue006\ue004\ue005\ue004 is unlikely to exceed \ue00b\u2013\ue00b.\ue008\ue003.

Economic per\ue007ormance

Te Indian economy achieved a gross domestic product (GDP) growth
rate o\ue014 8.\ue006% in FY\ue005005 (\ue006 April \ue005005\u2013\ue004\ue006 March \ue005006). On the expenditure
side, the economy was li\ue003ed by broad-based domestic demand growth.
While aggregate expenditure data have not yet been released, consumption
growth is estimated at 8.0%, driven by a good monsoon, which supported
rural incomes. Gross \ue002xed capital \ue014ormation grew at an estimated rate
o\ue014 8.5%, re\ue001ecting rising investor con\ue002dence (Figure \ue005.\ue0066.\ue006) in the \ue014ace
o\ue014 strongly entrenched demand growth and as a consequence o\ue014 the
expansion in credit and companies\u2019 initial public o\ue000erings. Te rate o\ue014
gross \ue002xed capital \ue014ormation in GDP has increased to \ue0055.9% and that o\ue014
gross domestic capital \ue014ormation to \ue0040.\ue006%. Meanwhile, public consumption
grew less rapidly than GDP as the central Government set the target to
reduce its overall de\ue002cit to 4.\ue004% o\ue014 GDP \ue014or FY\ue005005. Te Government
has announced that it expects to have surpassed this target, reducing the
de\ue002cit to 4.\ue006% o\ue014 GDP. Te boom in domestic private demand, combined
with rising oil import costs, widened the trade de\ue002cit and pushed the
current account \ue014urther into a de\ue002cit equivalent to \ue005.5% o\ue014 GDP.

Figure \ue005.\ue0066.\ue005 shows the decomposition o\ue014 growth by sector. Te
importance o\ue014 the services sector was reafrmed in FY\ue005005. Tis sector
accounts \ue014or 54% o\ue014 economic output and grew by an unprecedented

9.8%. Tis was mainly the result o\ue014 signi\ue002cant increases in the demand
\ue014or domestic services. Te export-oriented in\ue014ormation technology (I\ue013)
and business process outsourcing (BPO) sectors also continue to per\ue014orm
very well due to growing international demand \ue014or skilled, low-cost,
English-speaking Indian workers, although these sectors constitute only
a small portion o\ue014 total services output. Indian competitiveness in I\ue013 and
BPO has been aided by substantial investment in telecommunications
in\ue014rastructure and the phased liberalization o\ue014 the communications sector.

Te industry sector, which accounts \ue014or approximately \ue0056% o\ue014 GDP,
2.16.1 Business con\ue000dence index
110
120
130
140
150
160
J06
O
J
A
J05
O
J
A
J04
O
J
A
J2003
May 1993 = 100
Source: National Council \ue00cor Applied Economic Research,
Business Expectations Survey, various issues, New Delhi.
2.16.2 Contributions to growth (supply)
8.1
7.5
8.5
3.8
5.8
2001
02
03
04
05
Agriculture
Industry
Services
GDP
-3
0369
Percentage points
Source: Central Statistical Organization, available: http://
mospi.nic.in, downloaded 10 March 2006.
Asian Development Outlook 2006 159

grew by 9.0%. Tis strong per\ue014ormance was driven by manu\ue014acturing,
which accounts \ue014or about \ue014our \ue002\ue003hs o\ue014 industrial output. \ue013extiles, basic
metals and alloys, and transport equipment were the \ue014astest-growing
product categories. As discussed in Part \ue006 o\ue014 this Asian Development

Outlook, India has bene\ue002ted \ue014rom the ending o\ue014 the Agreement on
\ue013extiles and Clothing, with exports o\ue014 clothing and textile intermediates

to the United States rising by \ue0044% and \ue005\ue005%, respectively, in value terms
in calendar \ue005005. India\u2019s exports o\ue014 clothing and textiles to the European
Union increased by \ue0066% in value terms in this period, but by under 5%
in volume terms, re\ue001ecting a signi\ue002cant improvement in unit values.
Tese increases, however, partly re\ue001ect the shi\ue003 in trading patterns \ue014rom
\ue014ormally nonquota to quota countries. Growth in the transport equipment
sector re\ue001ects, in part, the rapid emergence o\ue014 \ue013amil Nadu state as an
international destination \ue014or automobile component manu\ue014acturing.

Te agriculture sector, with a share o\ue014 about \ue0050% o\ue014 GDP, registered
only a \ue005.\ue004% growth rate, despite a \ue014avorable monsoon, re\ue001ecting

continuing difculties in raising productivity. Tese difculties have been linked to increasing problems with irrigation and sur\ue014ace water management, as well as with persistent structural weakness in the markets \ue014or rural credit and \ue014or crop insurance.

