India
India’s economy is estimated to grow by 7.5 to 8 per cent in the current fiscal year with sustained growth in farm and industrial production, according t0 the Reserve Bank of India (RBI). The Indian GDP recorded a growth of 8.1 per cent in 2005-06, up from 7.5 per cent the previous year. The Indian central bank said inflation will remain within 5 to 5.5 per cent in the current fiscal year. The inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, stand at 4.0 per cent at the end of March, 2006. The Indian economy will see a good perspective thanks to the recovery in agriculture, alongside the sustained momentum of growth in industry and services. There is a gathering confidence that the economy is possibly poised on the threshold of a structural step up in the growth trajectory. But the central bank also noted risks in India’s economic outlook. The country will have to make more efforts to develop infrastructure if it wants to maintain a fast growing manufacturing, the key driver of industrial recovery.
Getting infrastructure right will hold the key to achieve the growth targets in fiscal 2006-07 and 2007-08 if the global economic environment remains conducive. Fiscal policy will obviously have to play a key role in improving the delivery of infrastructure services, in fostering public-private partnerships and in crowding in private investment. The economy will also face the risks of volatile oil prices as the country imports 75 per cent of the oil it consumes. Growth in GDP has been achieved by the economy in only five years of recorded history, and two out of these five are in the last three years. After dipping below 1.0 per cent in 2004-05, mostly on account of erratic rainfall, agricultural and allied sector’s growth in 2005-06 is projected at 2.3 per cent. Some significant dimensions of the dynamic growth in recent years are: a new industrial resurgence; a pick up in investment; modest inflation in spite of spiralling global crude prices; rapid growth in exports and imports with a widening of the current account deficit.
Inflation, in most parts of the world, showed a rising tendency on account of rising global crude oil prices. The sharp and spiralling increase in international oil prices from late 2003, combined with considerable week-to-week and even day-to-day volatility, posed considerable challenge in the maintenance of macroeconomic stability. Average headline world price of Indian basket of crude petroleum increased by 44.5 per cent, from US$37.3 per barrel in April-November 2004 to US$53.9 per barrel in April-November 2005, and was US$58.10 per barrel on February 13, 2006. Nevertheless, the virtuous expansion in the current phase of economic upturn has been maintained without an undue escalation of domestic prices.
In India, inflation, measured by a point-to-point increase in the Wholesale Price Index (WPI) declined from 5.7 per cent on April 2, 2005, to a low of 3.3 per cent on August 27, 2005. Despite increasing thereafter, prices have remained at comfortable levels with the WPI-inflation at 4.1 per cent on February 4, 2006 vis-à-vis 5.0 per cent on February 5, 2005. The decelerating trend in inflation relating to manufactured products group observed since the last quarter of 2004-05 continued as the inflation rate for this group dropped from 4.5 per cent a year ago to 2.4 per cent on February 4, 2006.
This deceleration in both wholesale and retail prices, in the aftermath of the introduction of value added tax (VAT) in most of the States with effect from April 1, 2005, helped to mobilise popular support behind a fundamental reform of State-level sales taxes – a reform termed by some as the most important tax reform in post-independent India. Inflation in manufactured products was under tight control with heightened competition in increasingly liberalised markets for such products. Simultaneously, however, the low inflation in primary articles observed in the previous two years came to an end as the point-to-point inflation rate for this group increased from 1.2 per cent to 5.0 per cent between February 5, 2005 and February 4, 2006.
India’s foreign exchange reserves have increased by 7 per cent from $141.5 billion in March 2005 to $151.6 billion by the end of March 2006. Exports increased by 24.7 per cent in the 2005-06 fiscal while imports showed an increase of 31.5 per cent. Among the imports, oil imports increased by 46.8 per cent and non-oil imports showed an increase of 25.6 per cent. The sharp rise in current account deficit reflects the burgeoning trade deficit during the current year so far. Net invisibles increased but it was not enough to neutralize the expanding trade deficit.
