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Economic scenario
FY 2005 will soon end, paving the way for FY 2006. Almost all the economic indicators
show that FY 2005 is a milestone in the history of the Indian economy. FY 2004 notched up
the highest ever GDP growth rate of 8.5% (at constant price). In FY 2005, the economy is
poised to grow at 6.9%, less than the previous year’s growth rate of 8.5%. This is
primarily a result of the fall in foodgrain production due to the deficient south-west
monsoon, which adversely affected kharif crops, mainly coarse grains and pulses.
The resilience of the economy was visible when, despite the rise in international fuel
prices and inflation at home, the industrial sector, till December 2004, recorded a growth
of 8.4%, in the first nine months of the year till December 2004 as against 6.6% in the
same period of the previous year. The manufacturing group recorded a higher growth rate of
9% as compared with the growth of 7.2% a year earlier. The year- on-year (y-o-y) inflation
has come down to around 5% from the peak level of 8.5% in August 2004 and exports and
imports have recorded a very respectable growth rate of 25.6% and 34.72%, respectively.
The foreign exchange reserves are at a high of US $ 133 billion, a shade greater than
the total foreign debt. The rupee-US dollar exchange rate is also at a comfortable level.
The exchange rate at Rs. 43.64 per US dollar showed a depreciation of 3.7% from the level
that it was at a year ago.
Gross Domestic Product
The Gross Domestic Product (GDP) in FY 2005 is estimated by the Central Statistical
Organisation (CSO) to grow at 6.9%.
(see table).
The agricultural sector will grow at a rate of only 1.1% as compared with the growth at
around 9.6% in the previous year. The service sector will also contribute a little less
than it did a year earlier. Thus, the growth impetus of the current year is solely based
on the performance of the industrial sector, particularly that of manufacturing and
electricity.
Inflation
The latest weekly index numbers of wholesale price pertain to the week ending 12
February 2005. The All-Commodities Index for the week, recorded on a y-o-y basis, showed
an increase of 5% to 188.8, which is at its lowest since 22 May 2004. Inflation reached
its highest level of 8.74% on 28 August 2004. A year ago, inflation was at 6.1%. This
decline is a welcome relief.
Our calculations indicate that the overall inflation, as indicated by the
All-Commodities Index, showed a rise of 4.9% in FY 2005, till 12 February 2005, as
compared with a rise of 4.4% in the same period of FY 2004. The manufacturing and primary
commodity groups recorded a moderate rise of 4.1% and 2.3%, respectively, as compared with
a rise of 5.9% and 2.4%, respectively, in the same period of the previous year.
The main source of inflation in FY 2004 was the manufacturing sector, accounting for
75.4% of the inflation, followed by primary articles and fuels and lubricants, at 12.3%
each. In FY 2005, there has been a 9.8% rise in the prices of the fuel and lubricant group
(as against a nominal rise of only 2.5% in the previous year). The relative contribution
of this group to the inflation in the period was as much as 41.6%, out of which 34% was
because of mineral oil.
The all-India Consumer Price Index (CPI) for Industrial Worker for January 2005 showed
a rise of 4.4%, over the corresponding month of the previous year (4.3%). In April-January
2005, the index showed a rise of 3.8% to 518.4 over the corresponding period of the
previous year. In FY 2004 the index had risen by 3.9%.
In January 2005, CPI for Urban Non-Manual Employees (UNME) showed a rise of 3.8% to 440
over the corresponding month of the previous year (4.4%)
FII investment in equity
After recording low investments in January 2005, FII activity picked up in February
2005. FII investments showed a rise of 157.16% to US $ 1785.20 million over the
corresponding month of the previous year. In January-February 2005, FII investment showed
a rise of 68.11% to US $ 2066.30 million over the corresponding period of the previous
year.
Exchange Rate
The exchange rate of the rupee on 28 February 2005, showed an appreciation of 0.09% to
Rs. 43.64 per US dollar over the month. In the same period last year, the rupee had
depreciated by 1.8% against the pound sterling and 1.6% against the euro and appreciated
by 0.98% against the Japanese yen.
Since 2002, the dollar has been depreciating against the euro and the pound sterling.
From 2003, the dollar also started weakening against the Japanese yen. The gradual
weakening of the US dollar can be traced to the deepening structural imbalances in the US
economy, manifested in its widening fiscal and current account deficits. The US fiscal
balance, as a proportion of its GDP, has deteriorated from a surplus of 1.3% in 2000 to a
deficit of 4.9% in 2004. Over the same period, the US current account deficit, as a
proportion of GDP, has worsened from 4.2% to 5.4%.
India’s foreign exchange reserves, as on 18 February 2005, aggregated US $ 133.0
billion comprising foreign currency assets of $ 127.15 billion, gold $ 4.39 billion, IMF
tranche $ 1.41 billion and SDRs $ 5 million. The total reserves in the current financial
year till date have risen by 17.7% or $ 20 billion. In FY 2004, reserves had increased by
48.4% or $ 36.9 billion. Y-o-y changes indicate that reserves have increased by 22% or $
24 billion in the year.