Investor concern over India\u2019s in\ue014rastructure de\ue002cit continued to
mount in \ue005005, especially with regard to a shortage o\ue014 power generation
capacity, stemming in part \ue014rom continued \ue002nancial problems at many
state electricity boards. Urban planning, too, remains worrisome with
constraints tightening in transport, sanitation, hotel accommodation, and
other \ue014acilities usually required by investors.

High global oil prices might have been expected to damp growth in
FY\ue005005. Te reasons why they have not are structurally revealing. First,

as shown in \ue013able \ue005.\ue0066.\ue006, the economy, when measured in purchasing
power parity terms, is not especially intensive in its consumption o\ue014
energy. Moreover, much o\ue014 this energy\u2014the electrical component\u2014is
derived \ue014rom domestically mined coal and hydropower (Figure \ue005.\ue0066.\ue004).
Second, as depicted in Figure \ue005.\ue0066.\ue005 above, India\u2019s growth over the past

\ue014ew years has been driven primarily by the services sector and, with
the exception o\ue014 transport, this sector (particularly its high-growth
components such as I\ue013, retailing, and BPO) is relatively oil un-intensive.

Tird, since \ue00500\ue004, the central Government has shielded the domestic
economy \ue014rom international oil price increases by controlling retail \ue014uel
prices, especially those \ue014or cooking \ue014uel (lique\ue002ed petroleum gas [LPG])
and kerosene. Te burden o\ue014 this implicit subsidy, which could approach
\ue006% o\ue014 GDP in FY\ue005005, \ue014alls predominantly on state-owned oil production
and marketing companies. It is likely that the cost o\ue014 these subsidies
will eventually be reduced, or shi\ue003ed back to the \ue002scal budget, to ensure
the \ue002nancial health o\ue014 these companies. Fourth, manu\ue014acturing goods
in\ue001ation has been \ue014alling (Figure \ue005.\ue0066.4), perhaps indicating productivity
increases and competitive pressures, thus counteracting in\ue001ationary
pressure \ue014rom higher \ue014uel prices.

According to the preliminary estimates presented by the \ue002nance

minister in the February \ue005006 budget speech, the overall \ue014ederal \ue002scal de\ue002cit (including adjustments to capital \ue014unds) \ue014ell to 4.\ue006% o\ue014 GDP in FY\ue005005. Tis re\ue001ects stronger current revenues, which\u2014according to

\ue003.\ue002\ue005.\ue002 Total primary energy supply, \ue003\ue001\ue001\ue004
Ratio to GDP
Middle East
\ue004.\ue007\ue00b
OECD
\ue004.\ue0059
Latin America
\ue004.\ue005\ue009
World
\ue004.\ue006\ue005
Non-OECD Europe
\ue004.\ue006\ue00a
Asia, excl. PRC
\ue004.\ue0059
A\ue00crica
\ue004.\ue007\ue004
PRC
\ue004.\ue006\ue007
Former Soviet Union
\ue004.\ue008\ue005
India
\ue004.\ue0059
OECD = Organisation \ue00cor Economic Co-operation
and Development; PRC = People\u2019s Republic o\ue00c
China.
Notes: Total primary energy supply is measured
in tons o\ue00c oil equivalent. GDP is measured in 2000
purchasing power parity terms.
Source: International Energy Agency, 2005, Key
World Energy Statistics, available: http://www.iea.
org, downloaded 10 March 2006.
2.16.3 Installed power generation capacity,
by \ue007uel source
Other
sources
5%
Nuclear
3%
Diesel
1%
Gas
10%
Coal
55%
Hydro
26%
Source: Ministry o\ue00c Power, available: http://powermin.nic.
in/, downloaded 7 March 2006.
160 Asian Development Outlook 2006

estimates \ue014rom the Reserve Bank o\ue014 India\u2014rose by roughly 0.4% o\ue014
GDP, \ue014rom 9.7% in FY\ue005004. Meanwhile, interest payments on central
government debt \ue014ell to \ue004.9% o\ue014 GDP, continuing a downward trend begun
in FY\ue00500\ue005. Aware o\ue014 the need to reduce the debt burden and create \ue002scal

space \ue014or much-needed in\ue014rastructure investments, the Government
has announced a de\ue002cit target o\ue014 \ue004.8% o\ue014 GDP \ue014or FY\ue005006. As detailed
in Box \ue005.\ue0066.\ue006, the budget does not revise many tax rates upward, and
introduces no new taxes. In e\ue000ect, this target is to be achieved primarily
on the strength o\ue014 higher economic growth. Growth has two e\ue000ects on
the de\ue002cit-to-GDP ratio, assuming that \ue002scal expenditures are invariant
to growth: \ue002rst it increases the tax base, raising revenues; and second,
when GDP is higher, a larger de\ue002cit can be accommodated without the
de\ue002cit-to-GDP ratio exceeding its target level. Te Government also
expects increasing compliance as tax schedules have been lowered and
simpli\ue002ed somewhat.

