The Economy

The EconomyGrowth in 2005/06

The revised estimates of gross domestic product (GDP) released by the Central Statistical Organisation (CSO) at the end of May 2006 showed that the economy had grown by 8.4 per cent in 2005/06 (Table 1.1). This was on account of (a) strong persistent growth in the nonagricultural component of GDP (which now accounts for 81 per cent of the total) at 9.6 per cent, marginally higher than the 9.5 per cent of 2004/05; and (b) a boost to the agricultural sector in the form of growth at 3.9 per cent compared to a mere 0.7 per cent in the previous year. Table 1.1

Sectoral annual growth rates post-reform

Year ending March 31	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007^f

GDP at factor cost	5.9	7.3	7.4	7.8	4.8	6.6	6.0	4.4	5.8	3.8	8.5	7.5	8.4	8.1
GDP per capita	3.6	5.2	5.2	6.0	3.0	4.8	3.3	2.5	3.8	2.1	6.6	5.9	6.7	6.4
Agriculture & allied activities	4.1	5.0	−0.9	9.6	−2.4	7.1	0.5	−0.0	6.2	−6.9	10.0	0.7	3.9	1.0
Non-agriculture	6.7	8.5	10.9	7.1	7.6	6.4	8.1	5.9	5.6	7.2	8.0	9.5	9.5	9.9
Of which: Industry	5.2	10.2	11.7	7.0	4.3	3.4	5.3	6.3	2.7	7.0	7.6	8.6	8.7	10.8
Services	7.7	7.1	10.4	7.2	9.8	8.2	9.7	5.6	7.1	7.3	8.2	9.9	10.0	9.5
Memo items
Manufacturing (regd. & unregistered)	8.5	12.0	14.9	9.7	1.5	2.5	4.4	7.8	2.5	6.8	7.1	8.1	9.0	10.5
Construction	0.6	5.5	6.7	1.7	10.2	6.1	8.2	6.1	4.0	7.7	10.9	12.5	12.1	14.0
Trade, hotels, transport, & communication	7.1	10.4	13.3	7.8	7.7	7.1	8.3	7.1	9.2	9.1	12.0	10.6	11.5	10.5
Finance, insurance, real estate & business services	13.4	5.6	8.2	7.0	11.6	8.4	9.6	4.1	7.3	8.0	4.5	9.2	9.7	9.5
Community, social & personal services	3.5	3.2	7.9	6.3	11.7	9.9	12.1	4.7	4.0	3.8	5.4	9.2	7.8	7.5

Note: ^fForecast.
Source: Data from Central Statistical Organisation (CSO).

The rates of growth for the previous 12 quarters, at the aggregate and sectoral levels, plus estimates for the first and second quarter of 2006/07, are provided at Table 1.2. The salient point is the continued strong growth of non-agriculture as a whole, which has averaged 9.5 per cent and has been systematically close to 10 per cent throughthe 8 quarters of 2004/05 and 2005/06, due not only to higher growth in the services sector (9.9 per cent), but also to the strength of industrial growth at 8.5 per cent. Table 1.2

Sectoral quarterly growth rates—year-on-year basis

	2003–04				2004–05				2005–06				2006–07^f

	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1^f	Q2^f

GDP at factor cost	5.5	8.8	11.0	8.5	7.9	6.7	7.0	8.6	8.5	8.4	7.5	9.3	7.9	8.1
Agri. & allied activities	0.1	7.2	18.2	8.2	3.5	−0.2	−1.2	1.5	3.4	4.0	2.9	5.5	0.5	0.5
Non-agriculture	7.1	9.2	8.6	8.5	9.1	8.2	10.0	10.4	9.9	9.3	9.0	10.2	9.7	9.6
Of which: Industry	5.8	6.3	6.3	8.3	7.1	7.7	11.1	8.4	10.2	7.8	8.1	8.9	10.2	10.6
Services	7.8	10.7	9.9	8.6	10.1	8.4	9.4	11.4	9.8	10.0	9.4	10.9	9.5	9.2
Memo items
Manufacturing—registered & unregistered	6.1	6.9	7.0	7.9	6.6	8.3	9.2	8.1	10.7	8.1	8.3	8.9	11.0	11.0
Trade, hotels, transport, & communication	8.0	10.4	13.6	18.1	10.6	11.2	9.7	11.0	11.7	11.0	10.2	12.9	10.5	10.0
Finance, insurance, real estate & business services	6.4	7.2	7.3	7.5	8.8	7.5	9.7	10.7	8.8	10.5	8.9	10.5	9.5	9.5
Community, social & personal services	9.0	14.9	5.2	−5.5	10.7	4.8	8.5	12.7	7.3	8.0	8.4	7.6	7.5	7.5

Note: ^fForecast.
Source: CSO, Quarterly Estimate of Gross Domestic Product—Press Notes up to May 30, 2006.

Drivers of Economic Growth

In the previous issue we had compared the present growth phase with that immediately succeeding on the initiation of economic reforms. The burden of our contention was that conditions that obtain today are markedly different from that which characterised the early nineties—arising from a wide array of factors that range from corporate and banking behaviour to international conditions. That led us to the conclusion that there are several factors which suggest that:

“… the present phase of growth is here to stay: None of the factors that led to de-stabilisation of growth in the nineties is present today. On the contrary Indian capitalism—private businesses, public sector companies and banks—has had a deep-immersion accelerated education in surviving in a competitive and globally unified world. In addition, the fractious state of public finance that had seen the combined fiscal deficit (of Centre and State combined) cross 10 per cent of GDP, has come down significantly and political will has crystallised behind the process of fiscal consolidation as exemplified by the Fiscal Responsibility and Budget Management legislation in the Centre and in the States. Indicators of macro-economic stabil-ity—whether it is domestic prices or exchange rate—appear veering on the side of stability.”¹

¹Macro-overview, Money & Finance, Vol. 2, Nos. 22–23, July-Dec 2005, p. 100.

Will Growth Be Severely Affected by Tighter Monetary Conditions?

