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Indian economy registered a growth rate, which was far less than that had been expected. The Union Budget for the year 2001-02 removed the surcharge on income tax, rationalized excise and customs tariff to provide protection to both domestic industry and agriculture. The easing of liquidity condition in the economy through reduction in the CRR and SLR by the Reserve Bank of India have a positive effect on the industrial activity.
The exports, which had registered a growth of 20 per cent last year, also decelerated sharply in this year. The decline in export growth, fall in the foreign direct investment as a result of the down grading of India’s sovereign ratings and the withdrawal of funds from the stock market by the foreign institutional investors, following the attack on the US are some of the factors contributed to the rupee depreciation in the current fiscal year. The industrial growth, after the mid-1990s of high growth, has continued to decline secularly. The growth rate of industrial production in the current fiscal year has been declining further. The overall growth during this period has been just 2.2 per cent.
The India economy would grow 4.4 per cent in the financial year ending March 2003 as poor farm sector output pushed the Asia’s third largest economy to one of its lowest expansions since the country launched economic reforms in 1991.
The finance ministry had estimated in December the economy of more than a billion people would grow by 5.0-5.5 per cent in the year to March 2003 with a similar expectation from the Reserve Bank of India (RBI).
The RBI had cut the benchmark bank rate to a 29-year-low of 6.25 per cent in a bid to insulate the economy from the impact of the drought. The farm sector shrank 3.1 per cent due to poor monsoon rains after expanding 5.7 per cent in 2001-02, wiping out gains posted by the manufacturing and services sectors.
But strong manufacturing sector growth, which was seen growing at 6.1 per cent this year, was not enough to ward off the impact of poor monsoon rains on the country’s economy. The sector grew 3.4 per cent in 2001-02 (April-March). Industry accounts for a quarter of India’s GDP and services more than 50 per cent.
The services sector, which has been a growth engine for the past decade, grew 7.0 per cent, as more people bought new cars and financed houses because of the country’s historically low interest rates. It grew 6.7 per cent in the previous year.
The Bangladesh government has made progress on economic reform since coming to power in October 2001. Following the symbolically important closure of a huge state-owned jute mill in June 2002, the Privatisation Commission has made progress in restructuring the state sector and reported in late November that it had recently closed or served closure notices on 17 mainly small factories. Progress in restructuring state-owned institutions is, however, proving slow in other areas such as the banking and infrastructure sectors. A second challenge will be to diversify the export base away from garments exports, which are coming under competitive pressure in key markets such as the US.
The Economist Intelligence Unit expects a slow economic recovery in the OECD in 2003-04. Real GDP growth in the US, the destination of 37 per cent of Bangladesh’s merchandise exports in fiscal year 2001-02, is expected to slow fractionally to 2.3 per cent in 2003 before accelerating to 3.2 per cent in 2004, boosting Bangladesh’s export growth. Growth in the EU, the destination of 48 per cent of Bangladesh’s exports in 2001-02, will be more sluggish at 1.6 per cent in 2003 and 2.2 per cent in 2004. Oil prices are expected to be broadly stable in 2003, before falling by 22 per cent in 2004, reducing Bangladesh’s fuel import bill.
Despite weak growth in real demand, consumer price inflation is estimated to have averaged 3 per cent in 2002 compared with 1.1 per cent in 2001. Consumer price inflation will average 5.7 per cent in 2003-04, as higher prices for imported cotton, industrial raw materials and capital equipment filter into the index. The economic growth is expected to accelerate in 2002-03 and 2003-04, driven by stronger exports of goods and services. There have been signs of a pick-up in merchandise exports in the most recent data, and the Economist Intelligence Unit expects this trend to accelerate.
A substantial progress has been made on macroeconomic stabilization during the first half of the year. Although growth has not picked up during this period (due mainly to falling exports), with improvements in the global economy, the peace process holding, increased business confidence and improved rains, the economy is expected to turn around in 2003. Still, the government will run a current account deficit of 3.4 per cent of GDP and needs to borrow heavily for both current and capital spending.
After a weak recovery in 2002, real GDP growth will strengthen in the latter half of 2003 and in 2004 as export demand firms. Consumer price inflation will moderate. The rupee will continue to depreciate. The current-account deficit will fall from an annual average of 3.1 per cent of GDP in 2002 to 2.2 per cent of GDP in 2004. The Economist Intelligence Unit’s estimate for GDP growth in 2002 has been revised slightly upwards to 3.2 per cent, as growth appears to have accelerated in the second half of the year.
On the economic front, the key to Sri Lanka’s future lies in greater commitment for further structural reforms required under the PRGF: privatization of key sectors such as petroleum, transport, railways, postal services and expansion of infrastructure (especially much needed power generation capacity); implementation of major reforms in the civil service, education, pension, welfare and labour sectors; more disciplined government spending and improved revenue collection. These would help generate stronger economic growth.
Main concerns in the short-term are the slow export pick up, huge public debt, bloated public sector and stagnant government revenue. Sri Lanka’s donors, led by the World Bank, stressed the critical importance of implementation of reforms and donor funded programmes. The PRGF is expected to be formally considered by the IMF in late 2002 and would require stronger commitment for further structural reforms.
