Present Scenario of the Indian Economy
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Written by MYOD on Wednesday, 04 May 2011 00:00   
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Since the economic crisis of 1991, sustained economic liberalisation has steered the country towards a more globally integrated and market-based economy. This twin strategy of economic reforms and encouragement to foreign and private capital resulted in the economy beginning to register high growth rates in the first decade of the 21st century. By 2008, India had established itself as the world’s second-fastest growing economy after China.

It was the financial crisis of 2007–2010 that emerged as a major setback for our economy. The poor monsoon too worsened the situation as India’s Gross Domestic Product (GDP) growth rate significantly slowed to 6.7 per cent in 2008–09, but subsequently recovered to 7.2 per cent in 2009–10, while the fiscal deficit rose from 5.9 per cent to a high 6.5 per cent during the same period. India’s current account deficit surged to 4.1 per cent of GDP during Q2 FY11 against 3.2 per cent the previous quarter. The unemployment rate for 2009–2010, according to the State Labour Bureau, was 9.4 per cent nationwide, rising to 10.1 per cent in rural areas, where two-thirds of the 1.2 billion population live. Finally, the Central Statistical Organisation’s recently released estimate of GDP growth of 8.6 per cent for 2010-11 is consistent with the Reserve Bank’s projection set out in the Third Quarter Review.

Inflation
The stubbornly high rate of inflation continues to be a worry. After a slight moderation in January, the inflation rate, as measured by the Wholesale Price Index, rose again, thanks mainly to a sharp increase in non-food manufactured product inflation. As expected, prices of food articles have witnessed a decline after reaching a peak in late 2010. However, the prices of protein sources such as milk and eggs, meat and fish continued to remain high reflecting structural demand-supply imbalances. The Budget 2011-12 showcased a number of measures to improve the agricultural supply response and the imbalances.



Fiscal Deficit
While the budgeted level of fiscal deficit for 2011-12 gives some comfort on the demand front, a potential increase in the subsidies on petroleum products and fertilisers as a result of high crude prices could put pressure on expenditure. According to the Finance Minister Pranab Mukherjee, the emphasis is to focus on the quality of expenditure, keeping the aggregate under control without cutting down on social welfare schemes.

Current Account
The Reserve Bank had expressed concern about the widening of the Current Account Deficit (CAD) and the nature of its financing in its Third Quarter Review. Going by the recent robust export performance, CAD for 2010-11 is now estimated to come lower than earlier expected, at around 2.5 per cent of the GDP.

Credit Condition
While the year-on-year non-food credit growth at 23 per cent in February remains above the indicative projection of 20 per cent, the pace of credit expansion has moderated since December 2010. Monetary transmission is increasingly visible as banks continue to raise their lending rates.

Liquidity
Net liquidity injection through Liquidity Adjustment Facility (LAF) declined from an average of around Rs. 93,000 crore in January to Rs.79,000 crore in February 2011, and further to Rs. 68,000 crore in March, mainly due to an increase in government spending and consequent decline in government cash balances with the Reserve Bank. Going forward, the overall liquidity situation is expected to move close to the comfort level of the Reserve Bank, although it is likely to come under some temporary pressure in the second half of March due to advance tax collections.

Monetary Measures
On the basis of the current macroeconomic assessment, it has been decided to increase the Repo Rate under the LAF by 25 basis points from 6.5% 6.75 % with immediate effect; and, increase the Reverse Repo Rate under the LAF by 25 basis points from 5.5 per cent to 5.75% on March 17, 2011.

Growth in GDP at market prices at 9.7% for 2010-11
The Central Statistics Organisation (CSO), Ministry of Statistics and Programme Implementation, in February 2011 released the advance estimates of national income at constant (2004-05) and current prices, for the financial year 2010-11.

 

 

 

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