The Economy

The security environment in India remains stable, having improved dramatically through 2004 and continuing in a positive direction though the first half of 2005. Tensions with Pakistan have deescalated, and the Kashmir situation improved considerably. Developments in Nepal — a combination of the Royal coup, and the evident strength of the Maoist guerrillas — continue however to be a matter of concern.

Economic Growth

Ever since 2002–03, on the back of a recovery in manufacturing activity, the rate of growth of nonagricultural GDP has strengthened considerably from 5.5% in 2000–01 to 6.9% in the following year and thereafter to 8.0% in 2003–04 and 8.5 % in 2004–05.

The Advance Estimates of the Central Statistical Organisation (CSO) for 2004–05 released on February 7, 2005 estimated GDP growth in the year at 6.9 per cent. The revised numbers are due to be released on June 30, 2005 and it is expected that with slightly stronger than expected agricultural output, the overall growth number may rise to 7.0 per cent. At Table 1.1, we present the overall growth numbers, as well as their sectoral decomposition between 1993–94 and 2004–05. It may be observed that ever since 2002–03, on the back of a recovery in manufacturing activity, the rate of growth of non-agricultural GDP has strengthened considerably from 5.5 per cent in 2000–01 to 6.9 per cent in the following year and thereafter to 8.0 per cent in 2003–04 and 8.5 per cent in 2004–05. Table 1.1

Sectoral annual growth rates in the decade post-reform

Year ending March 31	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005*

GDP at factor cost	5.9	7.3	7.4	7.8	4.8	6.6	6.0	4.4	5.8	4.0	8.2	7.0
Agriculture & allied activities	4.1	5.0	−0.9	9.6	−2.4	7.1	0.5	−1.4	6.8	−5.2	9.1	1.8
Non-agriculture	6.7	8.5	10.9	7.1	7.6	6.4	8.1	6.3	5.5	6.9	8.0	8.5
Of which: Industry	5.2	10.2	11.7	7.0	4.3	3.4	5.3	6.5	3.3	6.4	6.7	7.6
Services	7.7	7.1	10.4	7.2	9.8	8.2	9.7	6.2	6.6	7.1	8.7	8.9
Memo items
Manufacturing — registered and unregistered	8.5	12.0	14.9	9.7	1.5	2.5	4.4	7.1	3.7	6.2	7.3	8.9
Trade, hotels, transport, & communication	7.1	10.4	13.3	7.8	7.7	7.1	8.3	7.8	8.6	7.0	11.2	11.3
Finance, insurance, real estate & business services	13.4	5.6	8.2	7.0	11.6	8.4	9.6	3.5	4.5	8.8	6.8	7.1
Community, social & personal services	3.5	3.2	7.9	6.3	11.7	9.9	12.1	6.1	5.3	5.8	6.0	6.1

Note: * Expected revised estimates due for release at the end of June 2005, and based on Advance Estimates for 2004–05 released in February 2005 and the subsequent known data.
Source: Data for all years from Central Statistical Organisation (CSO), various press notes up to February 8, 2005.

As we have consistently argued in these columns, the year-to-year volatility of the agricultural sector serves to mask the real changes in the economy.

The arithmetical reason underlying the weakness in growth for most years since 1997–98 has derived from a combination of weak agricultural out-turn following on a wayward monsoon, and a sustained slackness in manufacturing output growth between 1997–98 and 2001–02, with the exception of one year, that is, 2000–01. It may be readily seen that the weakness in manufacturing was the principal factor behind the prolonged slowdown in economic growth since 1997–98, which was broken only in 2001–02. As we have consistently argued in these columns, the year-to-year volatility of the agricultural sector serves to mask the real changes in the economy. Thus, a recovery in the farm sector in 1998–99 pushed overall growth to 6.6 per cent, despite anaemic manufacturing growth of 1.5 per cent. Likewise in 2000–01, notwithstanding a recovery in manufacturing, overall economic growth was depressed to 4.4 per cent, in part because of negative growth in agriculture and in part because of a change in the treatment of how value added is measured in the state owned mutual fund business (Unit Trust of India). Again, despite strong performance in the industrial and services sectors in 2002–03, overall growth was a niggardly 4.0 per cent entirely because of a negative growth of 5.2 per cent in the farm sector. Tracking the rate of growth of the non-agricultural sector thus, as we have consistently argued, serves to provide a clear picture of what is happening to the economy.

The rate of growth for the previous twelve quarters, at the aggregate and sectoral levels, including an estimate for the fourth quarter of 2004–05, is provided at Table 1.2. Table 1.2

Sectoral quarterly growth rates—year-on-year basis

	2002–03				2003–04				2004–05

	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4*

GDP at factor cost	5.2	5.6	1.8	3.7	5.6	8.8	11.0	8.2	7.6	7.1	6.2	7.4
Agriculture & allied activities	−1.2	−4.7	12.1	−6.3	0.1	7.2	18.2	10.5	3.3	−0.8	−1.1	2.3
Non-agriculture	7.2	8.2	7.4	6.7	7.2	9.2	8.6	7.7	8.8	8.7	8.8	8.5
Of which: Industry	5.5	7.5	7.1	6.4	6.0	6.3	6.3	7.9	7.4	9.1	8.9	7.2
Services	8.1	8.6	7.5	6.9	7.8	10.7	9.9	7.6	9.5	8.5	8.8	9.2
Memo items
Manufacturing—registered and unregistered	4.3	7.0	7.1	7.3	6.1	6.9	7.0	7.6	8.9	10.8	10.4	9.2
Trade, hotels, transport, & communication	9.5	10.5	9.4	7.7	8.0	10.4	13.6	13.8	11.0	11.6	10.5	10.5
Finance, insurance, real estate & business services	9.4	9.6	8.5	7.5	6.4	7.2	7.5	8.5	7.0	7.0	8.1	8.3
Community, social & personal services	4.1	4.1	3.2	5.1	9.0	14.9	5.	−3.1	9.3	4.5	5.8	6.0

Note: * Estimated. Previous quarters subject to revision.
Source: CSO, Quarterly Estimate of Gross Domestic Product —Press Notes up to March 31, 2005.

The South-west (SW) monsoon in the current year is making slow progress and fears have been expressed that rainfall would be short and the resultant effect on the farm sector would be adverse and therefore some agencies have rushed to the conclusion that overall economic growth would stumble quite significantly.

First, it is early days yet. Every year the SW monsoon departs slightly from its statistical average course. That does not necessarily mean inadequate rainfall. Second, even if there is indeed some inadequacy in precipitation, the effect on the kharif crop is uncertain, for what matters as much as the total of precipitation is the distribution of rain over the season. Third, unless the shortfall is dramatic (as for instance in 2002), the negative impact if any, may not necessarily be significant, considering that over half the arable land (and more than that in terms of production) is irrigated and the dynamics of the winter (rabi) crop, which is mostly irrigated, do not necessarily follow from the SW monsoon. Finally, as we should have learnt from the experience in 2002, even one of the worst monsoons in recent memory failed to make a significant dent in the level of expansion of industrial and service sector output.

The upshot is that in looking at the outlook for economic growth, one must take explicit cognizance of the fast growing and more stable trajectory of growth of the non-agricultural sector, quite separately and distinct from what happens to agriculture. Undoubtedly there are linkages between what happens in the farm sector and in the rest of the economy, but they are not that significant. Further, the dominant factor defining what linkage truly exists, is likely to be influenced by the fact that the geographical sub-set of agriculture that makes up a disproportionately large share of the rural market for manufactures and other modern services, namely the richer farm belts of north-western India, and some of the fertile southern deltaic and commercial crop growing regions, are relatively insulated from the vagaries of the monsoon. Thus, the economic cost of a weak SW monsoon is most likely to be significantly smaller than the human cost as farmers in arid and semi-arid regions are hard-pressed by the paucity of rainfall.

Outlook for 2005–06

If however the SW monsoon turns out to be much below normal, it is likely that farm sector output growth would turn out to be close to flat, rather than being negative. Unless that is the monsoon failure is of devastating proportions.

Growth in the farm sector in 2003–04 was exceptionally high as there was a rebound from the precipitous decline in the previous year. Belying expectations in 2004–05, farm sector output despite not such a good monsoon, was expected to increase by 1.1 per cent in the Advance Estimates, and since farm output numbers estimated at the end of March appear to be stronger, this may be raised to as much as 1.8 per cent. Even with a normal SW monsoon in 2005, given that farm sector output has grown at an average pace of nearly 2.5 per cent over the past four years, it should not have been a surprise if growth in the current fiscal was in the region of 1.5 per cent, since the trend rate of growth since the mid-1990s has been below 2 per cent. The injection of much higher volumes of bank credit into the farm sector over the past year is an off-setting factor through a combination of higher inputs and a superior cropping pattern. It is however too early to assess the benefits attendant on credit injection, but it makes the adoption of 1.5 per cent growth in the farm sector a more conservative estimate than otherwise. If however the SW monsoon turns out to be much below normal, it is likely that farm sector output growth would turn out to be close to flat, rather than being negative. Unless that is the monsoon failure is of devastating proportions. In this context it may be recollected that the Indian Meteorological Department (IMD) has predicted a near normal SW monsoon and there has been no indications that they are considering a revision in their assessment made as recently as May 2005. We therefore proceed with a base case scenario of 1.5 per cent growth in the GDP arising in agriculture & allied activities.

Our estimates for the different components of industry and services are based on a combination of the trends apparent over the past several quarters. Industrial output expansion in April 2005, the first month of the fiscal, was very strong with manufacturing output growing by 10 per cent. The present phase of industrial output expansion began in July 2002 and it has completed 34 months in April 2005. Following economic reforms, the phase of rapid manufacturing output expansion began in July 1993 and lasted till August 1996 — a period of 38 months [see Chart 1]. Chart 1Expansion of Manufacturing Output and GDP Growth

Indian businesses, having experienced the pitfalls of unrestrained balance sheet expansion through high leverage, and assisted by generous lending from financial institutions and easy financing from capital markets, have exercised far greater caution in the current phase of expansion.

The first phase of rapid expansion of manufacturing output between mid-1993 and mid-1996 petered out by way of a combination of low international commodity prices arising from the disintegration of manufacturing enterprises in the former Soviet Union, unrestrained capacity expansion by domestic businesses that failed to appreciate how they would be impacted by domestic and international competition and the Asian currency crisis that was to follow shortly thereafter settling commodity prices to very low levels. External conditions today are far more comfortable and world commodity prices are at unprecedented high levels. There exists no destabilising source of supply like the collapsing state enterprises in the former Soviet Union and capacity creation in the rest of the world has been very restrained, the result of which we are seeing in the escalation of commodity prices today. Indian businesses, having experienced the pitfalls of unrestrained balance sheet expansion through high leverage, and assisted by generous lending from financial institutions and easy financing from capital markets, have exercised far greater caution in the current phase of expansion. Banks and the capital market have also exercised greater circumspection in financing capital plans. In consequence, the structural weaknesses that accompanied the first phase of expansion of manufacturing output in the post-reform period are absent today.

While export demand continues to be fairly strong, given the slowing in evidence in advanced economies, it would not be surprising that in 2005–06 the pace of export growth may turn out to be weaker than in the previous year. Domestic demand growth however continues to be strong, as evidenced by the rapid expansion of non-oil import demand (over 50 per cent in April 2005). On the whole, constraints are unlikely to rise from the demand side to the extent that it would end the on-going phase of manufacturing output expansion. However, supply side constraints — from infrastructure in general, and electricity in particular, as well as the availability of mineral resources (and its price)—can act as a dampener. With company profitability still rising, balance sheets healthy and excess manufacturing capacity reduced to the bare minimum (in most sectors), investment activity is likely to add to the demand facing the domestic economy.

