REFERENCE NOTE. No. 28/RN/Ref./November /2013

LOK SABHA SECRETARIAT PARLIAMENT LIBRARY AND REFERENCE, RESEARCH, DOCUMENTATION AND INFORMATION SERVICE (LARRDIS) MEMBERS REFERENCE SERVICE REFERENCE NOTE. No. 28/RN/Ref./November /2013 For the use of Members of Parliament Not for Publication Indian Economy : Current Scenario (April September 2013).------------------------------------------------------------------------------------------------------- The reference material is for personal use of the Members in the discharge of their Parliamentary duties, and is not for publication. This Service is not to be quoted as the source of the information as it is based on the sources indicated at the end/in the text. This Service does not accept any responsibility for the accuracy or veracity of the information or views contained in the note/collection.

Indian Economy : Current Scenario Introduction India s GDP growth slowed to a decadal low of 5 per cent in 2012-13. The reasons behind the sharp deceleration in growth as per the Economic Survey 2012-13 include factors such as (i) policy constraints impacting investment, (ii) tight monetary policy in response to rising inflation which took a toll on investment as well as consumption, and (iii) External uncertainties. However despite the low growth in 2012-13, fiscal year 2013-14 began with a new hopeful sign of economic recovery such as WPI inflation decelerated to a 40 month low of below 5 percent in April, 2013. On the Consumption side, it was expected that with inflation easing, monetary policy would be more accommodative on the investment side, the investment climate was expected to improve with Cabinet Committee on investment clearing projects. Assuming a normal monsoon and global economic recovery, the Economic Survey had anticipated the growth to be in the range of 6.1 to 6.7 per cent for 2013-14 1. Economy in the FY 2013-14 (April-September) For the First Half of the year, 2013-14, The Gross Domestic Product (GDP) growth slowed to 4.6 per cent as against 5.3 per cent in the First Half of 2012-13. Financing Insurance and Business Services achieved the maximum growth at 9.5 per cent followed by community, social and personal services at 6.6 per cent. Mining and quarrying sector as well as manufacturing sector registered a negative growth of 1.6 per cent and 0.1 per cent respectively. A comparative statement of growth in all sectors of economy are given in the following table. 1 India, Ministry of Finance, Quarterly Review 2013-14 (April-June) (Q1) p.6

2 Source: Ministry of Statistics and Programme Implementation, Press Note dated 29.11.2013 In this year s budget, a GDP growth of 5 per cent was estimated for the purpose of achieving various targets including the target set for the fiscal deficit at 4.8 per cent of the GDP. Since the GDP growth rate for the First Half is 4.6 per cent, it will have to be at least 5.4 per cent during October-March to achieve a growth of 5 per cent in 2013-14 2. Agriculture Favourable monsoon has brightened the scope for a good agriculture output during 2013-14. Rainfall during June-September 2013 was 6 per cent above normal. The current stock of food grains (rice and wheat) is 53 million tonnes (mid October 2013. The 1 st advance estimates of production of food grains for 2013-14 have placed Khariff food grains at 129.3 million tonnes, a 10.3 per cent above the first advance estimates for the previous year and 0.9 per cent growth over the fourth advance 2 The Hindu, dated 29.11.2013

3 estimates for 2012-13 3. The total Rabi sown area (weekending 8.11.2013) stands at 108.88 lakh hectare as compared to 61.20 lakh hectare (8.11.2012) 4. The total Khariff sown area stands at 1051.10 lakh hectare (18.10.2013) as compared to 1006.74 lakh hectare (weekending 18.10.2012) 5. An improved Khariff harvest is expected to help ease food price pressure. Industry The Index of Industrial Production (IIP) increased to 0.4 per cent in April-September, 2013-14 against 0.1 per cent growth in April-September, 2012. The cumulative growth in the mining, manufacturing and Electricity Sector during April-September 2013-14 has been (-)2.5 per cent, 0.1 per cent and 5.9 per cent over the corresponding period of 2012-13 when the growth for these Sectors was (-)1.1 per cent, (-) 0.3 per cent and 4.6 per cent respectively 6. During April to September, 2013 the growth of eight core industries decelerated to 3.2 per cent from 6.6 per cent in the corresponding period last year as given in the following table: Growth Rate (in %) of Eight Core Industries Sector April September April September 2012-13 2013-14 Coal 9.4 2.3 Crude Oil -0.8-1.3 Natural Gas -12.5-16.5 Refinery Products 27.0 5.3 Fertilizers -5.6 2.5 Steel 2.6 4.5 Cement 9.1 4.5 Electricity 4.8 5.4 Overall Index 6.6 3.2 Source: PIB release, Ministry of Commerce & Industry dated 31.10.2013 3 RBI, Micro-economic and Monetary Developments, Second Quarter Review, 2013-14, p.3 4 PIB, Ministry of Agriculture, release dated 8.11.2013. 5 PIB, Ministry of Agriculture, release dated 18.10.2013. 6 India, Ministry of Statistics and Proagramme Implementation, Press Release dated 12.11.2013