The argument has been made that much of the growth in the past several years has arisen from leveraged consumer demand (also affecting mortgage financed home purchases) and that in the face of monetary tightening this source will be greatly subdued. Further that, part of the leveraged consumer demand-led growth was reflected in the enlarged current account deficit (CAD) which was readily financed in a climate of exceptionally amenable capital flow. The composition of bank credit by kind of borrower is analysed at Table 1.3 based on data available in the Banks Statistical Returns (BSR) of the Reserve Bank of India (RBI). In order to address the extent of leveraged domestic demand, certain issues need to be appraised. Table 1.3

Composition of Bank Credit by Borrower Category

	2001	2002	2003	2004	2005	2006

Outstanding as at the end of March in Rs. Crore
Personal	65,940	82,518	113,942	179,087	255,981	373,373
Agriculture	51,730	64,009	75,935	96,245	124,385	182,644
Industry & Infrastructure	236,430	271,626	309,828	334,803	446,825	587,661
Transport & other services	27,933	37,025	43,318	55,099	68,987	50,781
Food procurement	39,819	51,902	47,503	36,850	40,039	45,671
Other trade	49,715	48,970	56,547	64,588	89,607	85,668
Finance	26,456	37,614	50,645	58,964	73,277	na
Others	40,410	62,330	58,252	54,675	53,368	na
Total	538,434	655,993	755,969	880,312	1,152,468	1,496,474
Composition of Outstanding Credit in per cent
Personal	12.2	12.6	15.1	20.3	22.2	25.0
Agriculture	9.6	9.8	10.0	10.9	10.8	12.2
Industry & Infrastructure	43.9	41.4	41.0	38.0	38.8	39.3
Transport & other services	5.2	5.6	5.7	6.3	6.0	3.4
Food procurement	7.4	7.9	6.3	4.2	3.5	3.1
Other trade	9.2	7.5	7.5	7.3	7.8	5.7
Finance	4.9	5.7	6.7	6.7	6.4	na
Others	7.5	9.5	7.7	6.2	4.6	na
Total	100.0	100.0	100.0	100.0	100.0	100.0
Share of Incremental Credit Flows in per cent
Personal	18.3	14.1	31.4	52.4	28.3	34.1
Agriculture	7.8	10.4	11.9	16.3	10.3	16.9
Industry & Infrastructure	28.9	29.9	38.2	20.1	41.2	40.9
Transport & other services	6.6	7.7	6.3	9.5	5.1	−5.3
Food procurement	17.3	10.3	−4.4	−8.6	1.2	1.6
Other trade	5.5	−0.6	7.6	6.5	9.2	−1.1
Finance	5.8	9.5	13.0	6.7	5.3	na
Others	9.7	18.6	−4.1	−2.9	−0.5	na
Total	100.0	100.0	100.0	100.0	100.0	100.0

Source: (1) Banks Statistical Returns, Reserve Bank of India, relevant years, up to 2004/05.
(2) For year ending March 2006, the figures above are estimates based on Table 60 of Macro-economic and Monetary Developments in 2005–06, April 2006, which provides data up to Jan 20, 2006 for the bulk of the outstanding credit. These numbers have been scaled up pro rata in proportion to total outstanding food and non-food credit as at the end of March 2006.

First, there was a significant pick-up in the off-take of personal loans (including home finance) in 2002/03, when the share of incremental credit flowing to this use rose to 31 from 14 per cent in the previous year. The year 2002/03 also marked the recovery in the manufacturing sector and it would be accurate to argue that this recovery was facilitated by the increase in consumer finance as is clearly borne out by the anecdotal evidence. In 2003/04, the share of incremental credit flow to this sector was still higher at 52 per cent and again it would be accurate to see the strong economic performance in that year being based on leveraged demand for manufactured consumer goods. However, the extent of bank credit going to finance personal demand (consumer goods and homes) was of a lower order in 2004/05 and perhaps in 2005/06 also.

Second, in 2004/05, the demand for credit from industry (including the power sector and other infrastructure) surged and accounted for more than 40 per cent of incremental credit flow, much ahead of consumer finance (28 per cent). It needs also to be borne in mind that in 2004/05 bank credit grew by more than 30 per cent— almost twice the rate of expansion in each of the previous two years. In 2005/06, bank credit expanded by over 30 per cent, but data on details on the composition of this increase is not yet available. However, the RBI has indicated that outstanding personal loans in January 2006 stood at Rs. 313,466 crore. It is known that developing conditions in the funds market had curtailed the off-take of many kinds of personal loans in the latter part of 2005/06. The share of personal (including home loans) credit in incremental credit flow in 2005/06 was perhaps in the region of 30–35 per cent.

The sequencing of credit demand—beginning with consumer finance and maturing into investment (industrial & infrastructure) finance—makes sense in a context of depressed economic growth, excess production capacity, low profitability and easy money conditions that characterised 2002/03. As demand expands, output responds in kind, leading to better capacity utilisation and improved profitability, which in turn feed into asset prices (rise in share prices). The combination of higher profitability and stronger stock market conditions (which enable the raising of further equity) forms the basis of significant investment plans by industrial companies, leading in turn to increase in demand for credit from these quarters. The sustained pressure of credit demand impacts liquidity to tighten and interest rates to rise, choking off the pace of expansion of consumer credit demand.

Changes in short-term interest rates influence investment decisions much less, than general business confidence arising from macroeconomic and politico-economic considerations. In other words, if businesses feel confident about the viability of their investment decisions, modest increases in the policy rate will not deter them.

Partly on account of long-term investment passing through several interest rate cycles, changes in short-term interest rates influence investment decisions much less, than general business confidence arising from macro-economic and politico-economic considerations. In other words, if businesses feel confident about the viability of their investment decisions, modest increases in the policy rate will not deter them. The corollary is if the conditions do not look good, businesses repay loans, which helps them cut costs and build up profitability and a stronger balance sheet in anticipation of the day when conditions look good and seem to warrant an increase in leverage. And this happens even under conditions of historically low interest rates.

To summarise, while the step-up in economic activity in 2002/03 and 2003/04 can legitimately be linked to leveraged consumer demand, this situation rapidly matured into one with rising demand from industry (and infrastructure) and ultimately leading to tighter monetary conditions where the growth of consumer finance fades— something that has been developing through 2004/05 and 2005/06. In the current fiscal (2006/07) it is likely that credit expansion will slow, and so will the demand for consumer finance. Finally, the CAD has turned out to be 1.3 per cent of GDP, a level that is in the comfort zone in regard of ease of finance and stability on the external payments front. Further, a very small part of the financing has been through additional debt—the nature of CAD financing being very relevant, provided that it is broadly replicable in the medium term.

