Higher domestic demand main driver of growth

in the early nineties, worsened subsequently to reach a level of 10.1% in the revised estimates (RE) for 2002-03, higher than the pre-reform level of 9.4%. The revenue deficit followed a more disturbing trend, deteriorating more sharply than the fiscal deficit. The combined revenue deficit as a proportion of GDP, after declining from 4.2 in 1990-91 to 3.6% in 1996-97, increased u Continued on next page u Continued from previous page to 7% in 2001-02, to decline again to 6.7% in 2002-03(RE) and further to a budget estimate (BE) of 5.8% in 2003-04. For 2003-04, the combined fiscal deficit was budgeted at Rs 2,59,265 crore, constituting 9.4% of GDP. Furthermore, a declining share of capital expenditure (excluding loans) in total expenditure, from 13.5% in 1990-91 to 10.3% in 2001-02, suggests a worsening quality of the deficit. With sustained efforts at stepping up capital expenditure, the share subsequently improved to 11.8% in 2002-03. It was budgeted to go up to 14.5% in 2003-04. Fiscal deficit of the central government was budgeted at 5.6% of GDP (Rs 1,53,637 crore) in 2003-04, compared to Rs 1,31,306 crore amounting to 5.3% of GDP in 2002-03. Revenue deficit was budgeted at 4.1% of GDP as compared with 4.4% of GDP in the previous year. The reduction in revenue deficit was budgeted to be achieved from higher growth in revenue receipts and lower growth in revenue expenditure. In the event, according to unaudited figures, fiscal and revenue deficits, as a proportion of GDP, are estimated to have been 4.6% and 3.6% in 2003-04. To enable the states to benefit from the soft interest rate regime, a debt-swap scheme mutually agreed between the states and the Centre is in operation since 2002-03. States are allowed to retire loans taken from the Central government bearing a coupon rate in excess of 13%. The retirement of high cost loans is funded through additional market borrowings and a specified percentage of small saving collections. High cost central loans to states amounting to Rs 13,719 crore and Rs 44,565 crore were retired in 2002-03 and 2003-04 respectively. Over the three-year period ending 2004-05, all the central loans bearing coupon rate of 13% and above are expected to be swapped, resulting in substantial saving in interest payments for the state governments. The Budget for 2003-04 undertook to provide a major thrust to infrastructure, principally to roads, railways, airports, and seaports, through innovative funding mechanisms. The total cost of these projects was estimated at about Rs 60,000 crore. The scheme undertook to leverage public funds through private sector partnership through three critical components; release of public funds only when linked to specific and well-defined milestones in completion of the project, in physical terms: a sharing of the risks with the private promoters and financiers: and no open-ended government guarantees at any stage. Implementation work on these projects has made substantial progress. NHAI has invited bids for 622 km of highways and DPRs for 1,510 km are under preparation. The restructuring of the Mumbai and Delhi airports is under implementation. Bids have been invited for the modernisation of the Cochin port. Rail Vikas Nigam Ltd. (RVNL) is executing 61 projects. As a ratio to total expenditure, the combined plan and non-plan expenditure of the Centre in social services (comprising education, health, family welfare, water supply, housing, social welfare, nutrition, and rural development) increased from 9.3% in 1997-98 to 11% in 2003-04. Expressed as a ratio of GDP at current market prices, the expenditure on social services increased from 1.4% in 1997-98 to 1.9% in 2003-04. An Interim budget for 2004-05 seeking a vote-on-account was presented on February 3, 2004, prior to the dissolution of the Thirteenth Lok Sabha and announcement of elections. While the Budget did not contain any fresh tax proposals, revenue and fiscal deficits â€” as proportions of GDP â€” were budgeted at 2.9% and 4.4% for 2004-05. A significant reform initiative taken both by the Central government and some states has been the enactment of Fiscal Responsibility Acts. The enactment of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003 marked an important landmark in this context. The FRBM Act mandates the central government to reduce the fiscal deficit and eliminate the revenue deficit by 2007-08, and thereafter build up adequate revenue surplus. The Act provides for greater transparency in budget formulation and execution, and a prudent fiscal policy stance is a natural concomitant of this legislation. A few states have put in place fiscal responsibility legislations to strengthen the institutional backing for fiscal reforms. These states include Karnataka, Kerala, Punjab, Tamil Nadu and Uttar Pradesh. Among the major institutional and legislative reforms was a new pension system based on defined contribution basis operative