ECONOMIC SURVEY 2000-2001: Macroeconomic overview...2

Demand Factors 1.16  On the demand side, real consumption growth decelerated from 7.9 per cent in 1998-99 to 5.8 per cent in 1999-2000 mainly due to deceleration of the growth rate of private consumption from 7.2 per cent in 1998-99 to 4.1 per cent in 1999-2000, although Government consumption expenditure recorded a higher increase during the same period. The growth rate of gross domestic capital formation showed a significant acceleration from only 2.3 percent in 1998-99 to 9.4 per cent in 1999-2000

1.17  The rates of investment and saving in India are high as judged by its level of economic development. Gross domestic savings as per cent of GDP declined from 23.5 per cent in 1997-98 to 22.0 per cent in 1998-99 due to negative savings in the public sector. Gross domestic savings have improved marginally to 22.3 per cent in 1999-2000 as a result of sustained economic growth, low inflation rates and better performance by the household sector. Private corporate savings remained stagnant at 3.7 per cent of GDP in 1999-2000. However, there was a steep fall in the savings of the public sector due to an increase in the dis-savings of Government administrative departments caused by large revenue deficit. In fact, public sector savings continued to be negative in 1999-2000 as in 1998-99. As a percentage of GDP, public sector savings deteriorated from (-) 0.8 per cent in 1998-99 to (-) 1.2 per cent in 1999-2000.

1.18  Gross domestic investment (GDI) as percentage of GDP has shown similar trends. It declined from 25.0 per cent in 1997-98 to 23.0 per cent in 1998-99 due to decline of investment in both public and private sectors. It is estimated that GDI as percentage of GDP has improved to 23.3 per cent in 1999-2000 (at current prices) due to higher investment by both public and private sectors. While public investment as percentage of GDP improved from 6.4 per cent in 1998-99 to 7.1 per cent in 1999-2000, private investment as percentage of GDP also improved from 14.8 per cent to 15.6 per cent over the same period.

1.19  There was significant improvement in the real gross domestic capital formation (GDCF) in 1999-2000. The growth rate of public sector GDCF accelerated from 5.1 per cent in 1998-99 to 19 per cent in 1999-2000 and that of private sector GDCF accelerated from 1.6 per cent to 15.2 per cent resulting in the acceleration of the overall GDCF growth rate from 2.3 per cent to 9.4 per cent over the same period . As percentage of GDP at market prices (at 1993-94 prices), real GDCF improved from 25.4 per cent in 1998-99 to 26 per cent in 1999-2000 due to improvement in both public and private sector real capital formation in 1999-2000. However, within private sector, there was marginal deterioration of real capital formation by the private corporate sector although the household sector showed significant improvement.

1.20  It is mentionable in this context that although GDCF in current prices seems to have fallen as a proportion of GDP in the late 90s, the trend in constant prices is quite different. Because of changes in relative prices, GDCF in constant prices has remained in the range of 25-26 per cent during this period.

1.21  Real gross fixed capital formation (GFCF) as per cent of GDP also showed some improvement from 23.5 per cent in 1998-99 to 23.8 per cent in 1999-2000 due to improvement in both public and private fixed capital formation. After a decline in 1998-99, inventories as proportion of GDP surged to 1.6 per cent in 1999-2000 with almost equal levels of inventories in public and private sectors.

1.22  As data on capital formation are not available for the year 2000-01, the trends have to be assessed by looking at various leading indicators of investment and growth. These present a mixed picture. Both domestic production as well as imports of capital goods have shown considerable deceleration in the current year. There was significant improvement in sanctions and disbursements made by the All India Financial Institutions (AIFIs). The inflows of Foreign Direct Investment (FDI) also recorded significant improvement in the current year. Inflows of FII investment have been erratic in the current year with overall inflows of portfolio investment lower than those in the last year. The trends indicate that there may not be any significant recovery of investment in 2000-01. Sustained high economic growth would require significant improvement in investment, which in turn, would depend on steep rise of foreign direct and portfolio investment, structural reduction in inflationary expectations and real interest rates, reduction in the fiscal deficit and further liberalisation of the domestic debt and capital markets.

1.23  While India’s private savings rate is more or less comparable to those achieved by the high performing East Asian economies, its negative public savings is a major constraint on domestic resource mobilisation. The Government is restructuring public expenditure for fostering domestic savings, releasing resources for physical and social infrastructure development and for reducing the crowding out effect on private investment.

1.24  The tempo of economic reforms was sustained successfully in 1999-2000. Major fiscal reforms were undertaken for broadening the income tax base and streamlining the excise and customs duty structures. There were enabling reforms in foreign investment and trade policy spheres also. Reforms in public sector enterprises are underway for reducing pressures on public finances, increasing the efficiency of public sector operations and reducing the incremental capital output ratio (ICOR). Strengthening of legal, institutional and regulatory frameworks in insurance, banking, capital markets, power and telecom are being undertaken for inducing greater private investment in infrastructure. The Union Budget for 2000-01 announced various measures for further deepening of the capital markets and financial sector and allowed private entry in insurance and provident funds.  It is expected that these measures would enhance both the savings and investment rates for the economy.