It is undoubtedly correct that the deficit in infrastructure is posing as a serious impediment to higher levels of economic activity and a large part of the successful maintenance of the trajectory of higher economic growth is dependent on the ability to execute infrastructure projects efficiently and in a financially sustainable basis.

Thus to conclude, the future course of economic growth in India derives from a readily understandable combination and sequencing of consumer and investment demand. It is however, undoubtedly correct that the deficit in infrastructure is posing as a serious impediment to higher levels of economic activity and a large part of the successful maintenance of the trajectory of higher economic growth is dependent on the ability to execute infrastructure projects efficiently and in a financially sustainable basis.

The Outlook for 2006/07

The current phase (Chart 1) of industrial output expansion began in July 2002 and it has completed 47 months in May 2006. This is by far the longest expansionary phase. It is quite a bit longer than the first phase of post-liberalisation manufacturing output expansion between July 1993 and October 1996 (40 months), although the extent of output increase was sharper in the first phase, aggregating 42 per cent (about 11 per cent per annum), while in the second phase it is till date on a cumulative basis marginally lower at 41 per cent (translating into over 9 per cent annually). Chart 1Expansion of Manufacturing Output

One must submit that the quality of the expansion in the second phase must be considered to be better, considering:

The much lower levels of available protection from imports;

The greater financial prudence in evidence both amongst borrowers (corporates) and financiers (banks and capital markets); and

Lower inflation in the recent period. Inflation in manufactured commodities was 4.5 per cent over the last 4 years, compared to well over 8 per cent for the period July 1993 to October 1996.

In the first quarter (April-June) of 2006/07 merchandise exports rose by 16.9 per cent in US dollar terms, while imports increased by 17.7 per cent in the same period. This was significantly less than theexpansion experienced in the corresponding quarter of the previous year when exports increased by 35.4 per cent and imports rose by 45.9 per cent. Most of the increase in imports was on account of higher crude oil prices. While in the first quarter of 2005/06 non-oil imports had risen by 51.7 per cent, the corresponding increase in the current year was a mere 9.6 per cent.²

²First Quarter Review of Annual Statement on Monetary Policy for 200607, Reserve Bank of India, 25 July 2006, p. 3.

During the full year of 2005/06 export growth averaged 23.0 per cent and that of imports 27.7 per cent in US dollar terms, compared to 30.8 and 42.7 per cent respectively in the previous year. In rupee terms the increase in exports in 2005/06 was slightly different at 23.2 per cent and that of imports at 29.8 per cent owing to variations in the exchange rate. Nearly half of the total increase in the value of imports in 2005/06 was on account of the increase in the oil import bill occasioned by the sharp increase in crude oil price. The value of gold imports declined sharply in the second half and the increase in the value of non-oil, non-bullion imports amounted to 22 per cent in 2005/06 compared to 36 per cent in 2004/05. On the export side, manufactured product exports increased by 22 per cent (previous year 27 per cent), but much of this was on account of the rise in the value of refined petroleum product export. Excluding the latter, manufactured exports increased by 17 per cent in 2005/06 compared to 22 per cent in the previous year [all in rupee terms].

In the previous issue (January 2006) we had estimated that export growth would slow, which it has from 31 per cent to 23 per cent. From this we had drawn the conclusion that:

“… even if slower export growth were to adversely impact aggregate demand, it would be offset by increases in investment—both in augmenting manufacturing capacity and infrastructure … Thus, while one does not expect a slowdown, it is not unreasonable to expect a moderation in the pace of expansion. Accordingly, for 2006/07, we have factored in manufacturing growth of 8 per cent, assuming some investment in new manufacturing capacity and infrastructure. There continue to be constraints in mining and power generation, although the restoration of the accident damaged Bombay High oil platform of ONGC should result in significant upsides in crude oil (and hence mining) output.”³

³Macro-overview, Money & Finance, Vol. 2, Nos. 22–23, July-Dec 2005, pp. 101–102.

Manufacturing output growth has been much stronger, averaging 11% in the first two months of the fiscal year, and it seems likely that the trend will hold for June. Even if growth eases up a bit from this pace in the second half of the year, overall it is likely that manufacturing output growth may hold up at over 10% for the full year of 2006/07.

However, manufacturing output growth has been much stronger, averaging 11 per cent in the first two months of the fiscal year, and it seems likely that the trend will hold for June. Even if growth eases up a bit from this pace in the second half of the year, overall it is likely that manufacturing output growth may hold up at over 10 per cent for the full year of 2006/07, supported by a combination of domestic final consumer and investment demand and from a steady expansion of export demand growing at somewhere in the range of 15 to 20 per cent.

The South West monsoon set in late in parts of the country and the cumulative rainfall up to 26 July 2006 was 14 per cent below the long period average (LPA), compared to an excess of 2 per cent at the same time last year and a 15 per cent shortfall in 2004/05. Most of the rain-dependent meteorological divisions have experienced significant shortfall in rainfall with respect to the LPA, namely:

As may be observed the shortfall in these relatively more vulnerable regions is comparable to, though not as severe, as in 2004. It is possible that in the coming weeks some, if not much, of the shortfall in rains will be made up in some, if not all the 8 meteorological divisions. The resemblance to the situation in the SW Monsoon of 2004 (shown in the table above in parentheses) is far too strong (except for Chhattisgarh, where it is quite a bit worse) for one to ignore. In other rain-dependent regions such as Gujarat, Saurashtra, Madhya Maharashtra and Orissa the position in 2006 is markedly superior to that in 2004, while in Rayalseema and Bihar the position is slightly worse.

There is a distinct possibility that overall seasonal rainfall will remain a bit short in 2006 and that in consequence agricultural production in 2006/07 will register at best marginal growth.

There is a distinct possibility that overall seasonal rainfall will remain a bit short in 2006 and that in consequence agricultural production in 2006/07 will register at best marginal growth, in a fashion similar to that of 2004/05—taken at 1.0 per cent for 2006/07.