Thus, while we do not expect manufacturing activity expansion to collapse as it did after August 1996, or for that matter after the short (12-month) period of expansion between May 1999 and April 2000, it would not be unreasonable to expect a moderation in the pace of expansion. Accordingly, we have factored in manufacturing growth of 7 per cent in the base case, with an upside potential of averaging 8 per cent, provided investment kicks in on a fairly broad basis, particularly in infrastructure. While construction activities ought to receive a fillip during this fiscal from the rolling out of known investment projects, mining and power are unlikely to exceed the growth of last year. The service sector is expected to grow at a pace slightly slower than that of last year, as the telecommunication sector expands on a much enlarged base.

This gives us a projected growth 6.7% in the base case, with an upside of 7.2%. The latter is contingent on a faster rollout of investment projects and a slightly improved performance in agriculture.

This gives us a projected growth of 6.7 per cent in the base case, with an upside of 7.2 per cent. The latter is contingent on a faster rollout of investment projects and a slightly improved performance in agriculture. If the SW monsoon turns out to be much weaker than has been expected and agricultural GDP remains more or less flat, the base case situation would drop to about 6.4 per cent and the upside would be correspondingly reduced to 6.7 per cent.

However, we do not see enough evidence to warrant such a conclusion and place 2005–06 expected GDP growth at between 6.7 and 7.2 per cent.

Official forecast

The Reserve Bank of India (RBI) in its Annual Policy Statement of April 28, 2005, has placed growth in the current fiscal at “around 7 per cent”, on the basis of expectations of a normal monsoon and agricultural growth of “around 3 per cent”.¹

¹Para 51, Annual Policy Statement for the Year 2005–06 by Dr. Y. Venugopal Reddy, Governor, Reserve Bank of India, April 28, 2005.

World Crude Oil Prices

Benchmark crude prices have hovered around $50–55 per barrel (/bbl), and on the odd day dropping below the $50-mark, but not by much. Both the OPEC seven-crude basket and the Dubai-Oman heavy sour have ruled a few dollars lower, on the rare occasion dropping just below $45/bbl, but for the most part hovering around the $50 mark.

High crude prices reflect the strength of demand across the world, but particularly in the emerging economies of Asia, especially China and India. On the supply side, there is little spare capacity available and potentially the largest addition, namely Iraqi crude, is still to flow in any sizeable quantity. Crude oil prices, beginning March 2002 for spot Nymex (New York Mercantile Exchange) are plotted at Chart 2.1. Chart 2.1Crude Prices-Nymex US$ per barrelDaily prices for one-month deliveries (spot) from March 2002 to June 2005Note: A barrel is a measure of volume, and therefore the density of the crude governs the volume to weight relationship. Little over 7 barrels make a metric tonne.Source: Department of Energy, US government.

Generally, future prices are lower than spot, especially when prices are at relatively high levels. However, ever since the second half of 2004, it has been the opposite with future prices persistently staying above spot prices, reflecting the market's perception that demand is strong and the supply side very tight indeed.

Oil market dynamics are complicated by crude oil futures being an attractive object of investment. Market expectations are reflected in the contango nature of the market, with forward prices consistently ruling well over spot prices. This is known in the parlance as a contango market. Generally, future prices are lower than spot, especially when prices are at relatively high levels. That is, the market expects supply to respond to elevated prices (or demand to weaken), thereby bringing about a reduction in market clearing prices. However, ever since the second half of 2004, it has been the opposite with future prices persistently staying above spot prices, despite the relatively very high level of spot prices, reflecting the market's perception that demand is strong (even at these prices) and the supply side is very tight indeed, pre-conditions that make the OPEC cartel work most smoothly and high prices to rule in consequence. At Chart 2.2, the difference between the spot and 4-month forward price for Nymex crude has been plotted. The area above the X-axis, that is where there is a premium in future prices, reflects the contango market. The area below the X-axis where future prices are at a discount over spot is the “normal” market. Chart 2.2Difference between Spot and 4-month Future Contract Price for NymexSource: Department of Energy, US government.

Normally future prices have approached or exceeded the spot prices at times when the spot price was at very low levels. Thus between July 1997 and February 1998 when international crude oil prices fell to below $15/bbl, future prices were higher, as markets expected an end to the Asian currency (and other) crisis and a return to normalcy. In the months that followed the September 11, 2001 terror attacks on the USA, crude oil prices plummeted and future prices went above spot, again as markets expected a return to normalcy. As crude oil prices rose through 2003 and most of 2004, the spot-future price structure remained normal with future prices at a discount, reflecting expectations of a correction, that is, a softening in spot prices. However, by November 2004, future prices began to stay ahead of spot (as spot weakened for some time) and continued ahead, even as spot started rising. The only interpretation that informed market players are confident of is that basic demand and supply situation will ensure the maintenance of high prices for some time to come. At Chart 2.3, we have plotted the discount/premium between spot and future prices since the beginning of 1997, with the spot price on the left-hand scale (LHS) and the premium/discount on the right hand scale (RHS). As is evident, in periods when spot prices fell to historical lows there was a forward premium and vice versa. Except for the past six months, when despite very high spot prices, the future prices remained at a premium. Chart 2.3Spot and Future Premium/Discount for Nymex—from January 1997 onwardsUnit: US$ per barrelSource: Department of Energy, US government.

Recent Developments

On June 14, 2005 at the OPEC meeting two significant statements were made. First that OPEC had moved its “target” price for crude oil to $50/bbl and second that meeting fourth quarter 2005 world demand would strain both crude production capacity in OPEC and refining capacity world wide. It may be recalled that OPEC has for quite some time maintained silence about what its “target” price was. There was a time that this price was acknowledged to be around $25/bbl, and later raised to under $30/bbl. There have been some doubts expressed about to what extent world demand would be affected by high crude oil prices in the $40 plus range.

The warning about fourth quarter tightness has helped crude prices to surge ahead with the week closing with Nymex at $58.47/bbl and UK Brent at $57.76/bbl.

However, the way that the demand for refined petroleum products has held up in the face of average crude oil prices in the $45–55/bbl range has certainly formed the foundation of the new target price of $50/bbl. The warning about fourth quarter tightness has helped crude prices to surge ahead following on the announcement with the week closing with Nymex at $58.47/bbl and UK Brent at $57.76/bbl. It would not be unreasonable to expect that these benchmark crudes would now move within a range of $55–60/bbl, instead of the $50–55/bbl over the past several months. Nymex spot closed on June 17, 2005 at a record level of $58.47/bbl and the 4-month forward (October 2005) delivery price crossed the $60-mark to close at $60.04/bbl. The price for December 2005 delivery was $60.43/bbl.

Balance of Payments Position

While the balance of payments data for the fourth quarter is not yet available, for the year as a whole the current account is likely to be in deficit to the extent of $10 to 12 billion, that is, 1.4 to 1.7% of GDP.

Surging merchandise imports, both oil and non-oil, have brought about a reversal in the current account from a positive balance to a deficit. Since 2000–01 the current account has been in positive territory and it had increased to $10 billion (0.8 per cent of GDP) in 2003–04. In fiscal 2004–05, even as exports did quite well, a rapid increase in imports has brought the reappearance of a sizeable current account deficit from the second quarter of 2004–05, which was repeated in the third quarter. While the balance of payments (BoP) data for the fourth quarter is not yet available, for the year as a whole the current account is likely to be in deficit to the extent of $10 to 12 billion, that is, 1.4 to 1.7 per cent of GDP.

The data released by the Director General of Commercial Intelligence & Statistics (DGCI&S) show that in 2004–05, both imports and export grew faster than they had in the previous year. Imports rose by 38 per cent, compared to 27 per cent in the previous year. Exports rose by 27 per cent in 2004–05, compared to 22 per cent in 2003–04. The merchandise trade deficit nearly doubled to $27 billion.

However, BoP imports have been reported to be significantly higher than that reported by the DGCI&S. In the normal course BoP imports are higher than that reported by the DGCI&S by about $1 to 2 billion, mostly on account of government (defence and other departmental) purchases that do not pass through customs and hence are not captured by the DGCI&S. However, in the second and third quarters of 2004–05, the gap widened to $4.5 and 5.5 billion, respectively. This has resulted in considerable divergence between the trade deficit as reported by the DGCI&S and in the BoP. For the first nine-month period (April to December 2004), the merchandise trade deficit as per DGCI&S stood at about $20 billion, while the BoP showed a deficit of $28 billion. Assuming that the divergence will persist into the fourth quarter of 2004–05, as against the DGCI&S reported trade deficit of $27 billion, we expect one of $40 billion. In the event that the difference is not expressed in the fourth quarter, the BoP trade deficit would be lower at $35 billion. In consequence the current account deficit would be proportionately smaller at under 1 per cent of GDP.

At Table 2, is a summary of the BoP for calendar years 2003 and 2004. Notable are:

A very sharp expansion in merchandise imports (42 per cent) that outstripped the strong increase in exports (31 per cent), leading to a near-doubling (79% increase) of the trade deficit;

125 per cent increase in the net balance on miscellaneous general services;

48 per cent reduction in the net negative balance in investment income;

Stable private remittances at about $22 billion annually.

Even as the positive balance of net invisibles increased by $5 billion or by 21 per cent, the $13 billion increase in the merchandise trade deficit converted the surplus of $6.9 billion in the current account to a deficit of $1.5 billion. Table 2

Major Balance of Payments Aggregates

Calendar years 2003 and 2004

Unit: US $ million

	January–December 2003			January–December 2004

	Credit	Debit	Net	Credit	Debit	Net

Merchandise Trade	59,339	75,710	−16,371	77,814	107,640	−29,826
Total Invisibles	50,009	26,786	23,223	67,306	39,078	28,228
of which:
Travel & Transportation	6,949	6,117	832	8,719	9,182	−463
Misc. General Services	15,734	11,475	4,259	29,929	20,305	9,624
Of which: software	11,282	465	10,817	15,247	659	14,588
Private remittances	22,311	345	21,966	21,601	457	21,144
Investment income*	3,647	7,640	−3,993	4,866	6,935	−2,069
Current Account Balance	109,348	102,496	6,852	145,120	146,718	−1,598
Foreign Investment	24,774	13,298	11,476	43,247	31,301	11,946
O/w Direct Investment**	4,773	1,513	3,260	5,422	2,309	3,113
Portfolio Investment	21,788	13,921	7,867	37,825	28,992	8,833
Loans (incl. Bonds)	17,776	22,903	−5,127	28,703	21,080	7,623
Banking Capital	21,189	9,910	11,279	13,951	11,833	2,118
“Other” capital	5,595	1,756	3,839	6,959	3,615	3,344
Total Capital Account	69,634	51,003	18,631	92,860	68,198	24,662
Overall Balance of Payments	179,471	153,807	25,664	238,635	215,080	23,555

Note: * After adjustments made for re-invested earnings of foreign owned companies operating in India and net of direct investments of Indian owned companies overseas.
**Including re-invested earnings as above.
Source: Statement 40, India's Balance of Payments in Dollars, Monthly Bulletin, Reserve Bank of India, previous issues up to May 2005.

Capital Account

The total capital account surplus in 2004 at $24.7 billion was $7 billion higher than in the previous year, resulting in an overall BoP surplus of $23.6 billion, which was a decrease by over $2 billion from that of the previous year, flowing from the conversion of the surplus to a deficit in the current account.

