The Indian economy, buoyed by the growth in GDP at market prices exceeding 8 per cent every year since 2003-04, is projected to grow at 8.7 per cent for 2007-08, says the Economic Survey for 2007-08, presented in Parliament today by finance minister P Chidambaram.

Growth in 2006-07, initially estimated at 9.2 per cent in February 2007, was revised upwards to 9.4 per cent in May 2007 and further to 9.6 per cent on 31 January 2008, suggesting that upward adjustments in the 2007-08 projections are possible. 

GDP at current market prices is projected at Rs.46,93,602 crore in 2007-08.  Thus, in the current fiscal year, the size of the Indian economy at market exchange rate will cross $1 trillion.  

Constraints: However, even though the economy has moved to a higher growth phase of 8 per cent GDP growth per annum, the loss of dynamism in agriculture, inflationary impact of the inflow of foreign funds, a slowdown of the US economy, the impact of rupee appreciation and an inadequate infrastructure are some of the major challenges confronting the Indian economy, the Economic Survey notes.

While the macro economic fundamentals continue to strengthen, the decisive change in growth trend also shows that the economy was "perhaps not fully prepared for the different set of challenges that accompany fast growth".

"The new challenge is to maintain growth at these levels, not to speak of raising it further to double-digit levels," the survey says and presents a spate of new reforms to help raise the growth to double-digits, saying, "Raising growth to double digit... will require additional reforms."

New reform measures: These include opening retail to FDI, raising FDI in insurance to 49 per cent, allowing 100-per cent FDI in new private rural agricultural banks, divesting up to 10 per cent equity of the cash-rich public sector units that have been accorded the Navratna status.

Among the various new policy reforms, the survey has included allowing regulated private entry into coal mining, phasing out control on sugar, fertiliser and drugs and selling old oil fields to private sector. It also suggested the inclusion of private corporate investment in nuclear power, adding that the state electricity regulatory commissions should notify rational and credible cross-subsidy for open access.

Inflation: On inflationary concerns, the survey notes, "Of late, the change in the structure of the economy and its more globalised nature has made management of inflation a complex task," adding that the rising capital inflows will require monetary policy to play a more decisive role.

Inflation flared up in the last half of 2006-07 and was contained during the current year, despite a global hardening of commodity prices and an upsurge in capital inflows. The document stated that the recent hike in fuel prices would add 19 basis points to the inflation rate projected at 4.4 per cent for the year 2007-08.

According to the Economic Survey, the overall inflation is projected to decline from 5.6 per cent in 2006-07 to 4.1 per cent in 2007-08.  The projected decline is due to the deceleration in investment goods prices from 5.5 per cent growth in 2006-07 to 4.3 per cent growth in 2007-08.  This, the Economic Survey says should have a positive effect on investment.

Foreign trade: The strengthening of the rupee against the dollar by 8.9 per cent between 3 April 2007 and 6 February 2008 has affected exports in sectors with low import intensity. Besides the rupee impact, the US slowdown is also expected to affect exports.

"The US economy is expected to slow down in 2008, consequent to the sub-prime crises. Most projections of the world economy suggest a moderate but not severe slowdown in world growth. This will impact both the demand for India's exports and the value of imports," the Survey stated.

On balance of payments the Economic Survey says that there is considerable uncertainty in quantifying the downside risk to global growth arising from the downturn in housing market and the sub-prime mortgage market crisis in the United States.  Monetary policy actions by the United States and other developed countries seem to have contained the immediate impact, though more surprises in the next six months cannot be ruled out.

It said the sub-prime crisis in the US might lead to additional capital flows into India and other emerging markets.  "The situation of excess inflows is likely to remain, though the pressure on reserve accumulation and exchange rate appreciation is likely to ease," the Survey said. In the longer term, the solution to excess capital inflows lies in deepening productivity gains and addressing the root causes like interest differential and build-up of expectations on the rupee.

Noting that the composition of capital flow is also changing, the Economic Survey says that the most-welcome feature of increased capital flows is the 150 per cent increase in net foreign direct investment inflows in 2006-07 to $23 billion.  The trend has continued in the current financial year with gross FDI inflows reaching $11.2 billion in the first six months. 

India's greater integration with the world economy was reflected by the trade openness indicator, the trade to GDP ratio, which increased from 22.5 per cent of GDP in 2000-01 to 34.8 per cent of GDP in 2006-07.  The exports and imports grew by 22.6 per cent and 24.5 per cent respectively in 2006-07, recording the lowest gap between growth rates after 2002-03.  In the first nine months of the current year, exports reached US$111 billion, nearly 70 per cent of the year's export target.  Imports grew by 25.9 per cent during April-December 2007 due to non-POL imports growth of 31.9 per cent, implying strong industrial demand by the manufacturing sector and for export activity.  

Investment and saving: The survey says domestic investment and saving rates accelerated to drive growth and provide the resources for meeting the 9 per cent (average) growth target of the Eleventh Five Year Plan.  Macroeconomic fundamentals continue to inspire confidence and the investment climate is full of optimism.  Buoyant growth of government revenues made it possible to maintain fiscal consolidation.

Expressing concern over slowdown in the consumer goods segment of industry and infrastructure constraints, the Economic Survey calls for additional reforms to raise growth to double digit.

The survey observes that with rising per capita consumption, simple Engel curve analysis would predict a decline in share of food consumption and an increase in luxuries, which in our context include entertainment and durable goods. 