While the surge ahead in merchandise exports observed since 2002-03 continued, such growth was surpassed by an even faster rise in merchandise imports. Merchandise imports have been rising more rapidly than exports since 2003-04, reflecting perhaps the overall industrial recovery that commenced from the second quarter of 2002-03. The heavy demand for imports arising from increasing buoyancy and robustness of Indian industry may have led to a sustained rise in growth of merchandise imports.
India’s merchandise exports have been recording annual growth rates of more than 20 per cent since 2002-03. In 2004-05, such exports grew by 26.2 per cent – the highest annual growth rate in the last three decades – to cross US$80 billion. Five major sectors – gems & jewellery, engineering goods, petroleum products, ores & minerals, and chemicals and related products – were the key drivers. Despite recording a somewhat lower rate of growth of 18.9 per cent, exports during April-January 2005-06 have already reached $74.9 billion and are well on their way to achieve the US$92 billion target set for 2005-06. In 2004-05, merchandise imports had grown by 39.7 per cent – the highest growth in two and a half decades. On a decelerating mode in the current year, such imports grew by 26.7 per cent during April-January, 2005-06. The increase in imports has been driven, inter alia, by the sharp rise in global crude prices, which resulted in petroleum, oil and lubricants (POL) imports increasing by 46.9 per cent in April-January, 2005-06. Non-oil, non-bullion imports, increased by 30.8 per cent during April-October, 2005 – on top of a 29.9 per cent rise during the corresponding period of the previous year.
The Indian economy will continue to grow by 7.5-8 per cent in 2006-07 riding on the back of good industrial and services sector performance, amid hopes that a normal monsoon would push farm sector growth. RBI projected 5-5.5 per cent inflation for this fiscal, but admitted that reining in inflation will continue to pose a challenge to monetary policy due to volatile oil prices. Despite some uncertainties, the overall industrial outlook continues to be positive. Services sector growth is expected to sustain the momentum.
The Reserve Bank estimated inflation for the current financial year to March 2007 at 5.0-5.5 per cent. The IMF report urged the Congress-led coalition to step up economic liberalisation to bolster growth. The reform agenda needs to be accelerated in such areas as infrastructure development, the power sector and liberalisation of labour laws. India’s central bank announced last month it had set up a committee to pave the way for convertibility of the rupee, which the authorities see as a major liberalisation intended to boost investment.
Economic Intelligence Unit predicts that India’s economic boom will continue, albeit at a more moderate pace; real GDP growth is forecast to slow from 8.5 per cent in fiscal year 2005/06 (April-March) to 7.1 per cent in 2006/07 and 7 per cent in 2007/08. High international oil prices and strong domestic demand will lead to a significant widening of the merchandise trade deficit over the forecast period, but surpluses on the services and transfers accounts will limit the size of the current-account deficit. Despite high oil prices, inflation will remain under control.
Asian economies
THE International Monetary Fund has raised its 2006 growth forecast for Asia, excluding Japan, because of faster- than-expected expansion in China and India. It predicts Asian economies to expand 7.9 per cent this year. Growth in both China and India has continued to surprise. The 2006 growth forecast for China has been raised to 9.5 per cent from 8.2 per cent previously and for India to 7.3 per cent from 6.3 per cent. With global economic conditions favourable, the growth momentum is expected to continue in 2006.
Increased worldwide demand for mobile phones, digital cameras and flat-screen televisions is spurring expansion in Asian technology exports in China, South Korea and other nations. India’s economy averaged 8 per cent annual growth in the past three years, making it the second- fastest growing major economy after China. Growth in China remains very strong, with investment growth running at a high rate and net exports increasing significantly. The ongoing domestic demand recovery in Japan is particularly helpful for Asia. An expansion in Japan, the world’s second-largest economy, is stoking demand for goods shipped from its Asian neighbours. The IMF projects Japan to grow 2.8 per cent this year. The Fund, however, is of the view that threats to Asian economic growth include rising oil prices and any increase in trade protectionism in developed economies.
The World Bank and the Manila-based Asian Development Bank have also increased their Asian economic growth forecasts. The World Bank has raised its forecast for East Asia, excluding Japan and the Indian subcontinent, to 6.6 per cent.