As may be observed from Table 2, foreign direct investment (FDI) inflows in 2004 were at the same level as in 2003, while portfolio flows continued to remain strong and about 11 per cent higher in 2004. Inflows on account of loans (including multilateral and bilateral loans) and issue of bonds turned from a large net negative number in 2003 to a sizeable positive figure in 2004. The total capital account surplus in 2004 at $24.7 billion was $7 billion higher than in the previous year, resulting in an overall BoP surplus of $23.6 billion, which was a decrease by over $2 billion from that of the previous year, flowing from the conversion of the surplus to a deficit in the current account.

Invisibles

At Table 3.1, the pattern of expansion of key elements in the category “Invisibles” which include both the export of services, as well as the flow of factor income, is presented. At Table 3.2, key elements of the BoP for the previous nine quarters are reported. Earnings from export of software services show consistent year-on-year growth in excess of 30 per cent in previous years and over 40 per cent in 2004–05, while the export of services other than software (miscellaneous general services less software) shows erratic, but strong growth nevertheless. Remittances have shown negative growth in the second and third quarters. Table 3.1

Changes in Key Items of Invisible Earnings on a Quarterly Basis⁺ Total Value and Change^† 2000–01, 2001–02, 2002–03, 2003–04 and 2004–05

Unit: US dollar millions

		Fiscal Year ending March 31	Q1 (Apr–Jun)		Q2 (July–Sep)		Q3 (Oct–Dec)		Q4 (Jan–Mar)

			$ million	Change	$ million	Change	$ million	Change	$ million	Change

Miscellaneous General Services, including Software & Expenses of overseas branches of Indian companies	Credit	2001	2,039		2,306		2,486		2,973
		2002	3,273	61%	2,448	6%	2,574	4%	2,741	−8%
		2003	3,712	13%	3,274	34%	3,494	36%	3,773	38%
		2004	3,611	−3%	4,052	24%	4,298	23%	4,904	30%
		2005	8,397	133%	7,315	81%	9,313	117%
	Debit	2001	1,217		1,467		2,254		2,734
		2002	1,405	15%	1,824	24%	1,514	−33%	2,029	−26%
		2003	2,762	97%	1,954	7%	1,628	8%	3,585	77%
		2004	2,693	−2%	3,575	83%	1,622	0%	4,051	13%
		2005	4,822	79%	4,937	38%	6,495	300%
	Net	2001	822		839		232		239
		2002	1,868	127%	624	−26%	1,060	357%	712	198%
		2003	950	−49%	1,320	112%	1,866	76%	188	−74%
		2004	918	−3%	477	−64%	2,676	43%	853	354%
		2005	3,575	289%	2,378	399%	2,818	5%
Of which Software Services	Net	2001	1,198		1,611		1,421		1,520
		2002	1,700	42%	1,683	4%	1,770	25%	1,731	14%
		2003	1,963	15%	2,054	22%	2,415	36%	2,431	40%
		2004	2,544	30%	2,750	34%	3,092	28%	3,364	38%
		2005	3,866	52%	4,021	46%	4,336	40%
Remittances of overseas Indians	Net	2001	3,141		2,608		4,088		3,017
		2002	5,130	63%	3,047	17%	3,215	−21%	4,006	33%
		2003	3,551	−31%	3,957	30%	4,073	27%	4,806	20%
		2004	4,798	35%	6,472	64%	5,890	45%	5,673	18%
		2005	6,084	27%	4,605	−29%	4,782	−19%
Investment Income	Net	2001	−1,721		−941		−1,013		−989
		2002	−1,040	−40%	−731	−22%	−1,049	4%	−1,024	4%
		2003	−1,025	−1%	−626	−14%	−1,218	16%	−675	−34%
		2004	−783	−24%	−515	−18%	−2,020	66%	27	nm
		2005	−636	−19%	−808	57%	−632	−69%
Total of all Invisibles	Net	2001	930		2,331		4,033		2,500
		2002	5,094	448%	2,356	1%	3,495	−13%	4,029	61%
		2003	3,196	−37%	4,271	81%	5,135	47%	4,433	10%
		2004	4,929	54%	6,621	55%	7,240	41%	7,225	63%
		2005	8,902	81%	5,770	−13%	6,331	−13%

Note: ⁺Revised numbers, except Oct-Dec 2004, which is provisional. The numbers in the table also incorporate the large scale revision of BoP data released in September 2004 going back to Apr-Jun 2000.
^†The change is the variation with respect to the same quarter in the previous year.
Source: As in Table-2 above.

table 3.2

Net position—Major Balance of Payments Aggregates; +Previous Nine Consecutive Quarters

Unit: US $ million

	2002–03		2003–04				2004–05

	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3

Merchandise Trade	−3,781	−2,386	−5,565	−3,795	−4,625	−1,470	−6,711	−9,844	−11,801
Total Invisibles	5,135	4,433	4,929	6,621	7,240	7,225	8,902	5,770	6,331
Of which:
Travel & transportation	199	−111	76	218	649	597	−81	−412	−567
Misc. General Services	1,866	188	918	477	2,676	853	3,575	2,378	2,818
O/w Software	2,415	2,431	2,544	2,750	3,092	3,364	3,376	3,512	4,336
Private remittances	4,073	4,806	4,798	6,472	5,890	5,673	6,084	4,605	4,782
Investment income	−1,218	−675	−783	−515	−2,202	27	−656	−808	−632
Current Account Balance	1,354	2,047	−636	2,826	2,615	5,755	2,191	−4,014	−5,470
Foreign Investment	1,421	1,362	2,097	3,025	4,992	4,662	801	1,409	5,074
O/w Direct Investment	676	769	721	889	881	929	720	979	485
Portfolio Investment	745	593	1,376	1,787	4,111	3,733	81	430	4,589
Loans (incl. Bonds)*	248	−2,269	960	1,036	−4,854	10	3,232	1,449	2,932
Banking Capital	3,009	3,012	1,931	2,716	3,620	380	1,094	−1,002	1,646
Other capital	262	90	1,334	1,185	1,230	−990	300	1,438	2,596
Capital Account Balance	4,940	2,079	6,021	5,544	4,987	3,990	5,150	3,292	12,230
Overall BoP Balance	6,082	4,314	5,464	8,592	7,294	10,071	7,524	−634	6,594

Note: ⁺Revised numbers, except Oct–Dec (Q3) 2004–05, which is provisional. The numbers in the table also incorporate the large scale revision of BoP data released in September 2004 going back to Apr–Jun 2000.
* This category includes external assistance.
Source: As in Table-2 above

Oil Import Bil—position in 2004–05

The oil import bill in 2004–05 stood at $29.1 billion, which was $9 billion or 41 per cent higher than that of the previous year. Indian refineries however export surplus refined petroleum products and on net basis, the oil import bill was about $25 billion in 2004–05, nearly 49 per cent higher than in the previous year.

Current Account Outlook for 2005–06

In the first two months of the year, imports rose by 41 per cent, while exports increased by 20 per cent. In consequence the trade deficit doubled to $7.2 billion, from $3.6 billion in the corresponding period of the previous year. In 2004–05, in the first half DGCI&S exports had risen by 32 per cent, while exports had risen by 38 per cent. In the second half of the year export growth had dropped to 17 per cent, but imports had continued to increase at the brisk pace of 33 per cent. The same pattern was in the evidence in the first two months of 2005–06. As has been noted earlier, the increase in non-oil imports has been as strong as that of total imports.

This basically implies that domestic demand for exports will continue to rise strongly on the back of favourable underlying economic conditions. Export growth on the other hand will be the outcome of a mix of factors:

Demand in overseas markets;

Cost competitiveness vis-à-vis our competitors;

Further intensification of the process of manufacturing outsourcing and our place in it.

Degree of success in navigating choppiness in trade relations and in currency markets, as also easing infrastructural shortages at home that constrain the movement of goods.

With safeguard textile quotas in place in the US with respect to Chinese exports, and similar restrictions in the EU, Indian exporters need to be sensitive to the pitfalls that abound in the post-MFA regime.

Most OECD member nations that account for a significant share of our exports [see Tables 8.3 & Tables 8.4] are not in the best of economic health, especially those in the Euro area and in Japan. Flagging domestic demand in these economies cannot but be bound to adversely impact import demand. However, that could increase the pressure to compress supply prices and hence drive imports from low cost producing centres. This process will be facilitated by the demise of textile quotas arising from the MFA (Multi-Fibre Arrangement). But how much of this opportunity Indian exporters can seize will depend on their relative costs and other measure of competitiveness, such as quality and delivery time standards. With safeguard textile quotas in place in the US with respect to Chinese exports, and similar restrictions in the EU, Indian exporters need to be sensitive to the pitfalls that abound in the post-MFA regime. China's currency regime and purported tax subsidies on exports have and are going to come under increasing scrutiny. It will serve us well if we learn constructively from this experience and cease to look at fiscal breaks in order to service exports.

Higher imports are also to an extent driven by the rate of export expansion, to the extent that many items of export have a very large import component. Keeping these in mind, we have examined various scenarios for 2005–06 with export growth ranging between 10 and 20 per cent and import growth ranging between 20 and 40 per cent. The most likely merchandise trade deficit that emerges from this exercise is $45 billion. This estimate would correspond to the DGCI&S trade data. The extent of deviation of the DGCI&S import data and that in the BoP in 2004–05 probably derives from government purchases and the dimension of this category is not possible to anticipate in 2005–06, especially since these involve advance payments in many cases. We have assumed, for want of anything better, that BoP merchandise trade deficit would be higher by $5–10 billion in 2005–06, which means an expected merchandise trade deficit in the BoP of $50–55 billion. This translates to 6.3–6.9 per cent of expected GDP in 2005–06.

We have assessed likely growth in miscellaneous general exports (which includes software) to be in excess of 30 per cent, that in private remittances to be in excess of 20 per cent and net investment income outflows to rise by 50 per cent (on the back of higher loans/bonds incurred in the previous years and little further accretion to official foreign currency assets). That gives us a range for net invisibles from $34 to 38 billion. The resultant current account deficit (CAD) for 2005–06 is thus assessed to be likely to be around $17 billion, that is, 2.1 per cent of expected GDP. With capital account surpluses around $20 billion in the past couple of years, financing this magnitude of CAD should not be difficult.

More pertinently, with a CAD relatively close to the size of the capital account surplus, two consequences are likely to emerge:

The real absorption by the domestic economy of the foreign savings availability that the capital account represents;

Favourable conditions for a market clearing exchange rate with reduced intervention of the central bank.

Foreign Investment

Further liberalisation of the FDI regime in a host of areas from infrastructure to retail to the financial sector to realty, and a general improvement in the domestic regulatory climate can result in significantly higher levels of FDI, with attendant benefits on technology absorption, efficiency and greater market access.

Fresh net foreign direct investment (FDI) inflows, in 2004–05 up to February 2005, stood at $3 billion, which is a significant increase of 47 per cent from the $2.0 billion in the corresponding period of last year [see Table 3.3]. Further liberalisation of the FDI regime in a host of areas from infrastructure to retail to the financial sector to realty, and a general improvement in the domestic regulatory climate can result in significantly higher levels of FDI, with attendant benefits on technology absorption, efficiency and greater market access. Table 3.3

Inward foreign investment — stock and changes

Unit: US dollars millions

As on 31 Mar	For the year/month					Cumulative

	FDI	Portfolio flows			Total foreign inv.	FDI	Portfolio flows			Total foreign inv.