from January 1, 2004. This new system is for new entrants to central government service, except to the armed forces, in the first stage. To tackle the problems of demand-supply imbalance in the recently deregulated sugar industry, the Essential Commodities Act, 1955, was amended to regulate free-sale releases to ensure that sugar mills do not sell sugar in excess of their quota and courts do not intervene in the release mechanism. Parliament also passed the Industrial Development Bank (transfer of Undertaking and Repeal) Bill, 2003 and the Sick Industrial Companies (Repeal Provisions) Bill, 2001. Consumption, savings & investment Private final consumption expenditure, at constant 1993-94 prices, increased by Rs 30,507 crore or 3.5% in 2002-03 compared to an increase of Rs 47,099 crore (5.7%) 2001-02. This growth at a rate lower than that of GDP meant that private final consumption as a proportion of GDP at current market prices declined from 65.5% in 2001-02 to 64.4% in 2002-03. The decline in private final consumption in 2002-03 was mainly on account of lower expenditure on cereals, which declined from Rs 1,58,621 crore in 2001-02 to Rs 1,24,560 crore in drought-affected 2002-03, and reduced the share of food, beverages and tobacco in total consumption by 2.6 percentage points to 44.8%. Among other major categories of consumption, share of clothing and footwear, gross rent, fuel and power, medical care and health services, transport and communication and miscellaneous goods and services increased marginally, while the share of furniture, furnishings, appliances and services, and recreation, education and cultural services remained unchanged between 2001-02 and 2002-03. In 2002-03, gross and net domestic savings at current prices grew by 11.7% and 14.2%, respectively. Gross domestic savings as a proportion of GDP at current market prices increased from 23.5% in 2001-02 to 24.2% in 2002-03. Net domestic savings as a proportion of NDP also increased, from 15.4% in 2001-02 to 16.2% in 2002-03. In 2002-03, as a proportion of GDP, there was a marginal reduction in the gross savings of the household and the private corporate sectors, which are the mainstay of overall savings in the economy. The share of financial savings in total household savings declined from 49% in the previous year to 45.5% in 2002-03, while the share of savings in physical assets increased from 51% to 54.5%. The increase in the overall saving rate in 2002-03 was on account of a decline in the dissavings of the public sector to 1.9% of GDP in 2002-03 from 2.7% in the previous year. Dissavings of the public sector declined from Rs 62,704 crore in 2001-02 to Rs 45,730 crore in 2002-03. Between 2001-02 and 2002-03, savings of departmental enterprises increased from Rs 1,023 crore to Rs 2,339 crore, and those of non-departmental undertakings from Rs 75,035 crore to Rs 91,909 crore. Gross domestic capital formation (GDCF) at constant prices grew by 7.6% in 2002-03. GDCF as a proportion of GDP at 1993-94 market prices was marginally higher at 25.8% in 2002-03 compared with 25.1% in 2001-02, with the improvement coming from capital formation in the private sector. Among the components of GDCF, gross fixed capital formation improved from 23.7% of GDP in 2001-02 to 24.8% of GDP in 2002-03, while the corresponding improvement in change in stocks was from 0.4% of GDP to 0.5% of GDP. Within gross fixed capital formation, there were variations across sectors, though in the aggregate, investment in machinery grew faster than investment in construction. In the public sector, fixed capital formation in construction grew by 16.7% compared with a negative growth of 0.9% in machinery. In contrast, capital formation in machinery grew faster than that in construction in the household sector. In the private corporate sector, there was actually a decline in fixed capital formation in construction. Domestic demand has been the main driver of growth in recent years. In 2002-03, among demand categories, private final consumption, by contributing 52.4% of the GDP growth at current market prices, was the prime mover, followed by investment (25.6%), government consumption (13.4%) and external balance (2.4%). The contribution of private final consumption to growth, however, was lower in 2002-03 compared to 69.6% in the previous year. The contribution of investment to growth has not been following a consistent pattern: in recent years, it varied from 8.4% (1998-99) to 50% (1999-2000). During the period 1998-99 to 2002-03, on average, the contributions of private final consumption expenditure and investment to growth of GDP at current market prices were 64.2% and 21% respectively. GDCF in the public sector as a proportion of GDP at current market prices witnessed a decline from 8.2% in 1993-94 to 5.6% in 2002-03, as the share of consumption expenditure in the total expenditure of the central government increased from 21.3% in 1990-91 to 23.6% in 1997-98. Public