On the basis of this, overall growth for 2006/07 appears headed for 8.1 per cent. Downside risks arise principally from a sudden slowdown in industrial, particularly manufacturing output arising either from a greater-than-expected slowing of exports or a faster-than-expected slowing of leveraged consumer demand. The other component of the downside risk is that agricultural growth may slide marginally into negative territory.

World Crude Oil Prices

Over the past six months, benchmark crude prices have increased by more than $10 per barrel (/bbl) over the range of $55–65/bbl that had prevailed in the six months prior to that. In the first quarter of 2006/07 Nymex sweet has averaged $70/bbl, staying tightly clustered around this level. With fresh conflict breaking out in Lebanon, adding to the burdens of troubles in Iraq and tension on Iran, prices have jumped to average $75/bbl in July. The OPEC seven-crude basket and the Dubai-Oman sour have also risen in tandem to close to $70/bbl in July with the latter crossing that level on a few days.

It is certain that the surge of demand particularly out of China and the relatively smooth absorption of the increase by the consuming countries of the world have operated from the demand side, to bring about and sustain the increase in oil prices.

It is not possible to decompose the contribution of different factors to the increase, and indeed the elevated levels of crude prices in recent times. However, it is certain that the surge of demand particularly out of China and the relatively smooth absorption of the increase by the consuming countries of the world have operated from the demand side, to bring about and sustain the increase in oil prices. On the supply side, the support to the high prices has come from inadequate spare production capacity in the industry as a whole, compounded by the insurgency in Iraq that has prevented restoration of production to previous levels. Crude oil prices, beginning March 2002 for spot Nymex (New York Mercantile Exchange), are plotted at Chart 2.1Chart 2.1Crude Prices-Nymex US$ per barrelDaily prices for one-month deliveries (spot) from March 2002 to July 2006

Oil market dynamics are complicated by crude oil futures being an attractive object of financial investment. Market expectations are presently being reflected in 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 high level of spot prices. This is reflective of the perception that demand is strong (even at these prices) and the supply side is very tight. These are the preconditions that make the OPEC cartel work most smoothly.

Normally future prices have approached or exceeded the spot prices at times only 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) crises 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, once again since 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 to stay ahead, even as spot rose rapidly. Informed market players were obviously confident that basic demand and supply situation will maintain high prices for some time to come. At Chart 2.3, is 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). Chart 2.2Difference between Spot and 4-month Future Contract Price for Nymex

Chart 2.3Spot and Future Premium/Discount for Nymex—from January 1997 onwardsUnit: US$ per barrel

Chart 3Industrial Growth in General and Manufacturing IIP

Chart 4Consumer and Wholesale Rates of Inflation

The outbreak of fresh hostilities and the further increase in tension in West Asia appear to presage continued strength in crude oil prices for much of the rest of 2006/07.

In September and October 2005, the premium disappeared and discounts appeared on several days, indicating expectations that prices were set to soften or at least stabilise (at the then $65/bbl). Higher interest costs (which negatively affected the profitability of oil future assets) and associated expectations of slower US economic growth may have played a role, along with the successful completion of the elections in Iraq. However, since then the premium has become re-established and has averaged over $2.50/bbl in the first 4 months of 2006/07. The outbreak of fresh hostilities and the further increase in tension in West Asia appear to presage continued strength in crude oil prices for much of the rest of 2006/07.

Balance of Payments Position

Provisional estimates had reported that in the first half of the year alone the CAD was $13.0 billion or 3.2% of expected GDP. However, subsequent revisions scaled down the magnitude for the first three quarters to $12.4 billion and reported a positive balance of $1.8 billion in the fourth quarter, yielding a total of $10.6 billion for the year.

A surge in merchandise imports, both oil and non-oil, had altered the current account position from a whopping surplus of $14.1 billion (2.3 per cent of GDP) in 2003/04 to deficits in both 2004/05 and 2005/06 of $5.4 billion (0.79 per cent of GDP) and $10.6 billion (1.33 per cent of GDP). In 2005/06, the order of magnitude of the CAD underwent significant change in the course of the year. Provisional estimates had reported that in the first half of the year alone the CAD was $13.0 billion or 3.2 per cent of expected GDP, which was certainly well above the 2 per cent level that is conventionally considered to be sustainable in a developing economy context. However, subsequent revisions scaled down the magnitude to $13.5 billion for the first three quarters (2.3 per cent of GDP). The latest release at the end of June 2006 further scaled down the estimate for the first three quarters to $12.4 billion and reported a positive balance of $1.8 billion for the fourth quarter, yielding a total of $10.6 billion for the year.

The surplus on the capital account in 2005/06 aggregated $24.7 billion (3.1 per cent of GDP), somewhat less than the $31.0 billion (4.4 per cent of GDP) in 2004/05. However, if the redemption of India Millennium Deposits (IMD) amounting to over $5.5 billion and the accumulated interest thereon (most of the depositors had opted for the cumulative scheme) of about $2.5 billion is factored in, the adjusted capital account surplus in 2005/06 would exceed $30 billion.⁴

⁴It could be argued and correctly so, that some of the IMD maturity value may have been re-invested in other rupee denominated assets and hence adjustment of the capital account balance for the entirety of the redemption value is not warranted.

At Table 2.1, is a summary of the BoP for the past 6 half years—April-September and October-March for 2003/04, 2004/05 and 2005/06. Notable developments on the current account side were:

The sharp increase in the merchandise trade deficit over the past two years;

Steady increase in the net positive balances on software;

A sharp pick-up in net balance from remittances in 2005/06;

Steady levels in the net balances on investment income, notwithstanding the accumulated interest outgo on account of IMD in 2005/06;

A sharp improvement in the net positive balances on invisibles as a whole, in both the first and second half of 2005/06;

Table 2.1

Principal Balance of Payments (BoP) Aggregates^;; Half Years Totals for 2002/03, 2003/04 and 2005/06