Supply Side : Production

1.25  The adverse weather conditions affected the crop prospects, particularly foodgrains and oilseeds production in year 2000-01. The foodgrains production in 2000-01 is likely to be 199 million tonnes compared to 208.9 million tonnes in the preceding year. The decline of nearly 10 million tonnes should, however, not pose a serious supply management problem since the country is comfortably perched on nearly 45 million tonnes of foodgrain stocks, which should be an adequate safeguard against speculative uptrend in foodgrain prices.

1.26  As for commercial crops, the rabi prospects of oilseeds and pulses production in 2000-01 is also not satisfactory since their area sown is much less this year due to inadequate winter rainfall. Mustard crop has particularly suffered in the rabi season. Hence edible oil prices may be under pressure later in summer and would need to be carefully watched.

1.27  The overall industrial growth path in the 1990s has been marked by cyclical fluctuations with the peak level of industrial growth being 13 per cent in 1995-96. Since 1996-97, industrial growth has remained around 6.5 per cent annually except for a drop to 4.1 per cent in 1998-99. Some of the factors responsible for this cyclical behavior of industrial growth during the last few years are, high interest rate environment, lack of demand for capital goods, business cycle, inherent adjustment lags in industrial restructuring and infrastructural constraints, particularly for power, roads, telecommunications and transport.

1.28  According to the Index of Industrial Production (IIP), overall industrial growth was 5.7 per cent in April-December 2000 (compared to 6.4 per cent in April-December 1999) contributed by a growth of 4.1 per cent in mining, 5.9 per cent in manufacturing and 4.8 per cent in electricity. The growth rate of manufacturing in April-December 2000 at 5.9 per cent was lower than 7 per cent registered in April-December 1999. The growth rate of electricity generation in April-December 2000 at 4.8 per cent was significantly lower than 7.7 per cent achieved in April-December 1999. Only the mining sector was able to improve its growth rate from 0.5 per cent in April-December 1999 to 4.1 per cent in April-December 2000.

1.29  Mixed trends were noted while analysing industrial production according to use-based classification. While growth rates of both durable and non-durable consumer goods accelerated during the current year, there was deceleration in the growth rate of basic, capital and intermediate goods. The downward trends in the growth rates of capital goods and intermediate goods indicate that there is lack of sufficient investment demand. The high growth in the consumer goods sector continues to be a strength and with greater industrial restructuring and more favorable internal and external investment environment can lead to higher growth momentum in other sectors of the industry.

1.30  As regards the growth rates of broad manufacturing groups, the metal products and parts (except machinery & equipment) group registered a growth rate of 22.9 per cent in April-December 2000. The other groups to register double-digit growth were rubber, plastic, petroleum and coal products (10.4 per cent) and leather and leather & fur products (10.3 per cent). The other better performing groups were food products (9.4 per cent), textile products (8.4 per cent), machinery and equipment other than transport equipment (8.3 per cent) and other manufacturing industries (8.2 per cent). Only two groups viz. paper and paper products and print, publication & allied industries (-11.3 per cent) and non-metallic mineral products (-0.3 per cent) registered negative growth.

1.31  After decelerating to 4.1 per cent in 1998-99, industrial growth improved to 6.5 per cent in 1999-2000. To consolidate the higher growth momentum, the Union Budget for 2000-01 announced a number of policy measures. These included the following:

• Rationalisation of excise duty by introduction of CENVAT and reduction in the number of excise rates.
• Permitting enhancement of the Foreign Institutional Investment (FII) limit to 40 per cent of total equity through a special resolution by the shareholders.
• Raising of the limit for providing collateral to obtain finance for small-scale industries from Rs. 1 lakh to Rs. 5 lakh .
• Extension of existing tax holiday benefits for small-scale industries and industrial units set up in industrially backward states and districts by another two years, i.e. till 31st March 2002.
• Concession to the entertainment industry through reduction of import duty on cinematic camera and other related equipment.

1.32  In pursuance of Government’s commitment to further facilitate investment in Indian industry, foreign direct investment has been permitted through automatic route for all industries except for a few specified items and situations. Non-Banking financial companies have been allowed to hold foreign equity up to 100% if they are the holding companies. Their subsidiaries, which are the operating companies, have also been allowed to hold foreign equity up to 75%. To facilitate the setting up and operation of such subsidiaries, Government has further allowed holding companies with a minimum capital of US$ 50 million to set up 100% downstream subsidiaries undertaking specific non-banking financial activities with a minimum capital of US $ 5 million. Such a subsidiary, however, would be required to disinvest its equity to the minimum extent of 25% through a public offering only, within a period of 3 years.

1.33  An Expert Group constituted by Government to review the Industries Development and Regulation Act 1951, has proposed enactment of a new Industry Act, which would focus on promotion and development of industry instead of regulation. The Government is examining the feasibility of framing a new enactment in this regard.

1.34  Liberalisation of the economy in the 1990s and encouragement of private investment in industry and infrastructure have induced sustained high growth in service sectors. A rapid increase in expenditure on public administration, social services, rural extension services and defence also had an impact on the growth of service sector. As a consequence, the share of the service sector in GDP increased from a level of 28 per cent in the early 1950’s to 41 per cent in 1990-91 and further to around 49 per cent in 2000-2001. The service sector is expected to grow at 8.3 per cent in 2000–01 induced by substantial foodgrains procure- ment by the Government, sustained industrial growth and good performance of transport services, trade related activities and financial services.