Other potential areas \ue014or \ue002scal tightening include \ue014urther privatization

o\ue014 inefcient public companies and reductions in government payrolls.
Both areas are politically difcult, yet improvements can be discerned.
First, a stando\ue000 over the privatization o\ue014 the management o\ue014 Mumbai and

2.16.4 Monthly infation
036912
15
Wholesale price index
Manufactured products
Fuel, power, light, and lubricants
Primary articles
J06
O
J
A
J05
O
J
A
J04
O
J
A2003
%
Source: Reserve Bank o\ue00c India, Database on Indian Economy,
available: https://cdbmsi.reservebank.org.in/cdbmsi/
servlet/login/, downloaded 24 March 2006.

Te \ue014ederal budget \ue014or FY\ue00b\ue009\ue009\ue00f was prepared against a
background o\ue014 strong growth, moderate in\ue001ation, a rising
ratio o\ue014 tax to gross domestic product (GDP), and a
com\ue014ortable \ue014oreign exchange reserves position. Te main
challenge tackled in the budget is the mobilization o\ue014
resources \ue014or spending on social programs and on urban
and rural in\ue014rastructure. Tis year\u2019s budget has not been
used as a tool \ue014or initiating \ue014undamental re\ue014orms. Rather,
they are likely to be introduced incrementally over the

next year.

Modest in\ue001ation and high growth have provided
signi\ue002cant \ue002scal space to increase spending while the
Government pursues \ue002scal consolidation, with both the
revenue and \ue002scal de\ue002cits targeted to grow less quickly
than GDP in FY\ue00b\ue009\ue009\ue00f. Improvements are expected to \ue001ow
\ue014rom tax collections, with the gross tax revenue-to-GDP
ratio projected to rise \ue014rom \ue00a\ue009.\ue00e\ue008 in FY\ue00b\ue009\ue009\ue00e to \ue00a\ue00a.\ue00b\ue008 in
FY\ue00b\ue009\ue009\ue00f, while expenditures keep pace with GDP growth.
Consequently, de\ue002cit indicators \ue014or FY\ue00b\ue009\ue009\ue00f are in line
with the Fiscal Responsibility and Budget Management
road map, which envisages an annual reduction o\ue014 at least
\ue009.\ue00c percentage points in the \ue002scal de\ue002cit. Te overall \ue002scal
de\ue002cit as a share o\ue014 GDP is projected to decline to \ue00c.\ue011\ue008 in
FY\ue00b\ue009\ue009\ue00f \ue014rom \ue00d.\ue00a\ue008 in FY\ue00b\ue009\ue009\ue00e.

Planned expenditures target implementation o\ue014 some
o\ue014 the goals o\ue014 the Common Minimum Programme\u2014the
vision statement o\ue014 the current Government\u2014\ue014ocusing
on social sector programs in the areas o\ue014 education,
health, rural employment, and a midday meal scheme.
A National Rural Employment Guarantee Scheme also

o\ue000ers at least \ue00a\ue009\ue009 days o\ue014 work each year to at least one
member o\ue014 every \ue014amily. Te total allocation \ue014or these
programs has been increased by \ue00d\ue00c.\ue00b\ue008 to Rs\ue00e\ue009\ue009 billion
(approximately \ue00a.\ue00d\ue008 o\ue014 GDP) in FY\ue00b\ue009\ue009\ue00f. Meanwhile, the
Bharat Nirman (Development o\ue014 India) Program, which
targets six main elements o\ue014 rural in\ue014rastructure, has seen
its budget raised by \ue00e\ue00d\ue008, to around \ue009.\ue00f\ue008 o\ue014 GDP. Finally,
to \ue014armers the Government has o\ue000ered debt relie\ue014, and a
program o\ue014 short-term credit lines o\ue014 just under \ue007\ue00f,\ue011\ue009\ue009 at
a \ue010\ue008 rate o\ue014 interest.

Acknowledging the in\ue014rastructure de\ue002cit, the FY\ue00b\ue009\ue009\ue00f
budget speech emphasizes the speed with which existing
capital projects will be implemented, and in keeping
with the emphasis on private in\ue014rastructure development,
announces modest increases in in\ue014rastructure spending.

Te budget proposes no new taxes. Rather, it attempts
to improve compliance and collection efciency, and to
rationalize indirect taxes, mainly by lowering rates and
slowly reducing variations in marginal tax rates. Tus,
it proposes reductions in customs and excise duties on
several products, while raising the service tax rate by
\ue00b percentage points with some extension o\ue014 coverage.
Te budget envisages rationalizing rates o\ue014 excise taxes,
in the process reducing rates on several products. It does
not change tax rates on personal income and corporate

pro\ue002ts.

Overall, the \ue014ederal budget \ue014ares reasonably well in
terms o\ue014 containing the de\ue002cit, moving slowly but surely
toward a less distortionary tax regime, and allocating
resources to much-needed in\ue014rastructure.

2.16.1 Highlights of the FY2006 federal budget

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