consumption expenditure of the Centre declined marginally to 21.2% in 2002-03 (RE), and it was budgeted to increase to 22.3% in 2003-04. Consumption expenditure of states increased from 38.1% of total expenditure in 1996-97 to 38.8% in 2000-01. The share of wages and salaries in the consumption expenditure of states witnessed an increase from 77.3% in 1996-97 to 82.3% in 2000-01. The governmentâ€™s current expenditure comprises consumption expenditure and current transfers. Apart from an increase in the consumption expenditure, there was also an increase in current transfers, squeezing public investment. The share of current transfers in the total expenditure of the central government increased from 43% in 1990-91 to 58% in 2002-03 and was budgeted to decline marginally to 56.7% in 2003-04. Among components of current transfers, the share of interest payments increased from 44.2% in 1990-91 to 48.3% in 2002-03 (RE), and was budgeted at 48.2% in 2003-04. Grants to states, UTs and local bodies which constituted 24.6% of current transfers in 1990-91 increased marginally to 25% in 2002-03(RE), and was budgeted at 24.8% in 2003-04. The share of subsidies in current transfers declined from 23.8% in 1990-91 to 19.6% in 2002-03, and was budgeted to go up to 21.1% in 2003-04. Because of the growth in consumption expenditure and transfer payments of the central government, the share of current expenditure in total expenditure increased from 64.3% in 1990-91 to 79.2% in 2002-03(RE), and was budgeted to marginally come down to 79% in 2003-04. For the state governments, the share of current expenditure in total expenditure was even higher, at 83.1% in 1996-97 and 81.3% in 2000-01. The share of current transfers in total state governments expenditure declined from 45% to 42.6% between 1996-97 and 2000-01. The softening of interest rates in recent years has provided a climate conducive to investment growth. Off-take of non-food credit has shown signs of revival. There are indications that the scope for producing more with the same capital stock through efficiency enhancement is getting increasingly limited which may lead to investment in fresh capacities. The improvement in stock-valuation and flurry of activity in primary markets in the latter half of 2003-04 reinforce the optimism about the investment outlook. A pick up in the momentum of industrial growth can boost private investment, which in turn will stimulate industrial growth, and thereby set off a virtuous cycle. The surplus in the current account of Indiaâ€™s BOP for three consecutive years ending 2003-04 indicates that the rest of the world has contributed to sustaining aggregate demand. This surplus is likely to decline as investment picks up and the country transits to a sustained growth phase at a higher rate. Production A good monsoon helped to increase the level of food grains production from 174.2 million tonnes in 2002-03 to 210.8 million tonnes in 2003-04, contributed by increase in the production of both cereals and pulses. The prospects for agricultural production in 2004-05 are considered bright with a normal monsoon forecast by the meteorological department. As per the index of industrial production (IIP), overall growth in the industrial sector improved from 5.7% in 2002-03 to 6.9% in 2003-04, supported by growth rates of 5.1% in mining, 5.0% in electricity and 7.2% in manufacturing. As per use-based classification, industrial growth was broad-based except for consumer non-durables. Capital goods took the lead with a growth of 12.7% followed by consumer durables, which recorded a growth rate of 11.6%. Enhanced availability of retail loans and lower interest rates contributed to the latterâ€™s growth. Intermediate goods and basic goods also performed better in 2003-04 than in 2002-03, with growth rates of 6.2% and 5.4%, respectively, while the growth of consumer non-durables decelerated substantially from 12% in 2002-03 to 5.7% in 2003-04. As per the two-digit industrial classification, three out of 17 industry groups grew by over 15% in 2003-04. These industries include transport equipment and parts (17%), paper and paper products (15.9%) and machinery and equipment other than transport equipment (15.2%). Beverages and tobacco, and basic metals and alloys, also performed well in 2003-04, growing at 9.4% and 9.1%, respectively. Fabric production, which peaked in 2001-02 at 42 billion square metres, declined marginally to 41.9 billion square metres in 2002-03. In 2003-04, despite an initial sharp decline attributed to strikes by power-loom units and truck operators, rise in cotton prices and poorer demand for textiles, it picked up again, touching 42.2 billion square metres by the close of the year. The share of the powerloom sector in the total production of fabrics increased to 82% in 2003-04, compared to 80.6% during the previous year. Both production and exports of steel continued to rise, propelled by surging demand for steel in China and a