Foreign Trade
India’s exports in the first 10 months (April-January) of FY 2005 achieved 81% of
the export target of US $ 75 billion. In this period, exports showed a rise of 25.55% to
US $ 60.7 billion over the corresponding period of the previous year, when it had shown a
rise of 11.74% to US $ 48.3 billion.
India’s imports in April-January 2004-05 showed a rise of 34.72% to US $ 83.44
billion over the corresponding period of the previous year, when imports rose 24.71% to US
$ 61.94 billion. In April-January, 2004-05, oil imports increased 40.14% to US $
23.46 billion over the corresponding period of the previous year (16.59%). Non-oil imports
in the same period showed a rise of 32.71% to US $ 59.98 billion over the corresponding
period of the previous year (28%).
The trade deficit in April-January, 2004-05 was US $ 22.69 billion as against US $
13.55 billion in the same period of the previous fiscal.
India’s exports in FY 2004 were estimated at US $ 63.4 billion. The top 10
countries to which Indian goods were exported in FY 2004 were the United States of
America, the United Arab Emirates, China, Hong Kong, United Kingdom, Germany, Singapore,
Belgium, Japan and Italy.
India’s exports are targeted at US $ 150 billion in FY 2009 so as to reach a 1.5%
share in the global trade in the next five years. An export target of US $ 88 billion has
been fixed for FY 2006.
Banking
The major development in the banking sector in FY 2005 is the unprecedented spurt in
non-food credit. The growth in non-food credit up to 4 February 2005 was 25.2% (net of
conversion 21.2%) as compared to an increase of 13.9% in the same period of the previous
year. In absolute terms, incremental non-food credit amounted to Rs 202977 crore (net
of conversion Rs 170294 crore).
Analysis shows that out of the total (net) incremental credit, Rs 90239 crore or
about 53% of the credit expansion was in the first half of the year ending September 2004
and the balance Rs 80055 crore, or 47%, was in the second half till 4 February 2005. The
deposit growth has been around 11%, slightly less than it was in the corresponding period
of the previous year.
Consequent to increasing their lending, banks have had to reduce their exposure to
investments. As a result, incremental investments in government securities have been
considerably less at Rs. 19502 crore (net of conversion) as against Rs 127827 crore
in the same period last year. Thus, the investments in government securities were lower by
as much as 85%, or Rs 108325 crore. Therefore, the investments in government
securities showed a nominal growth of only 3% as against a rise of 24.4% in the
corresponding period of last year.
Infrastructure Industries
Cement: In January 2005, the performance of the cement industry witnessed a
remarkable improvement. Cement production in the month showed a rise of 9.96% to 11.26
million tonnes over the corresponding month of the previous year. Despatches showed a rise
of 10.27% to 11.27 million tonnes over the corresponding month of the previous year
(6.02%).
In April-January 2004-05, production of cement increased by 7.47% to 103.06 million
tonnes over the corresponding period of the previous year. On the other hand, cement
dispatches showed a rise of 7.33% to 102.62 million tonnes over the corresponding period
of the previous year (5.05%).
In January 2005, cement stocks declined by 3.36% to 1.15 million tonnes over the
corresponding month of the previous year (8.18%).
In January 2005, cement exports expanded 33.33% to 0.32 million tonnes over the
corresponding month of the previous year (-35.1%). In April-January 2005, exports showed a
rise of 19.49% to 3.31 million tonnes over the corresponding period of the previous year
(0.36%).
Limestone, coal, freight, electricity and furnace oil are the major cost factors for
cement. Due to the rise in coal and crude oil prices, the input costs of cement have
increased. In January 2005, the average Wholesale Price Index (WPI) of the fuel group
showed a rise of 9.9% to 287.6 over the corresponding month of the previous year (5.8%).
In April-January 2004, WPI of the fuel group increased 10.3% to 278.3 over the
corresponding period of the previous year (6.1%). In January 2005, WPI of cement declined
0.12% to 150.3 over the corresponding month of the previous year (2.5%). In April-January
2005, WPI showed a rise of 3.2% to 150.9 over the corresponding period of the previous
year (1.1%). Despite a 10.3% rise in fuel prices, cement prices moved up by only 3.2% in
same period.
Electricity: In April-January 2004-05, the generation of electricity increased
by an impressive 6% as compared with the 3.7% rise recorded in the corresponding period of
the previous year.
Generation of electricity was up by 2.6% in January 2005 as compared to the
corresponding month of the previous year (5.9%). In April-January 2005, electricity
generation showed a rise of 6% to 488.46 billion kilowatt-hours over the previous year
(3.7%). In this sector, the maximum growth of 8.2% (12.0%) was recorded in hydropower
generation, followed by 4.9% (2.9%) in thermal power. Nuclear power registered a negative
growth of 7.2% (7%) in the same period.
In the generation of electricity, 82.22% was contributed by thermal power, 13.86% by
hydropower and remaining 2.82% by nuclear power.