A notable feature of the recent GDP growth has been a sharply rising trend in gross domestic investment and saving with the former rising by 13.1 per cent of GDP and the latter by 11.3 per cent of GDP over five years till 2006-07. 

Both private and public savings have contributed to higher overall savings while the increase in investment has been driven by private investment.            

The growth in the services sector continued to be broad based with ''transport and communication'' being the fastest growing with an average of 15.3 per cent per annum during the 10th Five Year Plan followed by ''construction''.  The contribution of the construction sector increased to 10.8 per cent while that of telecom to 11.4 per cent.  There was 13.9 per cent growth in the financial services comprising banking, insurance and business services in 2006-07.  

Annual average growth of money reached a trough of 13 per cent in 2003-04 and has been on an accelerating trend since then, reaching 19.5 per cent in 2006-07.  However, in contrast to money supply, average credit growth slowed marginally to 26.8 per cent in 2006-07 and has decelerated further in 2007-08.
 
The industrial sector witnessed a slowdown in the first nine months of the current financial year.  The growth of 9 per cent during April-December 2007, when viewed against the back drop of the robust growth witnessed in the preceding four years, suggests that there is a certain degree of moderation in the momentum of the industrial sector. 

The Economic Survey states that the share of the Central Government expenditure on social services, including rural development, in total expenditure (plan and non-plan), has increased from 10.97 per cent in 2001-02 to 16.42 per cent in 2007-08.  The demographic dividend will manifest itself as a rise in the working age population aged 15 to 64 years from 62.9 per cent in 2006 to 68.4 per cent in 2026.  To tap this dividend, the Eleventh Five Year Plan focuses on ensuring better delivery of healthcare, skill development and encouragement of labour intensive industries.

Agricultural growth, dependent as it is on the monsoon, continued to fluctuate.  The overall food grains production in 2007-08 is expected to fall short of the target by 2.2 million tonnes, though it is expected to be 10.1 million tonnes higher compared to the second estimates for 2006-07.  While the production of Kharif food grains is expected to be 5.3 million tonnes (4.8 per cent) higher than the production in 2006-07, rabi production is expected to be lower by 3.3 million tonnes. 

Expressing concern over the loss of dynamism in the agriculture and allied sectors in recent years the Economic Survey emphasizes the need for the second green revolution, particularly in the areas which are rain-fed, to improve the income of the persons dependent on the agriculture sector.

Stock markets are an important instrument of financial intermediation.  They saw increased activity in 2007-08.  The Bombay Stock Exchange (BSE) Sensex rose from 13,072 at end-March 2007 to 18,048 as on February 18, 2008, while the National Stock Exchange (NSE) index Nifty 50 rose from 3,822 to 5,277 during the same period.  Both the indices gave a return of around 38 per cent during this period.

The Economic Survey acknowledges the importance of issues like Global warming and climate change.   It however emphasizes the need to balance the harmful effects of human activity on global warming against the need for poverty reduction and economic growth in developing and least developed countries.  
 
Highlights of the Economic Survey 2007-08

• Economy moves decisively to higher growth phase 
  
• Economic growth in 2007-08 projected at 8.7 % 
  
• Holding 9% growth a challenge, two digit growth even greater
  
• Overall inflation projected to decline from 5.6 per cent in 2006-07 to 4.1 per cent in 2007-08 
  
• Acceleration in domestic investment and savings rates
  
• Buoyant growth in Government Revenues 
  
• Investment climate full of optimism 
  
• Concern over slowdown in consumer goods segment of industry and infrastructure constraints 
  
• Indian economy at market exchange rate to cross 1 trillion dollars in current fiscal 
  
• Growth in service sector continues to be broad based with 'transport and communication' being the fastest during the Xth Five Year Plan 
  
• 13.9 per cent growth in financial services in 2006-07 
  
• Annual average growth of money on an accelerating trend since 2003-04 reaching 19.5 per cent in 2006-07 
  
• Considerable uncertainty in quantifying the downside risk arising from the housing market and sub-prime mortgage market crisis in US 
  
• 150 per cent increase in net foreign direct investment inflows in 2006-07 to $23 billion. Trend continues in the current financial year with gross FDI inflows reaching $11.2 billion in first six months 
  
• Trade to GDP ratio increases from 22.5 per cent of GDP in 2000-01 to 34.8 per cent of GDP in 2006-07 
  
• Heightened urgency to augment and upgrade infrastructure both physical as well as social and in particular power, roads and ports Inflation and infrastructure biggest growth challenges 
  
• Skill dearth causing attrition, wage hike; pushing inflation
  
• Persistent institutional weaknesses and implementation constrains at different levels of government need to be addressed 
  
• Private sector requires policy and regulations that are comprehensive but simple and clear and credible 
  
• Share of Central Government expenditure on social services, including rural development, in total expenditure (Plan & Non-Plan) increased from 10.97 per cent in 2001-02 to 16.42 per cent in 2007-08 
  
• Agricultural growth, dependent as it is on monsoon, continues to fluctuate. Overall food grains production in 2007-08 expected to fall short of the target by 2.2 million tonnes.  Farm growth in FY'08 seen at 2.6%, against 3.8% a year ago
  Foodgrain output seen at 219.3 MT against 217.3 MT in FY'07 Need for second green revolution particularly in rainfed areas emphasized.