Unit: US $ million

	2003/2004		2004/2005		2005/2006

	April–Sept	Oct–March	April–Sept	Oct–March	April–Sept	Oct–March

Current Account
Merchandise Exports	28,350	37,935	36,715	45,435	48,210	56,570
Merchandise Imports	37,214	42,789	51,483	67,296	76,446	79,888
Merchandise Trade Deficit	−8,864	−4,854	−14,768	−21,861	−28,236	−23,318
Invisibles Total	11,628	16,173	14,283	16,946	19,635	21,307
Travel & Transportation	523	1,791	213	1,030	163	88
Software	5,979	6,345	7,569	8,957	9,842	12,420
Miscellaneous General Services excluding software	−3,534	−1,044	−1,886	−1,939	1,314	−1,444
Private remittances	10,383	11,225	9,968	10,285	10,482	13,613
Investment income*	−1,528	−2,233	−1,430	−1,239	−2,104	−2,923
Current Account Balance	2,764	11,319	−485	−4,915	−8,601	−2,011
Capital Account
Foreign Investment	4,600	9,144	2,490	9,657	7,692	10,530
Direct Investment*	1,088	1,300	1,979	1,261	2,284	3,449
FDI Inflows	2,054	2,268	3,044	2,545	3,261	4,430
FDI Outflows	−966	−968	−1,065	−1,284	−977	−981
Portfolio Investment	3,512	7,844	511	8,396	5,408	7,081
Loans (incl. Bonds)	2,077	−6,441	3,835	6,920	4,216	521
External Assistance**	−262	−2,596	346	1,577	395	1,043
Medium/Long term Commercial Borrowing	294	−3,219	1,526	3,514	2,849	−1,258
Short term debt	2,045	−626	1,963	1,829	972	736
Banking Capital	2,259	3,774	644	3,230	2,778	−1,405
Rupee debt service	−303	−73	−279	−138	−142	−430
“Other” capital	2,094	−395	665	4,003	−100	1,033
Total Capital Account	10,727	6,009	7,355	23,672	14,444	10,249
Errors & Omissions	565	37	66	466	660	311
Overall Balance of Payments	14,056	17,365	6,936	19,223	6,503	8,549

Note:^;Revised, except Jan-March (Q4) 2005/06, which is provisional. The numbers in the table correspond to the latest releases including recent issues of the Monthly Bulletin, RBI.
* Includes profits reinvested by foreign-owned companies in India and Indian-owned companies overseas and net of direct investments of Indian owned companies overseas in the case of direct investment.
** External assistance from multilateral and bilateral agencies.
Source: Statement 43, India's Balance of Payments in Dollars, Monthly Bulletin, Reserve Bank of India, June, May, March and January 2006 and December 2005.

On the capital account side, the notable developments were:

A notable development on the capital account side is the strong and steady increase in foreign direct investment (FDI) over the past three years, with gross inflows in the second half of 2005/06 double the level in 2004/05.

A strong and steady increase in foreign direct investment (FDI) over the past three years, with gross inflows in the second half of 2005/06 double the level in 2004/05.

Portfolio capital inflows were strong in 2005/06 both on account of investment by Foreign Institutional Investors (FII) and also on conversion of convertible bonds issued earlier, which has reduced the inflows reported under commercial borrowings especially in the second half of 2005/06;

External assistance (loans from multilateral and bilateral agencies) turning from negative net balances in 2003/04 to fairly strong positive flows in 2005/06;

The much reduced contribution of “other capital” in 2005/06, compared to the previous year, particularly that in the second half of 2004/05.

Invisibles

At Table 2.2 are presented on a quarterly basis, the absolute magnitudes and expansion over the comparable period of the previous year of the key elements in the category “Invisibles” which include the export of services and the flow of factor income. Earnings from export of software services show consistent year-on-year growth of 30 per cent and more, roughly similar to the pattern last year. Remittances growth has been strong in 2005/06, particularly in the last three quarters. Table 2.2

Changes in Key Items of Invisible Earnings on a Quarterly Basis⁺ Total Value and Change^†2001–02, 2002–03, 2003–04, 2004–05 and 2005–06 (Unit: US dollar millions)

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

			$ million	Change	$ million	Change	$ million	Change	$ million	Chang

Misc. Gen. Services, incl. Software & Exp. of o/seas branches of Indian cos.	Net	2002	1,868	127%	624	−26%	1,060	357%	712	198%
		2003	950	−49%	1,320	112%	1,866	76%	188	−74%
		2004	1,529	61%	916	−31%	2,490	33%	2,811	1,395%
		2005	2,783	82%	2,900	217%	2,412	−3%	6,422	64%
		2006	5,372	93%	5,782	99%	4,554	89%	6,422	39%
Of which: Software Services	Net	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	3,030	54%	2,949	44%	2,881	19%	3,464	42%
		2005	3,710	22%	3,859	32%	4,157	44%	4,800	39%
		2006	4,853	31%	4,989	29%	5,755	38%	6,665	39%
Remittances from Indians working overseas	Net	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	4,323	2%	6,060	53%	6,126	50%	5,099	6%
		2005	5,815	35%	4,153	−31%	4,089	−33%	6,196	22%
		2006	5,491	−6%	4,991	20%	6,385	56%	7,728	25%
Investment Income	Net	2002	−1,040	40%	−731	22%	−1,049	−4%	−1,024	−4%
		2003	−1,025	1%	−626	14%	−1,218	−16%	−675	34%
		2004	−978	5%	−550	12%	−2,177	−79%	−46	93%
		2005	−527	46%	−903	−64%	−560	74%	−679	1,376%
		2006	−827	−57%	−1,542	−71%	−2,857	−410%	−373	45%
Total of all Invisibles	Net	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	4,893	53%	6,735	58%	7,354	43%	8,819	99%
		2005	8,154	67%	6,129	−9%	6,290	−14%	10,656	21%
		2006	10,048	23%	9,587	56%	8,011	27%	13,296	25%

Note:⁺Revised, except Jan-March (Q4) 2005/06, which is provisional. The numbers in the table correspond to the latest releases including recent issues of the Monthly Bulletin, RBI.
* Reduced by the amount of profits retained by foreign-owned companies in India, and by Indianowned companies in their overseas operations.
^† The change is the variation with respect to the same quarter in the previous year.
Source: As in Table 2.1 above.

Oil Import Bill—2005/06 and Likely Magnitude in 2006/07

The oil import bill in 2005/06 rose by 47 per cent to touch $43.9 billion, up from $29.8 billion in the previous year, which itself had been 46 per cent higher than in 2003/04. Indian refineries export surplus refined petroleum products and on net basis, the oil import bill was about $32.3 billion in 2005/06 about 40 per cent higher than in 2004/05 ($23.1 billion).