In April-January 2005, there was a gap of 35339 million units between demand and supply
of electricity. The maximum shortage of 10.7% was registered in the western region
followed by the northern region at 9.4%. The overall deficit in this period was 7.2%. Both
the western and northern regions had a deficit of around 10%. Being predominantly
industrial regions, they get adversely affected for want of adequate power supply.
If we examine the gap between demand and supply on the basis of states, Uttar Pradesh
had the highest deficit of around 20.9% in April-January 2004-05, followed by Gujarat and
Madhya Pradesh, with deficits of 12% each.
In January 2005, thermal plants achieved a plant load factor (PLF) of 78.2% as against
the 77.7% in January 2004. In April-January 2004-05, thermal plants achieved a PLF of
73.9%.
Crude Oil: In April 2004, crude oil was trading at US $ 34.7 per barrel, a rise
of 47.79% over the corresponding month of the previous year. But, from October 2004,
prices recorded a sharp rise and Crude Brent prices in October 2004 showed a rise of 75.6%
to $48.06 per barrel over the corresponding month of the previous year. The price has
eased thereafter to around US $46 in November 2004 and US $ 40 in December 2004. In
January 2005, prices had again gathered momentum and were in the range of US $ 46. The
current price, as on 28 February 2005, showed a rise of 55.81% to US$ 49.05 per barrel
over the corresponding period of the previous year. This rise in prices was due to weak
dollar, cold weather and the possibility of a cut in OPEC supply.
Index of Industrial Production (IIP): In April-December 2004, the overall Index
of Industrial Production (IIP) showed a rise of 8.4% to 199.4, over the corresponding
period of the previous year (6.6%). Among all the sectors, the manufacturing sector
recorded the highest growth of 9% over the corresponding period of the previous year
(7.2%), followed by electricity, with a 6.4% (3.5%) growth. The manufacturing sector led
the growth by contributing 88.3% of the growth, 7.1% electricity contributed 7.1% and
mining and quarrying the remaining 4.6%.
In December 2004, general IIP showed a rise of 7.9% to 217.9 over the corresponding
month of the previous year (7.4%). IIP for the mining, manufacturing and electricity
sectors showed a growth of 2.9%, 8.8% and 4.4%, respectively, over the corresponding month
of the previous year (5.6%, 7.8% and 5.4%, respectively).
In the manufacturing sector, out of 17 two-digit industry groups, 14 industries
recorded a positive growth rate and three industries recorded a negative growth rate in
April-December 2004 as compared to the corresponding period of the previous year, when 13
industries recorded positive and four industries negative growth rates. Further analysis
showed that, in April-December 2004, out of 17 two-digit industry groups, nine industry
groups recorded accelerated growth rate, five decelerated growth and three a negative
growth.
In the manufacturing group, the highest growth of 21.9% was registered by machinery and
equipment other than transport equipment, followed by other manufacturing industries
(19.4%), basic chemicals & chemical products (except products of petroleum & coal)
(15.7%) and textile products (including wearing apparel) (14.8%). On the other hand, wood
& wood products and furniture & fixtures recorded a negative growth of 10.4%,
followed by jute and other vegetable fibre textiles (except cotton) 1.3% and food products
1.1%.
In April-December 2004, the manufacturing sector comprising 17 industry groups showed a
rise of 9%. Out of 17 industries, only four industries contributed 78.2% to the growth:
machinery and equipment other than the transport equipment 34%, basic chemicals &
chemical products (except products of petroleum & coal) 32.6%, other manufacturing
industries 6.5%, and textile products (including wearing apparel) 5.1%.
As per the use-based classification, basic goods, capital goods and intermediate goods
showed a rise of 5.9%, 13.3% and 6.7%, respectively, in April-December 2004. Consumer
goods recorded a growth of 11.2% (15.3% in consumer durable and 9.8% in consumer
non-durable). The maximum relative contribution came from consumer goods with a growth of
40.03% [(13.76% by consumer durables (10.3% in the previous year) and 26.27% by consumers
non durables (24.9%)], followed by 22.5% in intermediate goods. In April-December 2004,
capital goods had shown a substantial improvement in the performance, recording growth of
13.3% as against 10.1% in the same period last year. The relative contribution of the
capital goods towards the growth was 15.1%, which was 14.2% in the corresponding period of
the previous year.
Gold
The trend in gold prices (standard gold) in the Mumbai market (based on month-end
prices) showed that in 2004 prices had touched a low of Rs 5600 per 10 gm on 10 May 2004.
They touched the year’s peak of Rs 6700 in November (when there is a seasonal
festival demand). Prices eased to the level of Rs. 6305 by December 2004, and slid further
to Rs 6125 by end January 2005. The prices at the end of February 2005 recorded a rise of
Rs 375 to Rs. 6265 as compared to the prices a year ago.
Gold prices in the London Market in 2004 reached the peak level of US $ 454.2 a troy
ounce on 2 December 2004, from a low of US $ 375 a troy ounce on 10 May 2004. Prices as on
28 February 2005 showed a rise of US $ 58.35 a troy ounce to US$ 435.45 a troy ounce,
from the low level of US $ 395.82 a troy ounce in February 2004. |