4 Inflation Inflation has re-emerged as a major problem as both the whole sale and retail price increased to a high of 6.5 per cent and 9.84 per cent respectively in September, 2013. Headline inflation, measured by year on year (y-o-y) changes in the wholesale Price Index (WPI), which had declined to a 42 month low of 4.6 per cent in May 2013 increased to 6.5 per cent (provisional) in September 2013 driven by a rebound in food and fuel prices 7. Rate of inflation for food items article raised from 5.06 per cent in April, 2013 to 13.5 in September 2013. Rate of inflation for fuel and power group which was 8.33 per cent in April, 2013 decreased to 7.2 per cent in May, 2013 before rising again to 10.08 per cent in the month of September, 2013 8. The average inflation during first half of 2013-14 at 5.5 per cent, however, remained considerably lower than 7.7 per cent during the corresponding period of the previous year. Food and Fuel group together contributed to above 87 per cent of the increase in the index of inflation during April September 2013) 9. Given the higher weight of food in CPI as compared with WPI, the food group contributed significantly to over all CPI inflation and divergence between WPI & CPI Inflation. Though WPI inflation has moderated in 2013-14 so far, consumer price index (CPI) continued to remain near double digit level driven by high food inflation 10. However, food inflation expected to come down in the 2 nd Half (H2) of the Year. Central Government Finances The Deficit indicators of the Central Government widened during April September of 2013-14 mainly due to a shortfall in tax collections as well as rise in expenditure. Gross tax collections during the period, showed a growth of 7.8 per cent against a budgeted growth of 19.1 per cent. Tax collections at 37.1 per cent of Budget Estimates (BE) were lower than 39.4 per cent a year ago. 7 RBI, Micro-economic and Monetary Developments, Second Quarter Review, 2013-14, p.32 8 PIB, Ministry of Commerce and Industry, dated 14.10.2013 9 op.cit, Micro-economic and Monetary Developments, p.32 10 Ibid, p.35

5 Total expenditure during April-September 2013 at 48.6 per cent of BE was higher than 46.5 per cent during the same period of previous year. Low growth of the centre s net tax revenue on the one hand and a significant increase in revenue expenditure on the other increased the revenue deficit of the central government, which has already reached 84.8 per cent of BE. The widening of revenue deficit coupled with higher capital expenditure resulted in a gross fiscal deficit of 76 per cent of budget estimates during the first 6 months period 11. Government s Public Debt and Market Borrowings The total public debt (excluding liabilities under the Public Account ) of the Government increased to `45,80,472 crore at end September, 2013 from `41,12,187 crore at end March, 2013. The outstanding internal debt of the Government at `41,58,084 crore increased from `37,47,745 crore at end March, 2013 and external debt increased to `4,22,389 crore at end September, 2013 12. Gross and net market borrowing requirements of the Government for the Financial Year 2014 were budgeted at `5,79,009 crore and `4,84,000 crore which were higher by 3.8 per cent and 3.6 per cent respectively than `5,58,000 crore and `4,67,384 crore in Financial Year 2013. The Gross borrowings for First Half of Financial Year 2014 were `3,44,000 crore (59.4 per cent of BE), lower than `3,55,000 crore (62.3 per cent of BE) in First Half of the Financial Year 2013. Net market borrowing during the first half at `2,69,265 crore or 55.6 per cent of BE was lower than 56.2 per cent of BE in the previous year 13. External Assistance and Debt Service Payments Gross external assistance during April-September 2013 stands at `11104.2 crore as compared to `11090.6 crore during the corresponding period of the previous year. 11 India, Ministry of Finance, Public Debt Management, Quarterly Report, July to September, 2013, pp.6-7 (www.fin.min.nic.in.) 12 Ibid, p.13 13 Ibid, p.7