		Overseas Issuance	FII	Sub-total			Overseas Issuance	FII	Sub-total

1993	315	240	1	244	559	541	240	1	244	785
1994	586	1,520	1,665	3,567	4,153	1,127	1,760	1,666	3,811	4,938
1995	1,314	2,082	1,503	3,824	5,138	2,441	3,842	3,169	7,635	10,076
1996	2,144	683	2,009	2,748	4,892	4,585	4,525	5,178	10,383	14,968
1997	2,821	1,366	1,926	3,312	6,133	7,406	5,891	7,104	13,695	21,101
1998	3,557	645	979	1,828	5,385	10,963	6,536	8,083	15,523	26,486
1999	2,462	270	−390	−61	2,401	13,425	6,806	7,693	15,462	28,887
2000	2,155	768	2,135	3,026	5,181	15,580	7,574	9,828	18,488	34,068
2001	4,029*	831	1,847	2,760	6,789	19,609	8,405	11,675	21,248	40,857
2002	6,130*	477	1,505	2,021	8,151	25,739	8,882	13,180	23,269	49,008
2003	5,035*	600	377	979	6,014	30,774	9,482	13,557	24,248	55,022
2004	4,673*	459	10,918	11,377	16,050	35,447	9,941	24,475	35,625	71,072
2005
2004–05: monthly data
Apr	217	35	846	881	1098	217	35	846	881	1,098
May	217	135	−457	−322	−105	434	170	389	559	993
June	380		−477	−477	−97	814	170	−88	82	896
July	173		−432	−432	−259	987	170	−520	−350	637
Aug	601		448	448	1049	1,588	170	−72	98	1,686
Sept	282		411	411	693	1,870	170	339	509	2,379
Oct	214		807	807	1,021	2,084	170	1,146	1,316	3,400
Nov	186	224	2,808	3,032	3,218	2,270	394	3,954	4,348	6,618
Dec	316		746	746	1,062	2,586	394	4,700	5,094	7,680
Jan	152	48	−231	−183	−31	2,738	442	4,469	4,911	7,649
Feb	238		2,390	2,390	2,628	2,976	442	6,859	7,301	10,277
Mar

Note: * Adjusted as per new method relating to estimation of foreign direct investment.
Source: Monthly Bulletin, Reserve Bank of India, Statement No 46, S-815, June 2005.

Overseas issuance in the form of Global Depository Receipts (GDR) and American Depository Receipts (ADR) in the first eleven months of 2004–05, has been at about the same level as in the corresponding period of the previous year (little under $0.5 billion). Investment made in Indian securities by Foreign Institutional Investors (FIIs) in the first eleven months of 2004–05 stood at $6.9 billion, which was a reduction of 24 per cent from that in the corresponding period of the previous year ($9.1 billion).

FII net purchases of Indian securities in the January-March quarter of 2004–05 stood at $3.8 billion, which was 34 per cent higher than in the corresponding period of the previous year. However, in the first quarter of 2004–05 net purchases by FII were a colossal $7.8 billion-concentrated in April and early-May, prior to the general elections. In 2005–06, the first quarter has seen FIIs book profits with net purchases at −$0.46 billion (till June 17, 2005).² The rally in stock prices from the end of April, through May and till mid-June in 2005, seems to have been driven by domestic investors and in the absence of large net buying interest by FIIs, though there has been fresh purchases since the middle of June. For the record net purchase by FIIs was −$0.3 billion in both April and May 2005 and +$0.2 billion in June till the 17^th of the month.

² Participation by FIIs in ADS (sponsored American Depository Receipts in ICICI and Infosys) may have been a factor behind the negative net purchases, which do not therefore reflect a decline in buying interest, given the significant premium that still obtains in overseas and domestic prices of most Indian scrips. However, the fact is that large scale fresh buying was in evidence in the first quarter of 2005–06.

Non-Resident Indian (NRI) deposits with the banking system fell by $3.1 billion through 2004–05 till the end of February 2005. There was a decline of about $600 million in FCNR deposits (foreign currency denominated) and about $2.5 billion in NRE (rupee denominated) deposits. This most certainly was a consequence of stricter market-linked interest rates on such deposits and an evaporation of expectations of a rapid increase in the external value of the Indian currency. Table 3.4

NRI Deposit — stock and changes

Unit: $ million

As on March 31	As at the end of Month				Flows for the year/month

	FCNR (B)	NR(E) RA	NR(NR) RD	Total	FCNR (B)	NR(E) RA	NR(NR) RD	Total

Previous fiscal years
1995*	10,114	4,556	2,486	17,156	−294	1,033	732	1,471
1996*	9,975	3,918	3,542	17,435	−139	−638	1,056	279
1997*	9,802	4,983	5,604	20,389	−173	1,065	2,062	2,954
1998	8,468	5,637	6,262	20,367	−1,334	654	658	−22
1999	7,836	6,045	6,618	20,499	−632	408	356	132
2000	8,172	6,758	6,754	21,684	336	713	136	1,185
2001	9,076	7,147	6,849	23,072	904	389	95	1,388
2002	9,673	8,449	7,052	25,174	597	1,302	203	2,102
2003	10,199	14,923	3,407	28,529	526	6,474	−3,645	3,355
2004	10,961	20,559	1,746	33,266	762	5,636	−1,661	4,737
2005
2004–05: Monthly Data
Apr	10,889	21,251	1,630	33,770	−72	301	−150	79
May	11,020	20,272	1,500	32,792	131	−512	−95	−476
June	11,054	19,731	1,379	32,164	34	−318	−105	−389
July	11,162	19,459	1,275	31,896	129	−145	−67	−83
Aug	11,067	19,375	1,155	31,597	−119	−105	−89	−313
Sept	11,087	19,472	1,047	31,606	−119	−105	−89	−313
Oct	11,100	19,616	965	31,681	−119	−105	−89	−313
Nov	11,196	19,940	895	32,031	−119	−105	−89	−313
Dec	11,437	20,475	801	32,713	−119	−105	−89	−313
Jan	11,292	20,094	701	32,087	−119	−105	−89	−313
Feb	11,415	20,407	475	32,297	−119	−105	−89	−313
Mar

Note: * For these years FCNR (A) has been included. All figures are inclusive of accrued interest.
Source: Statement No. 45: “NRI Deposits — outstanding” RBI Bulletin, S-814, June 2005.

Foreign Currency Assets of the Reserve Bank of India

NRI deposits with the banking system fell by $3.1 billion through 2004–05 till the end of February 2005. This most certainly was a consequence of stricter market-linked interest rates on such deposits and an evaporation of expectations of a rapid increase in the external value of the Indian currency.

In the past several issues of this journal we have been reporting our estimate of the accretion to the RBI's foreign currency assets due to revaluation gains arising from the movement in cross rates of the major currencies.³ Over the past year, the RBI has also shared the composition of the sources of accretion to the foreign currency assets with the general public. At Table 3.5, we have provided our past estimates and the actual position as revealed in the eventual BoP statement. It may be observed that our previous estimates have been reasonably close to the mark, given the crudeness of the approach adopted. The estimate for the last quarter of 2004–05 and that for the first quarter up to June 3, 2005, are also provided. As the dollar recovers strength vis-à-vis the Euro, the revaluation gains are being gradually wound down. Table 3.5

Increase in the foreign currency assets of the Reserve Bank of India

Revaluation and real components

Unit: US$ million

	2003–04^†				2004–05^†				2005–06

	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4*	Q1 up to June 3, 2005

Nominal increase	6,656	8,667	10,138	10,097	6,703	−68	11,081	10,098	−2,532
Overall BoP Surplus	5,464	8,592	7,294	10,071	7,524	−634	6,594
= Real increment	5,170	8,360	7,294	10,071	7,524	−634	6,594
Implicit impact of revaluation	1,486	307	2,844	26	−821	702	4,487
Our Estimates
Real increment	5,193	7,867	7,638	10,194	7,514	−442	6,621	12,316	−98
Revaluation impact	1,463	800	2,500	−96	−811	374	4,460	−2,218	−2,434

Notes: † Figures reported in previous issues of this journal for periods up to Q1 of 2004–05-from Table 3.5, Money & Finance July-December 2004, and earlier issues
* For Q4, the foreign currency assets and rates taken as on April 1, 2005.
Sources: Exchange rates for the four currencies are from the daily noon rates of the Federal Reserve Bank of New York, Aggregate foreign currency assets of the RBI from the respective Weekly Statistical Supplements up to June 18, 2005. The foreign exchange currency assets on the last day of each quarter are from the RBI's Report on Foreign Exchange Reserves, March 31, 2005 and similar releases by the RBI earlier.

³ Since the forex assets are held in different major currencies, and the aggregate is expressed in one currency (US dollars), the nominal increase in the dollar value of foreign currency assets is always due to a combination of valuation changes and real accretion. However, the impact is significant when there is considerable change in the cross rates of major currencies, as had happened in 2002, 2003, 2004 and is continuing in 2005.

SectorsMonsoon

South-west (SW) monsoon in 2005 (June to September) is making slow and delayed progress over peninsular India as we go to press. Last year the SW monsoon was deficient to the extent of 13 per cent of the long period average, with as many as 43 per cent of districts receiving deficient rainfall. The Indian Meteorological Department (IMD), as stated earlier, had forecast “normal” rainfall. In a release dated April 20, 2005 it stated that:

“IMD's operational Long Range Forecast for the 2005 South-west Monsoon season (June-September) is that the rainfall for the country as a whole is likely to be 98% of the Long Period Average (LPA) with a model error of ±5% …. The model suggests a very high (75%) probability for the 2005 south-west monsoon season rainfall over the country as a whole to be near normal and above.”

Of course predictive models do go wrong. Explaining why in 2004 there was a deficiency of 13 per cent in rainfall when the IMD had predicted 100 per cent normal precipitation, the department said:

“Forecasts for the 2003 south-west monsoon season were accurate. However, in 2004, the realized seasonal rainfall was 87% of the Long Period Average (LPA) as against the forecast of 100% of LPA. The deficient seasonal rainfall in 2004 was due to suppressed rainfall activity in July 2004, which was caused by the unexpected development of warming in the equatorial central Pacific. No Long-range prediction group in India or abroad could correctly predict the suppressed monsoon activity in July 2004.”

SW monsoon 2005 arrived over Kerala on June 5, 2005, four days behind time and within only 0.57 times the standard deviation of seven days. However, since then monsoon activity has been weak and as we write (June 19, 2005), the monsoon's normal approach over the sub-continent is clearly delayed by between 10 and 13 days—nearly 2 times the standard deviation of the monsoon's onset. However, since June 18, there has been renewal of monsoon activity in both the Indian Ocean and Bay of Bengal, after many days of relative inactivity. Much of the actual precipitation in the season is in late June and July, so there is time for things to recover. The SW monsoon is a phenomenon often marked by a lull in monsoon activities, followed by rapid advance and then again a lull.

If the SW monsoon in 2005 does indeed play truant and rainfall turns out to be deficient, and it is the rain dependent areas in central and western India that are hit, it will still not be a second bad monsoon-where it matters most.

In 2004, a large part of the shortfall in precipitation was in the Indo-Gangetic belt that is otherwise well-watered and irrigated. Then again there were good late rains in October which improved conditions for the rabi (winter) harvest. Thus if the SW monsoon in 2005 does indeed play truant and rainfall turns out to be deficient, and it is the rain dependent areas in central and western India that are hit, it will still not be a second bad monsoon — where it matters most. However, deficient rainfall in semi-arid rain dependant areas will bring considerable hardship to the farming community, besides widespread shortage of water for drinking and hydro-power. Poor rainfall prevents groundwater levels to be recharged and will then exact a second order burden on communities that are dependant for drinking water and irrigation on bore wells.

However, it is still too early to raise an alarm — as a few have done. There is as of yet no reason to believe that the delay in the progress of the SW monsoon which is still in the upper end of the range of normal statistical variability will not indeed end up in yet another normal or near-normal seasonal precipitation.