In the current fiscal 2006/07, in the first quarter (April-June), the value of oil imports was higher by 39% over the comparable period of the previous year. Our estimate is that in 2006/07 the oil import bill will rise by about 33% to little over $58 billion.

In the current fiscal 2006/07, in the first quarter (April-June), the value of oil imports was higher by 39 per cent over the comparable period of the previous year. On average crude prices in the period roughly corresponding to the first quarter of 2006/07 had risen by about 30 per cent, which is suggestive that the increase in the oil import bill was predominantly due to the price effect, but there was some volume growth of 5 to 7 per cent as well.

In the previous issue, we had estimated that India's oil import bill in 2005/06 would be (a) $43 billion—which has turned out to be reasonably accurate—and that (b) the increase in the order of magnitude in evidence in 2004/05 and 2005/06 was unlikely to be repeated. Although the oil import bill for 2005/06 was very close to what was expected, the level of oil prices in the summer of 2006 has continued to defy gravity.

Our estimate is that in 2006/07 the oil import bill will rise by about 33 per cent to little over $58 billion, the increase being composed of 23 per cent increase in price and 8 per cent increase in quantity, adjusted by about $0.9 billion on account of restoration of Bombay High output to 2004/05 levels from the second quarter of 2006/07 onwards. Broadly the price scenario visualised is an average level of about $73/bbl for Nymex sweet crude. The average for Nymex crude in the first 4 months of 2006/07 was $71.5/bbl; so implicit in the assumed price level for the full year is an expectation that some containment of the conflict in Lebanon will make headway. In consequence there will transpire declines from July levels which will last for at least part of the balance of 2006/07, although during parts prices may rule at recent $74/bbl-levels or even higher.

Current Account Outlook for 2006/07

The Current Account Deficit (CAD) is expected to be $11.1 billion (or 1.2% of GDP), more-or-less the same level as in the previous year ($10.6 billion and 1.3% of GDP).

The Current Account Deficit (CAD) is expected to be $11.1 billion (or 1.2 per cent of GDP), more-or-less the same level as in the previous year ($10.6 billion and 1.3 per cent of GDP). Projections for both the current and capital account along with previous years’ numbers are at Table 3.1). Table 3.1

Projected Balance of Payments 2006/07 and actual for previous two years (Unit: US$ Billion)

	2004/05	2005/06	2006/07 (projected)

Current Account
Merchandise Exports	82.2	104.8	120.6
Merchandise Imports	118.8	156.3	183.7
Merchandise Trade Balance	36.6	−51.6	−63.1
Proportion of GDP	−5.3%	−6.5%	−6.9%
Net Invisibles	31.2	40.9	52.0
o/w Software	16.5	22.3	29.3
Remittances	20.3	24.1	27.5
Investment Income	−2.7	−5.0	−4.1
Current Account Balance	−5.4	−10.6	−11.1
Proportion of GDP	−0.8%	−1.3%	−1.2%
Capital Account
Foreign Investment	12.1	18.2	13.5
o/w FDI (net)	3.2	5.7	8.5
Portfolio capital	8.9	12.5	5.0
Loans	10.8	4.7	12.0
Banking capital	3.9	1.4	1.0
Other capital	4.7	0.9	1.0
Capital Account Balance	31.0	24.7	27.5
Proportion of GDP	4.5%	3.1%	3.1%
Errors & Omissions	0.5	1.0	−
Accretion to Reserves	26.2	15.1	16.4
Proportion of GDP	3.8%	1.9%	1.8%

Source: Data for 2004/05 and 2005/06 as in Table 2.1 above.

It is true, as noted in the RBI statement of July 25, 2006, that the DGCI&S merchandise trade data showed an increase in the trade deficit of $2.0 billion in the first quarter of 2006/07 compared to the same period of last year.⁵ It might therefore be expected that the CAD would also be as a result higher in the first quarter of 2006/07 compared to the (revised) number of $3.6 billion for the same quarter in 2005/06. However, this putatively enlarged CAD is difficult to reconcile with some of the other known numbers for the first quarter of 2006/07.

⁵“The trade deficit expanded from US $10.5 billion during April–June 2005 to US $12.6 billion during April-June 2006”, Macroeconomic and Monetary Developments, First Quarter Review 2006–07, Reserve Bank of India, 24 July 2006, p. 3.

Thus, the net purchase/sale position of foreign institutional investors (FII) as reported by the Securities and Exchange Board of India (SEBI) shows that there ought to have been a net outflow of little over $1.1 billion in the April-June quarter of 2006/07.⁶ Overseas equity issuance by Indian companies through Global Depository Receipts (GDR) and American Depository Receipts (ADR) amounted to Rs. 2,120 crore or U$472 million,⁷ thus leaving about (–)$0.6 billion as net portfolio capital flow.⁸

⁶Equity inflows were –$1,407 million and debt inflows were $281 million, totalling –$1,126 million.

⁷For 2006/07 up to 6 July 2006, Prime Database www.primedatabase.com

⁸The July 2006 Monthly Bulletin of the Reserve Bank of India reports that FII inflow for the month of April 2006 was a positive $3,276 million (Statement No. 46), which seems to be an error.

The net foreign currency assets of the Reserve Bank of India (RBI) increased by nearly $10.9 billion during the quarter and our estimate is that (see Table 3.2) of this $7.4 billion was real—i.e. identical to the overall BoP surplus. It is unlikely that other items— notably foreign direct investment (FDI), foreign loans and Non-Resident Indian (NRI) deposits—increased by such an enormous extent that it could explain the net impact of an enlarged CAD in the presence of small net outflows on account of portfolio capital, such that it would produce an overall BoP surplus of the order of $7.4 billion. The only conclusion indicated is that the CAD was smaller than last year's, perhaps much smaller. This may have been the consequence of (a)higher than expected net export of services and private remittances; (b) smaller deviation in the BoP merchandise trade deficit relative tothe DGCI&S data. We guess that it is perhaps a combination of both factors and this has gone to shape our projections of both the merchandise trade deficit and service exports and remittances. Table 3.2

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				2006/07

	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1

The Data
Nominal increase	10,097	6,703	−68	11,081	10,407	−3,219	4,568	−6,170	14,358	10,860
Overall BoP Surplus	10,071	7,570	−634	6,594	12,629	1,246	5,256	−4,672	13,221
Equal to Real Increment	10,071	7,570	−634	6,594	12,629	1,246	5,256	−4,672	13,221
Implicit impact of revaluation	26	−867	566	4,487	−2,222	−4,465	−688	−1,498	1,137
Our Estimates†
Revaluation impact	−96	−811	374	4,460	−2,218	−4,490	−628	−1,551	1,046	3,479
Real increment, that is, the overall BoP Surplus	10,097	7,514	−442	6,621	12,316	1,271	5,196	−4,619	13,312	7,381

Notes: ^†Figures reported in previous issues of this journal for periods up to Q3 of 2005–06.
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 July 14, 2006. The foreign exchange currency assets on the last day of each quarter a e from various Report on Foreign Exchange Reserves, RBI. For Q1 of 2006–07, the last day of the reporting week is also fortuitously the last trading day of the quarter.