6 Net disbursement stood at `843 crore during April-September 2013 as compared to `1766.4 crore during April-September 2012 while net transfers were (-)`1203.4 crore during April-September 2013 as compared to (-)`433.1 crore during April-September 2012 14. Money Stock The Broad Money (M3) comprising currency with the public, Demand Deposits with Banks, Time Deposits with Banks and other deposits with RBI, stood at `87,949.2 billion as on September 20, 2013. The year on year growth of M3 as on September 20, 2013 was 12.5 per cent as compared to 13.6 per cent on the corresponding date of the previous year 15. Bank Credit Bank Credit Stood at ` 56,172 billion at September 20, 2013 which registered an increase of 4.2 per cent as compared to 1.2 per cent during the corresponding period last year 16. Exchange Rate Amid heightened volatility in global and Indian currency markets, the Indian rupee depreciated speedily by 17.7 per cent against the US$ during mid-may to end- August 2013. It crossed `68 US$ mark on August 28, 2013. Pressure on Rupee eased in September as the Syrian Crisis dissipated and the Federal Reserve decided to continue QE3 programme. Rupee closed at `62.7 per US$ at end September 2013 17. On 28 August 2013, the RBI introduced a Forex Swap Window for Public Sector oil marketing companies. The centre Bank decided to meet the entire daily requirement a three Public Sector Oil Marketing Companies by undertaking US$-rupee forex swap with then. This measure reduced the demand for dollar in the foreign Exchange Market. The opening of a forex swap window for the public sector oil marketing companies played an important role in stabilising rupee and providing immediate relief to the rupee. 14 India, Ministry of Finance, Monthly Economic Report, September, 2013, p.11 15 Ibid, p.6 16 Ibid, p.7 17 op.cit., 2 nd Quarter Review Public Debt Management, p.4

7 Owing to the sharp depreciation witnessed in May-August 2013 period, the average value of the rupee touched `59.1 per dollar in the first Half of the Financial 2013-14. This was much lower than the average level of `54.4 per dollar that was witnessed in 2012-13 18. Foreign Trade India s export performance over the last two years has been affected by continued sluggishness in global trade and an overvalued exchange rate for a prolonged period. The depreciation in the exchange rate, both in nominal and real terms, appears to have helped improve India s export competitiveness in recent months. Cumulative value of exports for the period April-September, 2013-14 was US$ 152.1 billion (`901194.97 crore) as against US$ 144.7 (`790838.40 crores) registering a growth of 5.1 per cent in dollar terms and a growth of 13.95 per cent in rupee term over the same period last year. Cumulative Value of imports for the period April-September 2013-14 was US$ 232.2 billion (Rs.1365699.30 crore) as against US$ 236.5 billion (`1292490.99 crore) registering a negative growth of -1.8 per cent in dollar terms and growth of 5.66 per cent in rupee term over April-September 2012-13. The trade balance responded to policy measures by the Government and RBI with gold imports declining and exports picking up resulting in a reduction of the trade deficit. The Trade deficit for April-September was estimated at US$ 80.1 billion (`464,504.33 crore) which was lower than the deficit of 91.8 billion (`501,652.59 crore) during April-September 2012-13 19. With some visible improvement in the trade balance, Current Account Deficit is likely to show a significant correction. Current Account Deficit The Current Account Deficit(CAD), which is the difference between outflow and inflow of foreign exchange, touched an all time high of US$ 87.8 billion or 4.8 per cent of the GDP in 2012-13. It widened to 4.9 per cent of GDP in April-June of 2013-14. 18 CMIE, Economic Outlook, dated 15.10.2013 19 PIB, Ministry of Commerce and Industry, dated 9.10.2013

8 With some visible improvement in the trade balance in July-September, 2013, CAD is likely to show a significant correction in 2 nd Quarter (July-September) of 2013-14 20. Foreign Direct Investment (FDI) In April-August of 2013, FDI grew by a meager 4 per cent to US$ 8462 million from US$ 8166 million in the same period of the year 2012 21. Foreign Exchange Reserves India s Foreign Exchange Reserves as on September 27, 2013 were US$276,264 million which were US$ 294,812 million for the same period of the previous year. Foreign currency Assets stood at US$247,925 million & US$259,958 million for the same period of 2013 & 2012 respectively 22. Prospects for the Economy World Bank s latest India Development Updates, a twice yearly report on the Indian economy and its prospects states that India s growth potential remains high but its macroeconomic vulnerabilities high headline inflation, an elevated current account deficit, and rising pressure on fiscal balances from the depreciation of the rupee could impact the speed of economic recovery. Although output growth in the first quarter of the current fiscal year fell to 4.4 per cent, growth is expected to rebound strongly in the second half of FY2014 with core inflation trending down, a bumper crop expected in agriculture (where a 5 per cent increase in area sown is expected to raise agricultural growth to 3.4 per cent from 1.9 per cent a year ago), and exports likely to benefit substantially from the rupee s depreciation. Growth is expected to improve further in the medium term as strengthening exports support a recovery in industrial activity and new investment projects come on stream. The report expects real GDP to expand by 4.7 per cent this fiscal year (FY2014) before accelerating to 6.2 per cent in FY 2015 23. 20 op.cit., RBI, Micro-economic and Monetary Developments, p.16 21 India, Ministry of Commerce and Industry, Fact Sheet on FDI 22 RBI Weekly Statistical Supplement, 4.10.2013 23 World Bank s, India Development Updates, October, 2013