Agriculture

The estimates for foodgrain output for 2004–05 were about 206 million tonnes (mt) in January 2005, the last time the Department of Agriculture released any numbers. It is however believed that output was indeed higher aggregating about 210 mt. Among non-foodgrain the biggest output increase was registered by cotton. Table-4.1

Output of Principal Agricultural Commodities

Unit: Million Tonnes except for cotton & index

	1998–99	1999–00	2000–01	2001–02	2002–03	2003–04	2004–05^†

Rice	86.1	89.7	85.0	93.3	72.7	87.0	87–88
Wheat	71.3	76.4	69.7	72.8	65.1	72.1	73–74
Coarse cereals	31.3	30.3	31.1	33.4	25.3	36.8	32–34
Pulses	14.9	13.4	11.1	13.4	11.1	15.2	14–15
Kharif foodgrain	102.9	105.5	102.1	112.1	87.8	112.0	103–104
Rabi foodgrain	100.7	104.3	94.7	100.8	86.4	100.0	103–106
Total of Foodgrain	203.6	209.8	196.8	212.9	174.2	212.1	206–210
Groundnut	9.0	5.3	6.4	7.0	4.4	8.3	6.5
Rape and mustard	5.7	5.8	4.2	5.1	3.9	5.8	7.6
Soybean	7.1	7.1	5.3	6.0	4.6	7.9	7.8
Total of nine oilseeds	24.8	20.7	18.4	20.7	15.1	25.1	24.8
Cotton (million 170 kg bales)	12.3	11.5	9.5	10.0	8.7	13.8	17.1
Sugarcane	288.7	299.3	296.0	297.2	281.6	236.2	234.2
Index of Agricultural Production (1981–82=100)	177.9	176.9	165.7	178.3	150.7	179.75

Note: † Foodgrain output estimates for 2004–05 are within a range defined by the January 2005 estimate released by the Department of Agriculture & Co-operation and media reports on the same at the end of March 2005 for foodgrain. For non-foodgrain crops as per the January 2005 estimate of the Department.
Sources: Department of Agriculture & Co-operation for output data up to 2004–05. Index of Agriculture Production (1981–82=100) from Economic Survey, Government of India 2004–05.

Rice output estimated at between 87 and 88 mt, about the same as last year, has seen an increase of 5 per cent in procurement. However, wheat output currently estimated at between 73 and 74 mt is also a tad above last year's production, but procurement up to May 27, 2005 is running nearly 12 per cent below that of last year. It is possible as some are concluding that output may have been much lower than estimated. It is however more likely that farmers are holding on to their stock in expectations of better market prices and private traders are making more purchases.

It is after all not a state secret that foodgrain stocks are at historical lows and much as many are quixotically disinclined to accept that price matters-farmers and merchants are rational economic entities quite open to the dynamics of demand, supply and prices. The relatively easy availability of credit to the farm sector may also have contributed to the holding power of wheat farmers who are concentrated in the richer belts of north-western India. To the extent that farmers and market intermediaries reclaim their legitimate markets from the official agencies, so much the better.

At this stage with the SW monsoon delayed any estimation of farm sector output in 2005–06 would be bound to be associated with considerable uncertainty. However, if the SW monsoon does turn out to be close to normal, albeit slightly deficient, and the deficiency is not severe in the rain-fed regions of central and western India, farm sector output is yet unlikely to be but slightly higher than that of the previous year. As stated above we do not expect farm sector output to grow by more than 1.5 per cent in the base case, and by little over 2 per cent if natural conditions — like the intra-seasonal rain distribution and soil moisture conditions — are favourable. If however, the SW monsoon turns out to be a poor one, and that too this deficiency is particularly expressed in rain-fed regions a flat to small negative growth is indeed possible, characterising the downside risk.

Industry

The electricity and mining sectors have failed to expand as fast as has manufacturing and the likelihood of these sectors posing as a constraint to manufacturing is self-evident.

As stated earlier the present phase of expansion of manufacturing output began in July 2002 and by the end of April 2005 had completed 34 months. This is almost as long as that of the longest previous expansion lasting 37 months between July 1993 and August 1996. The electricity and mining sectors have failed to expand as fast as has manufacturing and the likelihood of these sectors posing as a constraint to manufacturing is self-evident. While some items like coal are indeed tradeables and higher imports can alleviate domestic capacity problems, electricity is not a tradable commodity. Chart 3Growth in Industrial Output with respect to that 12 months agoUp to April 2005

Table 5.1

Index of Industrial Production: Growth rates (annualised) by sectors

Unit: per cent

Year	Period	General	Manufacturing	Mining	Electricity

1995–96	Full Year	13.0	14.1	9.7	8.1
1996–97		6.1	7.3	−1.9	4.0
1997–98		6.7	6.7	6.9	6.6
1998–99		4.1	4.4	−0.8	6.5
1999–00		6.7	7.1	1.0	7.3
2000–01		5.0	5.3	2.8	4.0
2001–02		2.7	2.9	1.2	3.1
2002–03		5.8	6.0	5.8	3.2
2003–04		7.0	7.3	5.2	5.1
2004–05		8.2	9.0	5.2	4.4
2001–02	Q-1	2.2	2.6	−1.6	2.2
	Q-2	2.4	2.5	−0.2	4.0
	Q-3	2.7	2.9	1.7	2.1
	Q-4	3.3	3.3	1.6	4.1
2002–03	Q-1	4.3	4.1	6.8	3.7
	Q-2	6.5	6.9	6.2	3.3
	Q-3	5.8	6.1	4.7	4.5
	Q-4	6.2	6.9	5.7	1.5
2003–04	Q-1	5.7	6.0	5.6	4.2
	Q-2	6.6	7.6	2.9	1.9
	Q-3	7.3	7.9	4.4	4.3
	Q-4	8.1	7.9	8.1	9.8
2004–05	Q-1	7.7	8.1	5.7	5.9
	Q-2	9.0	9.3	4.6	9.6
	Q-3	8.7	10.1	4.9	3.8
	Q-4	7.2	8.3	2.6	1.7
2005–06	April	8.8	10.0	3.1	3.0

Note: Quarterly growth rates are with respect to the corresponding quarter in the previous year.
Source: Central Statistical Organisation, Press Note on Index of Industrial Production, issues up to June 10, 2005.

In the present round of expansion the dispersion of output expansion at the 2-digit level has been widely spread with many sectors recording quite rapid growth

It is noteworthy that consumer goods—both durables and non-durables—have been consistent growth drivers in aggregate manufacturing output expansion.

It is noteworthy that consumer goods—both durables and non-durables—have been consistent growth drivers in aggregate manufacturing output expansion [Table 5.2]. Table 5.2

Index of Industrial Production: Growth rates (annualised) by Use-based Classification

Unit: per cent

Year	Period	Basic Goods	Capital Goods	Intermediates	Total	Consumer Durables	Goods Non-durables

Weight out of 1,000		355.65	92.57	265.14	286.64	53.65	232.99
1995–96	Full Year	10.7	5.4	19.3	12.8	25.8	9.8
1996–97		3.0	11.4	8.1	6.2	4.6	6.6
1997–98		6.5	5.8	8.0	5.5	7.8	4.9
1998–99		1.5	11.5	5.9	1.9	4.6	1.2
1999–00		6.3	8.0	9.0	6.0	15.3	3.2
2000–01		4.3	1.7	4.7	8.0	14.6	5.8
2001–02		2.4	−3.4	1.6	6.0	11.5	4.1
2002–03		4.8	10.5	3.9	7.1	−6.3	12.0
2003–04		5.5	13.6	6.4	7.0	11.6	5.8
2004–05		5.5	13.3	5.8	11.5	14.3	10.6
2001–02	Q-1	1.4	−6.0	3.3	4.8	7.4	3.9
	Q-2	2.4	−7.4	2.5	6.0	17.3	1.6
	Q-3	2.2	−0.9	0.2	6.9	11.6	5.3
	Q-4	3.7	0.6	0.4	6.2	9.6	5.1
2002–03	Q-1	5.5	5.2	0.2	6.6	−1.7	9.9
	Q-2	4.5	13.4	3.5	9.8	−10.4	18.8
	Q-3	4.5	13.3	4.5	6.3	−4.3	10.2
	Q-4	4.9	10.0	7.3	5.8	−8.2	10.4
2003–04	Q-1	4.4	8.4	2.8	8.6	4.0	11.1
	Q-2	4.2	11.6	7.1	7.3	9.3	6.7
	Q-3	5.2	10.2	9.4	6.7	13.8	4.5
	Q-4	8.0	23.0	6.1	5.6	19.0	2.0
2004–05	Q-1	4.6	13.4	10.9	7.3	12.2	4.6
	Q-2	6.4	14.1	5.1	13.0	20.3	11.8
	Q-3	6.9	13.6	4.9	13.5	13.5	13.5
	Q-4	4.3	12.3	2.9	11.9	11.3	12.1
2005–06	Apr	5.9	24.5	2.5	13.1	18.6	11.4

Note: As in Table 5.1 above
Source: As in Table 5.1 above.

In the present round of expansion the dispersion of output expansion at the 2-digit level has been widely spread with many sectors recording quite rapid growth [Table 5.3]. Table 5.3

Annualised Growth Rates for Manufacturing at the 2-digit level

Unit: per cent

Group	Description of sector	Weight in 1000	Average 1995–1998*	Average 2003–2005^†	1999–00	2000–01	2001–02	2002–03	2003–04	2004–05

The fastest growing industry groups: 10 per cent and higher
22	Beverage, tobacco etc.	23.82	15.4	15.8	7.6	4.3	12.2	27.9	8.6	10.8
35–36	Machinery (excl. transport)	95.65	9.8	12.3	17.7	7.3	1.3	1.6	15.6	19.6
37	Transport equipment & parts	39.84	10.8	11.8	5.7	−2.0	6.8	14.6	17.0	3.9
28	Paper & paper products	26.52	10.5	10.7	6.3	−9.1	3.1	6.8	15.6	9.7
26	Textile products incl RMG	25.37	17.9	10.1	2.0	4.0	2.4	14.4	−3.2	19.2
Industry groups with strong growth: Above 8 and below 10 per cent
30	Basic chemicals & chemical products	140.02	10.1	8.9	10.0	7.3	4.8	3.7	8.7	14.4
38	Others industries	25.59	25.3	8.3	−16.0	11.7	8.9	0.1	7.2	17.3
32	Non-metallic mineral products	43.97	15.0	8.0	24.4	−1.2	1.2	5.1	3.6	1.5
33	Basic metal & alloys	74.53	8.4	8.0	5.0	1.8	4.3	9.2	9.2	5.5
Industry groups with slow growth: 3 to 5 per cent
34	Metal products & parts (excl. Machinery)	28.10	8.8	5.3	−1.2	15.0	−10.0	6.4	2.6	5.8
24	Man-made fibres, wool & silk yarn	22.58	14.6	4.5	11.9	5.8	4.4	3.0	6.8	3.6
31	Rubber, plastic, coal & refined petroleum products	57.28	5.0	4.1	−1.1	11.8	11.1	5.5	4.5	2.4
20–21	Food Products	90.83	5.1	3.2	4.2	10.1	−1.6	11.0	−0.5	−0.9
25	Jute & mesta	5.90	12.3	2.6	−0.9	0.8	−5.9	8.3	−4.2	3.7
Industry groups with negative growth: Flat and up to −7 per cent
23	Cotton textiles	55.18	8.3	0.5	6.7	2.9	−2.2	−2.7	−3.1	7.4
29	Leather, leather & fur products	11.39	8.4	−0.1	13.8	10.7	5.3	−3.3	−3.9	6.9
27	Wood, products & furniture	27.01	15.6	−6.6	−16.2	2.9	−11.0	−17.6	6.8	−9.1
2–3	Overall Manufacturing	793.58	9.4	8.3	7.1	5.3	2.9	6.0	7.3	9.0
Distribution of Rates of Growth
	Median Value		9.1	5.3	5.7	4.3	3.1	5.5	6.8	5.8
	25 percentile value		5.0	3.2	−0.9	1.8	−1.6	1.6	−0.5	3.6
	75 percentile value		10.5	10.1	10.0	10.1	5.3	9.2	8.7	10.9
	Nos. of industry groups
	> mean		11	8	6	8	9	8	6	6
	Nos. industry groups
	< 1/3 rd of mean		0	3	6	4	5	5	5	4

Note: *Averages for 3 years — 1995–96, 1996–97 and 1997–98.
† Average growth rate for the 3-year period-2002–03 to 2004–05, and ranked in descending order of 3-year average growth, that is, column (5).
Source: As in Table 5.1 above.

