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The nation has entered 2005 in a sombre mood grappling with the tsunami devastation one of the biggest natural disasters to strike South and South East Asia.
In fact, the disaster came as a melancholy interlude as the country to enter the 56th year of the Republic, is going through a period of resurgence, with vital signs of progress, amid growing recognition of its political and economic power in Asia and in the comity of nations. The year, 2004 saw a consolidation of the economic gains from over a decade of liberalisation and structural changes which have already positioned India as a globally competitive nation, even if greater challenges lay ahead in reaching the fruits of growth for the people, in terms of employment and human development and rural connectivity.
Careful economic management in 2004 ensured that inflation, which showed signs of alarming rise when international oil prices zoomed to above 50 dollars a barrel, was contained and lowered from a high of around 8.5 per cent to 6.5 per cent by the end of the year. A mix of fiscal and monetary measures was employed to control prices though it entailed a sizeable loss of revenue for the exchequer through duty cuts on petroleum and metal products which largely accounted for the surge in inflation. GDP growth in 2004-05 has been robust – 7.4 per cent in the first quarter (April-June) and 6.6 per cent in the second (July-September), exports rising by 24 per cent till November, industry on a rebound with revival in investments, and continued buoyancy in Services, both IT-related and Trade, Transport and Communication.
Growth Trends
Capital inflows have been steady, and the Indian stock market, reflecting all round business confidence and the profitability of corporate and health of financial institutions, recorded new highs with the sensitive index crossing 6600 points at the end of 2004. The market holds considerable attraction for foreign portfolio investors. The primary market has also turned active with a significant increase in resource mobilisation through new issues. At current levels of relatively subdued inflation and low interest rates, taking into account the performance in the real sectors of the economy, the overall economic growth in 2004-05 should be around 6.5 per cent, as modestly assumed by both RBI and the Government.
Although India has run up a larger trade imbalance of 17 billion dollars in April-November, because of the higher oil prices as well as larger non-oil imports (which are supportive of the ongoing strong industrial recovery), and the current account turned negative for the first time in three years, the country has a comfortable balance of payments position. National foreign exchange reserves continue to rise and totalled 131 billion dollars in the last week of December 2004, an increase of over 18 billion dollars in the current fiscal year (April-Dec). The economy’s resilience stands considerably enhanced to overcome or minimise the adverse impact of exogenous shocks including oil price rises or interest rates moving up or sharp variations in movements of major currencies.
Emerging Strengths
Problems encountered in macro-economic management, such as inflation and unpredictable natural disasters, cannot overlook the emerging strengths of the Indian economy, becoming apparent in the current year. Firstly, the country’s manufacturing can now be said to have reached a stage of international competitiveness. Leading Indian corporates have begun to acquire stakes in overseas ventures. Sectors like steel, automobiles, pharmaceuticals, and a range of engineering goods are doing extremely well. Sustained growth in capital goods production along with imports of such goods is taken to reflect a revival of investment demand.
Optimism in industry is underlined in the business surveys. There has been a substantial rise in the non-food credit offtake of the banking system. Manufacturing recorded a 9 per cent growth in the first half of the year. The textile industry is gearing itself to boost exports with the dismantling of the quota regime and integration of textiles and clothing in the multilateral trading system . India has also complied with World Trade Organisation (WTO) obligation in regard to product patents and the law enforced through a provisional ordinance has safeguard for national interests in the areas of food, drugs and chemicals.
Secondly, the Indian financial system has made considerable headway in conforming to global standards. Banks have shown marked improvement in capital adequacy, profitability and asset quality and with renewed focus on risk management might help expand lending to unbanked segments of agriculture, industry and services. Banks would have a role to play in the financing of physical infrastructure, the bulk of investments for which would be from both the public and private sectors, domestic and foreign.
Thirdly, with the global revival in ICT, there would be a further acceleration in IT sector growth in the country. Research agencies foresee strong growth in the Asia-Pacific region driven by increased spending by India (22 Per cent) and China (15 per cent). India would also command an increasing share of offshoring of business processes from developed economies though global competition makes it imperative that outsourced services are provided in cost-effective manner.
Fourthly, the coming decade would see greater trade and investment cooperation between India and ASEAN (Association of South East Asian Nations) and East Asian nations through the framework of free trade agreements that are to be negotiated. Exports would become the driver of growth as India seeks to raise its share of world trade although less rapidly than many other developing countries, apart from China. Progress in this direction would be accelerated when the special economic zones come into existence and begin to operate with a special dispensation for investors, domestic and foreign, in order to maximize export earnings.
Budget Expectations
Hopefully, the forthcoming Union Budget for the year 2005-06 would address some of the immediate and medium-term challenges for the country while designing a new fiscal policy with tax reforms at the Centre and refashioning Centre-State fiscal relations in the light of the recommendations of the Twelfth Finance Commission for the period 2005-10. A nationwide system of VAT (Value Added Tax) is expected to be ushered in on April 1, 2005 towards making the country a common market for freer movement of goods and services. The Finance Minister Shri P Chidambaram has indicated that the Budget would be investor and industry-friendly with a simpler tax regime for sectors like petroleum, sugar, telecom and man-made fibres.
But the Budget would be looked for much more in terms of what Government would do to implement the promises in the National Common Minimum Programme (NCMP), especially those which have been summed up as a New Deal for Rural India. Agriculture remains the foundation for economic and social wellbeing. Apart from expanded credit flows, large investments are required for inputs, storage, marketing and food processing. A limited beginning has been made with the Food for Work programme but the proposed National Employment Guarantee Act would have to be on a larger scale and aim at creation of durable assets.
In 2005, India would also be called upon to play an active role in the multilateral trade negotiations (Doha Development Round), which could enter a decisive stage by the end of the year, as well as in the deliberations aimed at reshaping of the UN system to meet the challenges of the 21st century. The expert panel, which also went into reform of UN Security Council, has proposed a category of permanent members including India – which commands a wide measure of support –but without the right of veto. (PIB Features)
**Freelance Writer
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