Merchandise Trade Deficit

Gold imports had increased rapidly through 2003/04 and 2004/05 and continued to do so during the first half of 2005/06. However, the trend changed dramatically in the second half of 2005/06 with a declineof 29% with respect to the comparable period of the previous year.

Gold imports had increased rapidly through 2003/04 (up 52 per cent) and 2004/05 (up 54 per cent) and continued to do so during the first half of 2005/06 (41 per cent). However, the trend changed dramatically in the second half of 2005/06 with a decline of 29 per cent with respect to the comparable period of the previous year. As a result, overall for the year, 2005/06 saw the value of gold imports remain virtually unchanged at about $11.2 billion. The declining trend in gold imports appear to have continued into the first quarter of 2006/07 with import levels in April 2006 being 15 per cent lower than in the corresponding period of 2005, a level of decline which we assume persisted into the remaining two months of the first quarter of 2006/07.

Thus non-oil, non-gold imports in the first quarter of 2006/07 were 14.3 per cent higher than in the comparable period of the previous year. This number differs materially from the 9.6 per cent increase in total non-oil imports—both in regard of implications regarding the acceleration/deceleration of domestic economic activity and in regard to the likely growth of imports during the course of 2006/07. It may be noted that not only was the growth of non-oil imports in the first quarter of 2006/07 just 9.6 per cent, but it was also a major reduction from the 51.7 per cent recorded in the same quarter of 2005/06, as also from the 29 per cent recorded in the first quarter of 2004/05.

While the aggregation of gold along with other imports overstates the extent of deceleration of imports of raw materials, intermediates and capital goods (along with some finished consumer goods), the fact is there has also come about some reduction in the order of increase of non-oil, non-bullion imports. In the first quarter of 2004/05 it had been 25 per cent, while in 2005/06 it was 55 per cent; this has now come down to 14 per cent in 2006/07 (which on revision of the data may turn out to be a couple of percentage points higher).

Gold imports had continued to rise on year-on-year basis right through the second quarter of 2005/06, and it is expected that in 2006/07, it will be quite the opposite. Hence, it is reasonable to expect that the reported growth in total non-oil imports (and to an extent, total imports) would continue to remain subdued in the second quarter of 2006/07 as well, but less so than in the first quarter since the volume of bullion imports is generally at seasonal lows in the second quarter. Thereafter, as the comparison is made with periods of last year when gold imports had declined, the level of reported growth of non-oil imports (and total imports) will be well into the double digits. Further, some recovery in levels of gold imports in the second half of 2006/07 should be expected, further pushing up the reported growth in non-oil imports. For the year as a whole, gold imports are likely to be close to the levels of the previous two years, that is, around $11–12 billion.

Non-oil, non-gold imports are likely to increase by about 18% for the remaining three quarters of 2006/07 and for the year as a whole are expected to cross $102 billion—an increase of 17%. Add the projected oil import bill of $58 billion, the gold import bill of $11–12 billion and we have an estimate of total DGCI&S imports of $172 billion.

Non-oil, non-gold imports are likely to increase by about 18 per cent for the remaining three quarters of 2006/07 and for the year as a whole are expected to cross $102 billion—an increase of 17 per cent. Add the projected oil import bill of $58 billion, the gold import bill of $11–12 billion and we have an estimate of total DGCI&S imports of $172 billion.

Exports are expected to broadly follow the contours of the first quarter (up 16.9 per cent) in the second quarter, with slightly lower values for growth in the second half, given the likelihood of some weakening in import demand originating from major industrial economies. Overall growth for 2006/07 is expected to be 16.5 per cent with an aggregate level of exports of nearly $120 billion.

This leaves us with a DGCI&S trade deficit of $52 billion, which is 32 per cent larger than that of the previous year. As a proportion of expected GDP (current and market prices), this would involve an increase of the DGCI&S merchandise trade deficit from 5.0 per cent in 2005/06 to 5.8 per cent in 2006/07.

The difference between the DGCI&S trade data and that in the Balance of Payments (BoP) in 2005/06 was $2.1 billion for exports and $11.7 billion for imports. There is no logical method of inferring the magnitude of the difference in 2006/07. It is expected that while there will continue to be differences between the two sets of data, the order of difference this year may be somewhat smaller. Accordingly, we have assumed a difference of $1 billion for exports, $11.7 billion on imports, that is, a net difference of $10.7 billion on the trade balance. Hence, our projection of the BoP merchandise trade deficit in 2006/07, is $63 billion.

Invisibles

We expect software exports to rise by 32% (previous year 35%) and private remittances to increase by 13% (previous year 19%).

We expect software exports to rise by 32 per cent (previous year 35 per cent) and private remittances to increase by 13 per cent (previous year 19 per cent). Net investment income is likely to (in absolute terms) from the previous year's (–)$5.0 billion to (–)$4.1 billion due to the bunched-up outgoes on the accumulated interest on India Millennium Deposits which will be absent this year. At the aggregate level the net positive balance on invisibles is thus expected to increase to $52 billion from $41 billion in the previous year—an increase of 27 per cent (previous year 31 per cent).

Foreign Investment

Foreign direct investment (FDI) inflow into India in 2005/06 was $7.7 billion, which was 38 per cent higher than in the previous year. FDI outflows were slightly lower and in consequence the net FDI inflow in 2005/06 amounted to $5.7 billion, which was a whopping 77 per cent higher than in 2004/05. It is understood that a significant part of new FDI inflow was in the form of investment by private venture capital funds (about $3 billion in 2005/06). It is expected that FDI inflows will continue to rise in the current fiscal and we have projected little less than a 50 per cent increase at the net level.