2-digit level analysis

There has been significant variation at the 2-digit level in the growth record.

The fastest growing sectors that have averaged 10 per cent and higher growth in the last three years include #22 beverages, tobacco etc., #35–36 machinery, #37 transport equipment and #26 textile products including apparel.

Categories with growth between 8 and 10 per cent include #30 chemicals, #38 other manufactures, #32 non-metallic mineral products (cement and ceramics) and #33 basic metal & alloys.

Categories with 3 to 5 per cent growth include metal products, manmade fibres & yarn, rubber, plastic & refined petroleum products, food products (sugar, edible oil etc) and jute.

Cotton textiles (mill sector), leather and wood come in last with flat to negative growth.

It is interesting to note the wide divergence in manufacturing, between those that are growing at 8 per cent and over (eight categories) and those that are trudging along with 5 per cent and less growth (seven groups). The fast growing first group accounts for 62 per cent of the base weight in the manufacturing index, while the second slow moving group accounts for the balance of 38 per cent. It is also of interest to note that some of the slow moving group—manmade fibres & yarn, cotton textiles, metal products and leather—had registered fairly rapid growth in the first prolonged phase of expansion between 1994–95 and 1997–98.

Prices & InflationWholesale or Producer Prices (WPI)

Inflation had become a hot button policy issue in the second half of 2004. However, a combination of policy initiatives at the fiscal and monetary levels appears to have altered the direction of inflationary expectations and despite rapid economic growth the rate of inflation was brought down to acceptable levels. From peak levels of over 8 per cent in August, and close to 8 per cent through September and October 2004, to under 6 per cent by the beginning of 2005. At the end of March 2005 the WPI rate of inflation was down to 5.1 per cent, well within the Reserve Bank of India's projection of “6.5 per cent with a downward bias” (made towards the end of 2004). As discussed below, were the increase in petroleum refined products that is warranted by the increase in world crude oil prices passed on to the customer, the actual rate of inflation at the end of March 2005 would have been just shy of the RBI estimate.

For the first few months of 2005–06, the rate of WPI inflation has been in the region of 5.1–5.6 per cent, with recent weeks exhibiting a weakening trend, culminating in WPI inflation of 4.2 per cent for the week ended June 4, 2005. This was expected as the year progressed and the reported inflation rate was measured against the elevated base of the summer of 2004. However, it ought not to be forgotten that retail prices of refined petroleum products have not been revised upward to reflect the increase in international crude oil prices and the additional cost burden to the refiners and marketing companies. A 10 per cent across-the-board increase in the price of refined petroleum products would probably just about recompense the oil marketing and refining companies for their higher costs, but leave little by way of profit. If such an increase were to be given effect to, it would raise the WPI inflation rate by 1.3 percentage points, from the current level of 4.2 per cent to 5.5 per cent.

It is worth taking note of the fact that the inflation rate for manufactured goods has been inching up in recent weeks-from 4.5% at the end of March 2004 to 5.4% in the last week of May-even as the overall rate of inflation has been coming down.

From Table 6.1, it is worth taking note of the fact that the inflation rate for manufactured goods has been inching up in recent weeks—from 4.5 per cent at the end of March 2004 to 5.4 per cent in the last week of May—even as the overall rate of inflation has been coming down. However, on the 53^rd week of the last large price increase in steel products, manufactured goods inflation dropped off to 3.8 per cent. The base year effect of iron & steel alone accounted for 0.7 percentage points in the overall inflation rate and over 1 percentage point in inflation in manufactured goods. However, if the base year effect of iron & steel and other ferrous items were set aside, a perceptible upward movement in the prices of manufactured goods is still visible. Table 6.1

Components of Wholesale Price Inflation Base 1993–94=100

Unit: per cent

Calendar Year	All Commodities	Foodgrain (cereals & pulses)	Other Primary Food items	Commercial Energy	Manufactured Goods	Core(x)^†

Weight	100%	5.01%	10.39%	14.23%	63.75%	70.37%
Average of weeks for the completed calendar year up to 2004
1998	5.8	4.9	14.8	6.0	3.9	4.4
1999	3.5	18.4	−2.0	5.5	3.4	2.9
2000	6.3	0.9	5.7	25.6	2.7	2.4
2001	5.2	−1.5	4.6	14.7	2.9	3.2
2002	2.5	0.2	3.9	4.5	1.7	1.8
2003	5.3	2.1	1.1	6.7	5.0	5.9
2004	6.5	−3.8	−0.7	9.0	6.6	2.6
From the last week of March 2005 onwards—year—on—year basis
26-Mar-05	5.1	2.2	3.3	10.5	4.6	4.1
2-Apr-05	5.7	2.6	2.3	11.1	5.5	4.7
9-Apr-05	5.9	3.6	4.2	11.1	5.4	4.6
16-Apr-05*	5.6	4.2	3.0	11.2	5.1	4.4
23-Apr-05*	5.9	4.0	3.6	11.4	5.4	1.7
30-Apr-05*	5.7	3.8	2.2	10.9	5.4	4.7
7-May-05*	5.6	3.6	2.2	10.9	5.4	4.6
14-May-05*	5.6	3.3	2.9	11.1	5.2	4.4
21-May-05*	5.4	3.1	2.2	10.9	5.2	4.3
28-May-06*	5.2	3.5	2.7	10.9	5.4	3.9
4-Jun-05*	4.2	3.5	0.8	11.4	3.8	2.6

Notes: * Figures for weeks marked with asterisk are on the basis of provisional estimates. All previous periods are based on revised estimates.
^†Core (by exclusion) rates of inflation, which excludes primary food items and energy from the index —the standard procedure.
Source: Office of the Economic Adviser, Ministry of Commerce & Industry, Government of India, up to press release of June 17, 2005.

Composition of Inflation

Not only has the rate of inflation in manufactured goods been moving up in recent weeks, but the direction from where it is coming has also changed. Manufactured food products account less for increases in inflation, than do machinery, chemicals and cement.

The recent softness in international steel prices, which has been transmitted to domestic markets via price reduction, may see further paring down of the contribution of steel to inflation.

Much of inflation is contributed to by a relatively small set of products and this is shown at Table 6.2. Not only has the rate of inflation in manufactured goods been moving up in recent weeks, but the direction from where it is coming has also changed. Manufactured food products (e.g. sugar) account less for increases in inflation, than do machinery, chemicals and cement (non-metallic minerals). Iron & steel since June 4, 2005 has yielded pride of place to chemicals and machinery items. The recent softness in international steel prices, which has been transmitted to domestic markets via price reduction in domestic markets, may see further paring down of the contribution of steel to inflation. Table 6.2

Sources of Wholesale Price Inflation in 2004

Unit: per cent

	Weight	27 Mar 2004	26 Jun 2004	2 Oct 2004	25 Dec 2004	26 Mar 2005	4 Jun 2005*

Overall WPI inflation	100.00	4.6	6.1	7.1	6.6	5.1	4.2
Foodgrain	5.01	−0.5	−2.0	1.5	2.2	2.2	2.9
Other primary food	10.39	1.2	−1.2	1.0	3.6	3.3	−0.2
Raw cotton	1.36	12.3	3.8	−5.4	−21.5	−23.8	−23.1
Oilseeds	2.67	−0.5	−1.6	8.8	−1.2	−6.5	−5.7
Commercial Energy	14.23	2.5	11.8	10.8	11.5	10.5	11.4
Petroleum products	6.99	0.2	15.8	16.9	18.3	16.0	14.0
Manufactured Goods	63.75	6.7	6.6	7.0	6.0	4.6	3.8
Dairy products	0.69	11.6	9.1	2.9	3.1	−3.0	0.2
Grain mill products	1.03	11.8	2.1	−2.6	−1.5	−1.3	1.3
Sugar, khandsari & gur	3.93	14.5	18.8	20.0	19.7	17.5	10.8
Edible oil	2.76	7.1	−0.3	−4.5	−3.3	−8.4	−7.2
Tea & coffee processing	2.76	20.3	−0.4	0.9	2.1	2.9	1.5
Cotton textiles	4.22	15.3	10.9	6.8	−8.1	−12.7	−9.2
Manmade Textiles	4.72	−0.3	6.4	5.6	3.3	0.8	−0.9
Rubber & plastic products	2.39	2.2	0.1	−0.6	−0.9	−1.3	0.5
Chemical materials & products	11.93	0.1	2.0	3.2	3.9	3.9	4.5
Non-metallic minerals	2.52	3.0	6.2	7.9	4.9	11.4	8.0
Iron and steel	3.64	34.2	43.8	26.5	25.9	21.3	9.6
Non-ferrous metals	1.47	4.2	4.1	6.2	6.7	7.8	8.5
Machinery & machine tools	8.36	3.0	2.6	6.3	7.8	7.1	7.7
All other manufactured goods	15.14	5.2	2.4	7.1	6.7	4.9	4.0
Contribution to overall WPI inflation—in percentage points
Primary Food articles	15.40	0.11	−0.23	0.27	0.48	0.46	0.11
Oilseeds & Edible Oil	5.42	0.18	−0.05	0.11	−0.12	−0.40	−0.35
Cotton & Cotton Textiles	5.57	0.81	0.51	0.22	−0.64	−0.86	−0.70
Dairy products, grain mill, sugar and tea & coffee items	6.62	0.97	0.82	0.79	0.80	0.68	0.45
Chemicals, manmade textiles, rubber & plastics products	19.04	0.05	0.54	0.63	0.60	0.48	0.51
Non-metallic minerals	2.52	0.08	0.16	0.20	0.12	0.29	0.20
Iron & steel	3.64	1.24	1.59	0.96	0.94	0.78	0.35
Non-ferrous metals	1.47	0.06	0.06	0.09	0.10	0.11	0.12
Machinery & machine tools	8.36	0.25	0.22	0.53	0.66	0.59	0.64
All other manufactured goods	15.14	0.79	0.36	1.08	1.04	0.75	0.60

Notes: * Provisional estimates. All previous periods are based on revised estimates.
Source: as in Table 6.1.

Consumer Price Inflation

Consumer price inflation measured both by the CPI-UNME (urban non-manual employee) and CPI-IW (industrial worker) had stabilised at around 4 per cent in the first quarter of calendar 2005. In April however while the CPI-UNME stayed at 4.2 per cent, the CPI-IW recorded an increase in inflation to 5.0 per cent. The rates of inflation in consumer prices and WPI are now converging at around the 5 per cent level. If retail petroleum fuel prices are revised upward, WPI inflation rate would once again move ahead, since the weight of petroleum products in the consumer price indices is much smaller than that in the WPI. Chart 4Consumer and Wholesale Rates of InflationMonthly Basis—January 2001 to May 2005

Credit & Investment

In 2004–05, for the third year running, non-food credit expanded at a rising rate, and the increase during the course of the year amounted to nearly Rs. 214,00 crore.