strong domestic market. In 2003-04, total finished steel production rose by 7.5%, reaching 36.2 million tonnes, while exports of finished steel grew by 17.6% to 5.3 million tonnes. During 2003-04, automobile production grew by 15.1%, following up on strong growth of 18.6% in the previous year. Commercial vehicles grew by 25.1%, while passenger cars grew by 38.3%. A major development in India manufacturing has been the success in exports of automobile components and finished vehicles. With export of vehicles growing by 56% in 2003-04, India appeared to be on its way to establishing itself as a new player in the international market for small passenger vehicles. Six core and infrastructure industries (viz., electricity, coal, steel, cement, crude oil and petroleum products) having a total weight of 26.7% in the index of industrial production (IIP) registered a marginally lower average growth rate of 5.4% in 2003-04 compared to 5.6% in 2002-03. Among the other infrastructure sectors, new cell phone connections (with a growth of 159.2%), goods traffic on railways (7.5%), cargo handled at major sea ports (9.9%) and air ports (5.3%), and air passenger traffic at both domestic and international airports (10.3%) performed well in 2003-04 due to sustained industrial growth and significant pick-up of service activities. Major initiatives taken in 2003-04 for infrastructure development include notification of the Electricity Act in June 2003, signing of the tripartite agreement by 28 states for one-time settlement of the dues of state electricity boards to central public sector undertakings, launching of 50,000 MW hydro-electric power initiative in May, 2003, unified access service license regime for telecommunication services, and the Bharat Jodo Project for development of 10,000 km of roads connecting state capitals. Many policies were announced in the Union Budget for 2003-04 to encourage industry. Major measures included a special incentive package for textiles, garments and apparel, which have high exports and employment potential; income-tax concessions to the sunrise sectors of biotechnology, pharmaceuticals and information technology; withdrawal of expenditure tax for tourism; and withdrawal of small-scale reservation from 75 items of chemicals, leather, plastics and paper products. Employment & poverty It is well known that there was a significant decline in the poverty ratio from 36% in 1993-94 to 26.1% in 1999-2000. The Tenth Five-Year Plan (2002-07) has set a target of reduction in poverty ratio by five percentage points by 2007 and by 15 percentage points by 2012. Subsequently, â€˜thinâ€™ surveys for household consumer expenditure were conducted by the National Sample Survey Organisation (NSSO) for 2000-01 (56th round) and 2001-02 (57th round). As per the results of the 57th round, the proportion of chronically hungry households (not getting enough to eat in any month of the year) declined to 0.5% in rural areas and 0.1% in urban areas. As for seasonal hunger, 16 per thousand households in rural areas and 3 per thousand households in urban areas reported getting enough food only in some months of the year. Major initiatives taken for the social sectors during 2003-04 included expansion of the Antyodaya Anna Yojana to cover an additional 50 lakh families, introduction of a community-based universal health insurance scheme and a special pension policy called Varishtha Pension Bima Yojana, launching a national programme for education of girls at elementary level, launching a social security scheme for the unorganised workers in January 2004 on a pilot basis in 50 districts, and initiating the setting up of All-India Institute of Medical Sciences (AIIMS)-like institutions in six backward states (Bihar, Chattisgarh, Madhya Pradesh, Orissa, Rajasthan, and Uttaranchal). The Economic Survey 2002-03 reported that the rate of growth of employment, on current daily status (CDS) basis, declined from 2.7% per annum in 1983-94 to 1.07% per annum in 1994-2000. The deceleration of the employment growth was mainly due to near stagnation of employment in agriculture, although employment growth in all the sub-sectors within services (except community, social and personal services) exceeded 5% per annum. Some estimates of employment are available for the period beyond 1999-2000. As per the annual rounds conducted in July-December 2002, employment growth in the country improved to 2.07% per annum in 2000-2002, employment growth in the country improved to 2.07% per annum in 2000-2002 as compared to 1.07% per annum in 1994-2000. In absolute terms, additional employment by 84 lakh per year on an average in 2000-2002 fell short of the target of additional employment of one crore per year. However, these estimates are

Higher domestic demand main driver of growth

The revenue deficit followed a more disturbing trend, deteriorating more sharply than the fiscal deficit.

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