Credit flow from the banking system to the commercial sector increased rapidly and at a growing rate through 2002–03 and 2003–04. Non-food credit rose by over Rs. 125,000 crore in 2003–04 on top of the increase of over Rs. 100,000 crore in the previous year. In 2004–05, for the third year running, non-food credit expanded at a rising rate, and the increase during the course of the year amounted to nearly Rs. 214,00 crore.

In the first two months of 2005–06 up to May 27, 2005, non-food credit has gone up by a whopping Rs. 47,000 crore [Table 7.1]. The accelerating trends can readily be seen from the year-on-year rates of increase. In the first quarter of 2005–06 (up to May 28) the increase in non-food credit has been nearly 30 per cent, compared to 21 per cent in the previous year and 16 per cent in the year prior to that [Table 7.2]. Growth in investments (commercial paper, bonds, debentures and shares) has however been negative over the past three years and as a result the expansion of total accommodation to the commercial sector has been at a rate somewhat smaller than that of non-food credit. Table 7.1

Changes in Major Items of Bank Accommodation to the Commercial Sector§

Unit: Rs crore

FY	Non-food Credit				Food Credit

	02–03	03–04	04–05	05–06	02–03	03–04	04–05	05–06


Q-1 (June)	19,308	3,091	34,926	47,354*	7,030	586	7,100	4,806*
Q-2 (Sept)^†	46,834	41,034	92,443		−752	−12,107	2,677
Q-3 (Dec)	64,765	64,484	145,723		−2,031	−13,127	7,818
Q-4 (Mar)	104,204	125,088	213,464		−4,499	−13,518	5,159

FY	Investments^†				Total Accommodation

	02–03	03–04	04–05	05–06	02–03	03–04	04–05	05–06

Q-1 (June)	−5,724	−4,705	−2,440	−1,397*	6,111	−1,385	32,551	45,957*
Q-2 (Sept)^†	−5,675	−1,838	−3,920		40,825	39,484	88,218
Q-3 (Dec)	−2,719	−3,445	−4,531		61,472	61,363	140,887
Q-4 (Mar)	−1,802	−3,687	−8,537		101,791	121,725	208,534

Note: As in Table 7.2 below.
Source: As in Table 7.2 below.

Table 7.2

Year-on-year changes in Major Items of Credit Flow to the Commercial Sector§

Unit: per cent

FY	Non-food Credit				Food Credit

	02–03	03–04	04–05	05–06	02–03	03–04	04–05	05–06

Q-1 (Jun)	16.8	16.2	22.2	29.9*	21.2	−17.1	−14.8	5.1
Q-2 (Sept)^†	17.5	15.8	24.5		6.0	−29.8	3.4
Q-3 (Dec)	18.4	16.7	27.2		−0.6	−30.0	20.4
Q-4 (Mar)	19.5	18.4	26.5		−8.3	−27.3	14.3

FY	Investments^‡				Total Accommodation

	02–03	03–04	04–05	05–06	02–03	03–04	04–05	05–06

Q-1 (Jun)	−2.0	0.5	−1.7	5.4*	14.3	14.1	19.4	26.7*
Q-2 (Sept)^†	−4.4	3.8	−6.5		14.3	14.3	21.0
Q-3 (Dec)	−0.7	−1.6	−5.3		15.5	14.4	23.7
Q-4 (Mar)	−0.6	−4.0	−6.1		16.7	15.8	23.3

Note: § Data for last reporting Friday of the week of alternate fortnights and the data used for estimating Changes in the quarter is the last Friday of the month.
*Up to the reporting Friday for the fortnight ended May 28, 005.
^†For previous years since in the second quarter, the fortnight straddles the end of September and the first week of October. Hence the aggregates as at the end of the first week of October has been used, that is 1st, 3rd, 4th, 5th, and 6th October of 2004, 2003, 2002, 2001and 2000 respectively.
^‡Figures are with one fortnight lag in comparison with the other aggregates.
Source: Reserve Bank of India, Weekly Statistical Supplement various issues up to June 18, 2005.

Deposit and Credit Growth

Deposits and non-food credit have grown more or less at the same trend rate of 17 per cent over the past decade. However, since the starting magnitude of deposits was obviously larger than that of non-food credit, the increase in deposits exceeded the increase in non-food credit. This can be expressed as the incremental non-food credit to deposit ratio, that is, the increase in non-food credit in a given time period as a ratio of the increase in deposit over the same time period.

At Chart 5, we have presented the closing stock of deposits, non-food credit at the end of the financial year for the past 13 years, expressed as a proportion of GDP (at current market prices) on the left hand scale (LHS) and the incremental non-food credit to deposit ratio on the right hand scale (RHS). It might be observed that for all of these years, with the exception of 2004–05 and 2000–01, the incremental non-food credit to deposit ratio has been significantly lower than unity (that is, 100 per cent). In fact the average value of this ratio was 62 per cent for these 13 years. This has of course meant that government (Centre and States) could find ready sources of bank finance for their fiscal deficits. The year 2000–01 was preceded by a succession of poor years as far as non-food credit was concerned and the spike in the incremental ratio did not cause much ripples, and interest rates were at that time very much higher than they have been subsequently. Chart 5Movement of Deposits, Non-Food Credit and Incremental Credit to Deposit

The year 2004–05 has however been preceded by higher levels of credit flow, tighter monetary conditions at home and abroad and what appears to be a slight easing in the pace of deposit growth, relative to both economic expansion and non-food credit growth. In 2004–05, nominal economic growth was 12.6 per cent, deposit growth 13.6 per cent and non-food credit growth much higher at 26.5 per cent. In 2003–04, nominal economic growth was 12.0 per cent, deposit growth 17.4 per cent and non-food credit growth was again higher at 18.4 per cent. In 2002–03, nominal economic growth was 7.9 per cent; deposits grew by 10.8 per cent, while non-food credit growth was higher at 19.5 per cent.

The trend continues in the current fiscal. In 2005–06 till date (with respect to end-March 2005), deposits have grown by Rs. 58,411 crore or 3.4 per cent, while non-food credit has expanded by Rs 47,354 crore or by 4.7 per cent, and total bank credit has risen by Rs. 51,960 crore or by 4.8 per cent. In the comparable period in the previous fiscal the increase in deposits (with respect to end March) was Rs. 44,971 crore (3.1 per cent), while that of bank credit had been Rs. 23,212 crore (2.8 per cent) and non-food credit had been Rs. 15,661 crore (1.9 per cent).

On year-to-date basis for calendar year 2005 up to 27 May 2005, aggregate deposits in the banking system increased by Rs. 112,901 crore (6.8 per cent), while bank credit expanded by Rs. 117,043 crore (7.0 per cent) and non-food credit by Rs. 115,095 crore (6.9 per cent).

In calendar year 2004, on year-to-date basis up to 28 May 2004, aggregate deposits had risen by Rs. 128,594 crore (9.1 per cent), while bank credit rose by Rs. 80,639 crore (6.0 per cent) and non-food credit by Rs. 73,479 (5.5 per cent).

Banks have selectively raised their lending rates for home loans and some other consumer loans and price pressures have necessarily to follow the tightness in the funds market-deriving essentially from the strong volumes in the loan market.

Inflows into the Liquidity Adjustment Facility (LAF) have fallen from the level of about Rs. 20,000 crore till the end of the first week of June 2005 to Rs 9,000 crore on June 17, 2005. The RBI still holds about Rs. 70,000 crore in the Market Stabilisation Scheme and has the option of not re-issuing the underlying short-term securities on maturity and some re-adjustment of liquidity positions are possible fairly readily. Banks have selectively raised their lending rates for home loans and some other consumer loans and price pressures have necessarily to follow the tightness in the funds market—deriving essentially from the strong volumes in the loan market, where both marginal and cumulative growth have outpaced the growth of bank deposits.

External Merchandise Trade

This section has four tables that provide information on (a) the composition and (b) the direction of India's external merchandise trade.

Imports

In 2003–04, while total imports (in rupee terms) had risen by 21 per cent, gold imports had soared by 60 per cent. The value of crude petroleum imports rose by only 11 per cent and non-oil, non-bullion imports were up by 22 per cent. Import of capital goods and several manufacturing intermediates rose strongly—from chemicals to metals [see Table 8.1]. Table 8.1

Summary of Changes in the rupee value of Merchandise Imports Financial years of 2002–03, 2003–04 and 2004–05

Unit: Rs. Crore

	2002–03	2003–04			2004–05

		Amount	Change from 2002–03		Amount	Change from 2003–04

			Amount	%		Amount	%

Food Products	14,279	17,027	2,748	19	17,111	84	1
of which: Edible oil	8,780	11,683	2,904	33	10,756	−928	−8
Other agricultural products	3,202	3,625	425	13	3,192	433	−12
Ores & minerals	11,924	13,424	1,497	13	24,366	10,942	82
Manufactured intermed-iates & consumer goods	90,992	114,462	23,269	26	150,980	36,728	32
Electronic goods	27,099	34,492	7,392	27	43,759	9,267	27
Iron & steel	4,267	6,492	2,225	52	10,914	4,422	68
Organic chemicals	9,125	12,689	3,563	39	16,986	4,297	34
Fertilisers (manu-factured)	1,731	2,301	571	33	4,052	1,751	76
Artificial resins, plastic material	3,784	4,972	1,118	31	6,272	1,300	26
Non ferrous metals	3,226	4,360	1,134	35	5,630	1,270	29
Inorganic chemicals	5,516	5,838	322	6	6,985	1,147	20
Chemical material & products	2,187	2,902	715	33	3,541	639	22
Wood & wood products	1,946	3,269	1,323	68	3,803	534	16
Manmade filament/spun yarn	1,922	1,912	−10	−1	2,116	204	11
“Other” commodities	11,268	11,944	676	6	19,562	7,618	64
Capital goods	41,358	51,987	10,629	26	60,335	8,348	16
All kinds of machinery*	24,291	29,739	5,448	22	39,844	10,110	14
Professional instruments	5,494	5,653	1,59	3	6,681	1,028	18
Transport equipment	9,183	14,833	5,650	62	10,886	−3,947	−27
Gold	18,608	29,946	11,338	61	46,097	16,151	54
Diamonds & gem stones	29,341	32,757	3,416	12	42,341	9,584	29
Crude petroleum and products	85,367	94,520	9,153	11	134,094	39,574	42
Total	297,206	359,108	61,902	21	481,064	121,956	34
Memo
Non-oil, non-bullion imports	191,086	359,108	61,902	21	481,064	121,956	34
Non-oil, non-bullion, non-diamond imports	161,745	233,082	41,996	22	298,335	65,253	28

Note: * Including all project goods.
Source: Monthly Foreign Trade Statistics of India (principal commodities & countries), Imports and Exports & Re-exports, Directorate General of Commercial Intelligence & Statistics, Government of India, March 2005.

In 2004–05, overall imports rose much faster by 34 per cent. Imports of crude petroleum increased by 42 per cent, that of gold by 54 per cent and all other commodities by 28 per cent. Of the total increase in the value of imports of Rs. 122,000 crore, crude petroleum accounted for 32 per cent and gold another 13 per cent; the two thus aggregated 45 per cent of the total increase in imports. Imports of machinery increased by a more modest 14 per cent, while that of manufactured intermediate and consumer goods grew by 32 per cent and accounted for 30 per cent of the increase in the value of imports.

It may be interesting to note that the value of gold imports, which for the most part is purchased by householders as an outlet for their savings, in 2005–06 amounted to as much as 1.5 per cent of GDP, up from little over 1 per cent of GDP in the previous year.

Exports

In 2003–04, aggregate exports in rupee terms increased by 15 per cent and that of manufactured goods rose by 16 per cent. Amongst manufactures the fastest expansion were in transport equipment, plastics & linoleum products, dyes & intermediates, iron & steel, manufactures of metals and pharmaceuticals. Export of electronic goods rose by 37 per cent and that of petroleum refined products by 32 per cent. Important agro-products, namely marine items, rice and tea/coffee all showed negative growth [Table 8.2]. Table 8.2

Summary of Changes in the rupee value of Merchandise Exports Financial years of 2002–03, 2003–04 and 2004–05

Unit: Rs. Crore

Categories	2002–03	2003–04			2004–05

		Amount	Change		Amount	Change

			Amount	%		Amount	%

Agricultural Products	31,413	34,619	3,206	10	35,963	1,.344	4
Ores & minerals	9,660	10,885	1,225	13	18,848	7,963	73
Leather & manufactures	8,946	9,939	993	11	10,286	346	4
Textiles and products	56,220	58,779	2,559	5	56,677	−2,102	−4
Chemicals and products	33,942	40,777	6,835	20	50,482	9,706	24
Metals and products	20,309	25,726	5,417	27	42,255	16,530	64
Engineering goods	17,141	22,985	5,844	34	29,670	6,684	29
Other manufactured goods*	76,244	89,660	13,416	18	118,055	28,394	32
Total	255,137	293,367	38,230	15	356,069	62,702	21
Agricultural & mineral produce
Oil meals	1,487	3,348	1,861	125	3,101	−248	−7
Marine products	6,928	6,106	−822	−12	5,695	−410	−7
Meat & meat preparations	1,337	1,714	337	24	1,734	20	1
Rice—basmati & non-basmati	5,831	4,168	−1,663	−29	6,642	2,474	59
Sugar	1,770	1,217	−553	−31	144	−1,073	−88
Tea and coffee	1,856	1,840	−16	−1	2,792	69	3
Wheat	1,760	2,391	631	36	1,448	−943	−39
Iron ore	4,200	5,173	973	23	11,815	6,642	128
Manufactured Goods
Apparel—cotton	21,510	22,009	499	2	20,521	−1,488	−7
Drugs & pharmaceuticals	12,826	15,213	2,387	22	16,681	1,468	10
Cotton yarn, fabrics & made ups	16,218	15,600	−618	−4	14,309	−1,211	−8
Iron and Steel	8,982	11,386	2,404	27	22,476	11,091	97
Machinery and instruments	9,720	12,757	3,037	31	15,695	2,937	23
Manufacture of metals	8,942	11,150	2,208	25	14,734	3,584	32
Plastic & linoleum products	5,912	8,054	2,142	36	13,243	5,189	64
Transport equipment	6,455	8,988	2,533	39	12,714	3,726	42
Manmade fibres-yarn & apparel	6,639	8,093	1,454	22	8,353	260	3
Inorganic/organic/agro-chemicals	4,930	5,293	363	7	6,765	1,471	28
Dyes & intermediates	3,440	4,710	1,270	37	5,101	390	8
Total of Manufactured Goods	214,064	247,863	33,799	16	301,258	53,395	22
Select items categorised under “other manufactured goods” at the top of this table and marked with*
Gems & jewellery	43,701	48,586	4,885	11	61,581	12,995	27
“Other” commodities	5,770	8,640	2,870	50	9,388	748	9
Petroleum refinery products	12,469	16,397	3,928	32	30,518	14,121	86
Electronic goods	6,063	8,294	2,231	37	8,106	−188	−2
Handicrafts	3,801	2,296	−1,505	−40	1,543	−753	−33

Source: As in Table 8.1.

In 2004–05, overall exports rose by 21% and that of manufactured goods by 22%. The fastest growing manufactured items (in terms of value) were iron & steel, plastic & linoleum products, transport equipment and chemicals.

In 2004–05, overall exports rose by 21 per cent and that of manufactured goods by 22 per cent. The fastest growing manufactured items (in terms of value) were iron & steel, plastic & linoleum products, transport equipment and chemicals. The value of refined petroleum products rose by 86 per cent and that of gems & jewellery by 27 per cent. The export value of ores & minerals shot up by 73 per cent, propelled by 128 per cent increase in the export value of iron ore. In agro-products, while rice exports made a recovery with 50 per cent increase in the value of exports, that of marine products and tea/coffee failed to show recovery.

The export value of cotton textiles and products—yarn, made-ups and apparel—showed contraction in 2004–05, after registering flat growth in 2003–04. It is however possible that volume growth may have been there, but values may have stagnated deriving from a decline in unit value realisation attendant on a keener combination of lower cotton prices and tougher international competition.

Direction of Trade

In Table 8.3 we have presented Indian's exports to, imports from and trade balances (in rupee terms) with principal countries/economic regions and followed this up at Table 8.4 with a listing of the top 40 countries by total (exports + imports) value of trade in 2004–05. Import volumes exclude crude petroleum products. Table 8.3

Export, Import and Merchandise Trade Balances By Geographic Regions

Unit: Rs. Crore

	Exports		Imports		Trade Balance

	2003–04	2004–05	2003–04	2004–05	2003–04	2004–05

China	13,579	20,607	18,625	30,414	−5,046	−9,807
Hong Kong	14,989	16,406	6,859	7,686	8,130	8,720
Sub-total China + HK	28,568	37,013	25,484	38,100	3,084	−1,087
South Korea	3,515	4,326	13,001	14,352	−9,486	−10,026
Japan	7,854	8,886	12,258	13,506	−4,404	−4,620
Taiwan	2,447	2,641	3,533	4,745	−1,086	−2,104
East Asia	43,136	53,428	54,290	70,704	−11,154	−17,276
USA	52,799	59,604	23,136	28,269	29,663	31,335
Canada	3,507	3,667	3,336	3,318	171	349
Sub-total North
America	57,521	64,854	26,812	31,943	30,710	32,911
Euro-zone	47,812	56,766	47,371	56,926	442	−160
Sub-total Western
Europe	69,034	80,249	83,099	104,649	−14,065	−24,400
South Asia	19,535	19,839	3,258	4,264	16,277	15,575
South East Asia	26,725	35,915	34,156	39,568	−7,432	−3,654
West Asia	45,974	60,092	20,850	39,530	25,123	20,562
South & Central
America	3,375	6,993	4,804	7,919	−1,430	−926
Africa	16,088	20,865	13,834	15,590	2,254	5,275
Oceania	3,080	3,485	12,537	16,482	−9,457	−12,997
Eastern Europe & FSU	6,065	6,159	6,985	9,790	−920	−3,631

Note: The trade data does not include crude petroleum and refined products for the most part.
Source: As in Table 8.1

Table 8.4

Export, Import and Merchandise Trade Balances Top 40 Countries by total bi-lateral trade (exports+ imports) in 2004–05

Unit: Rs. Crore

		Exports		Imports		Trade Balance

		2003–04	2004–05	2003–04	2004–05	2003–04	2004–05

1	U.S.A.	52,799	59,604	23,136	28,269	29,663	31,335
2	United Arab Emirates	23,553	31,893	9,465	20,587	14,088	11,306
3	China, PR	13,579	20,607	18,625	30,414	−5,046	−9,807
4	Belgium	8,298	10,973	18,270	20,517	−9,972	−9,544
5	U.K.	13,892	15,927	14,862	15,418	−970	509
6	Germany	11,693	11,880	13,411	17,381	−1,718	−5,501
7	Singapore	9,737	17,054	9,583	11,603	154	5,452
8	Switzerland	2,067	2,345	15,223	26,141	−13,155	−23,796
9	Hong Kong SAR	14,989	16,406	6,859	7,686	8,130	8,720
10	Japan	7,854	8,886	12,258	13,506	−4,404	−4,620
11	Australia	2,685	3,087	12,174	16,001	−9,489	−12,914
12	South Korea	3,515	4,326	13,001	14,352	−9,486	−10,026
13	Indonesia	5,180	5,799	9,751	11,272	−4,571	−5,473
14	Italy	7,947	9,709	4,922	5,943	3,025	3,766
15	Malaysia	4,102	4,477	9,404	9,979	−5,302	−5,502
16	South Africa	2,478	4,307	8,727	9,648	−6,249	−5,341
17	France	5,886	7,230	5,010	6,204	876	1,026
18	Saudi Arabia	5,162	6,155	3,390	5,665	1,772	489
19	Israel	3,327	4,448	3,078	4,370	249	78
20	Russia	3,280	2,684	4,410	5,686	−1,130	−3,001
21	Netherlands	5,924	6,821	1,314	1,528	4,609	5,293
22	Sri Lanka	6,062	6,083	895	1,637	5,167	4,446
23	Thailand	3,822	3,846	2,799	3,745	1,023	101
24	Spain	4,607	5,905	1,189	1,674	3,418	4,231
25	Taiwan	2,447	2,641	3,533	4,745	−1,086	−2,104
26	Bangladesh	7,999	7,127	357	247	7,642	6,880
27	Iran	4,219	5,448	1,226	1,793	2,993	3,656
28	Canada	3,507	3,667	3,336	3,318	171	349
29	Brazil	1,267	2,948	1,441	3,424	−174	−476
30	Sweden	1,010	1,025	3,211	4,121	−2,201	−3,096
31	Nepal	3,076	3,273	1,314	1,528	1,761	1,745
32	Turkey	2,589	3,092	337	578	2,252	2,514
33	Norway	2,599	2,753	1,392	874	1,206	1,879
34	Qatar	590	616	860	2,871	−270	−2,254
35	Kuwait	1,466	1,816	655	1,319	812	497
36	Argentina	401	803	2,408	2,316	−2,006	−1,513
37	Ukraine	507	908	1,081	2,208	−574	−1,301
38	Nigeria	2,599	2,753	348	216	2,251	2,537
39	Vietnam	1,886	2,365	176	364	1,710	2,001
40	Pakistan	1,319	2,271	265	428	1,054	1,843

Source: As in Table 8.1.

Bilateral Trade Volumes

India has had a large and increasing trade deficit with Western Europe, and a very large positive trade balance with North America and the US in particular, as also with West Asia.

The largest regional source of non-oil imports in both 2003–04 and 2004–05 into India is Western Europe, followed by East Asia and South-East and West Asia [see Table 8.3]. The biggest destination for Indian exports was again Western Europe, followed by North America, East Asia, West Asia and South-East Asia. Merchandise trade with China and Hong Kong combined has been mostly balanced-comprising a deficit with China and a surplus with Hong Kong. India has had a large and increasing trade deficit with Western Europe, and a very large positive trade balance with North America and the US in particular, as also with West Asia.

The massive trade deficit and its increase with Switzerland stem from the fact that the bulk of the increase in gold imports both in 2003–04 and 2004–05 was routed through that country.

The largest trade partner country continues to be the US, followed by the UAE, China, Belgium and the United Kingdom [Table 8.4]. The massive trade deficit and its increase with Switzerland stem from the fact that the bulk of the increase in gold imports both in 2003–04 and 2004–05 was routed through that country. The biggest year-on-year increase in exports in 2004–05 (on a reasonably large base) were with Brazil (133 per cent), Oman (91 per cent), Kenya (77 per cent), South Africa (74 per cent), Pakistan (72 per cent), Israel (67 per cent), China (52 per cent), Iran (29 per cent), Belgium (22 per cent), France (23 per cent), South Korea (23 per cent) and Italy (22 per cent).

Macro—Overview