Portfolio flows in 2005/06 consisted mostly of investment through FII, some conversion into equity of fully or partially convertible bonds and some overseas listings. The total portfolio flows had amounted to $12.5 billion, a 40 per cent increase over that in the previous year. The enormous business and investment confidence and as a result lowered-risk perception that characterised the past few years drove these equity flows at these heightened levels. The conditions that have currently come to obtain in the financial markets do suggest greater investment caution and in consequence smaller net portfolio equity inflows. Although FII inflows were positive in both June and July 2006, we have assumed that for the second quarter (July–Sept) such flows will be biased towards a net outflow which trend will be partially reversed in the second half of 2006/07. Overall we have thus taken portfolio inflows for the current fiscal at $5.0 billion, which implies net inflows well in excess of $6.0 billion during the second half of 2006/07. This will include overseas offerings of equity by Indian companies, and some amount of conversion of qualifying bonds to equity.

Foreign Currency Assets of the Reserve Bank of India

In the past issues of this journal we have presented 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 curren-cies.⁹ 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 3.2, we provide our past estimates for recent quarters, the actual position as indicated in the BoP statement and the estimate for the first quarter of 2006/07. It may be observed that our estimates in the past have been reasonably close to the mark.

⁹Since 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,

SectorsAgriculture

The SW monsoon 2005 was a good one with total precipitation being 99 per cent of the long term average. Production of foodgrain rose to 210.0 million tonnes (Table 4.1), with considerable output gains in both kharif and rabi harvests. Oilseed, cotton and sugarcane production was higher than in the previous year, as was the production of fruits and vegetables. In consequence overall agricultural GDP increased by 3.9 per cent—much above the recent trend rate of around 1.5 per cent. Table 4.1

Output of Principal Agricultural Commodities (Unit: Million Tonnes except for cotton)

	1999–2000	2000–01	2001–02	2002–03	2003–04	2004–05	2005–06

Rice	89.7	85.0	93.3	71.8	88.5	83.1	89.9
Wheat	76.4	69.7	72.8	65.8	72.2	68.6	71.5
Coarse cereals	30.3	31.1	33.4	26.1	37.6	33.5	34.7
Pulses	13.4	11.1	13.4	11.1	14.9	13.1	13.9
Kharif foodgrain	105.5	102.1	112.1	87.2	117.0	103.3	109.8
Rabi foodgrain	104.3	94.7	100.8	87.6	96.2	95.1	100.2
Total of Foodgrain	209.8	196.8	212.9	174.8	213.2	198.4	210.0
Groundnut	5.3	6.4	7.0	4.1	8.1	6.8	7.8
Rape and mustard	5.8	4.2	5.1	3.9	6.3	7.6	7.2
Soybean	7.1	5.3	6.0	4.7	7.8	6.9	8.4
Total of nine oilseeds	20.7	18.4	20.7	14.8	25.2	24.4	26.7
Cotton (million 170 kg bales)	11.5	9.5	10.0	8.6	13.7	16.4	18.9
Sugarcane	299.3	296.0	297.2	287.4	233.9	237.1	273.2

Sources: Ministry of Agriculture and Central Statistical Organisation.

Given the above-trend expansion last year, it is more than likely that in the current year output will be more-or-less stagnant or suffer some contraction.

Two factors militate against a second consecutive expansion in the agricultural sector in 2006/07. The first is that given the above-trend expansion last year, it is more than likely that in the current year output will be more-or-less stagnant or suffer some contraction. The second is that, as has been discussed earlier, the South West monsoon 2006 arrived late and cumulative seasonal rainfall till the end of July was 14 per cent below the long period average and several of the relatively drier and rain-dependent regions suffer significant seasonal rainfall deficits. Under these conditions it is likely that foodgrain output may show some decline with oilseeds and other commercial crops, including fruits and vegetables, registering an increase with overall GDP arising in the farm sector going up by just 1.0 per cent—some-what like the experience in 2004/05. However, it is more than likely that given the market expectations in regard of sugarcane and cotton, output increase in the agricultural sector may be better than 1.0 per cent.

Industry

As mentioned earlier, the present phase of manufacturing output expansion that began in July 2002 has now completed its 47^th month and is into its 48^th month. Electricity generation and mining output have lagged, but in more recent months output in these categories too has shown more rapid expansion.

In the mining sector, as has been mentioned earlier, there is expected to be a rebound in the output of crude petroleum at least to 2004/05 levels as output from the off-shore platform of ONGC damaged in an accident last year is fully restored.

Output growth in durable consumer goods has continued to be strong as has been the case with capital goods. In the more recent period this has been supplemented by a strong recovery in output growth in basic and intermediate goods, indicative possibly of greater construction and other capital asset creation activities (Table 5.2). It is however possible that later in the year the increases in interest rates may take some of the edge off the volume of leveraged durable consumer good demand. 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		8.4	9.2	4.4	5.2
2005–06		8.0	9.0	0.7	5.1
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	7.8	9.0	2.6	1.7
2005–06	Q-1	10.4	11.3	4.3	7.7
	Q-2	6.5	7.8	−2.1	2.0
	Q-3	7.1	8.1	−0.8	4.8
	Q-4	8.5	9.3	2.2	6.2
2006–07	April	9.6	10.6	5.9	3.4
2006–07	May	10.1	11.3	4.7	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 July 12, 2006.

Table 5.2

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

Year	Period	Basic Goods	Capital Goods	Intermediates	Consumer Goods

					Total	Durables	Nondurable

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
2005–06		6.7	15.8	2.6	12.1	14.9	11.1
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	14.5	3.7	12.5	11.6	12.8
2005–06	Q–1	7.8	13.8	3.6	18.4	16.4	19.2
	Q–2	4.6	17.1	2.6	9.5	10.8	7.8
	Q-3	5.8	16.1	1.0	10.3	14.9	9.5
	Q-4	8.3	15.8	2.4	10.9	17.7	8.8
2006–07	April	9.1	21.6	6.5	9.0	10.3	8.6
2006–07	May	9.0	20.5	8.6	9.1	18.3	5.9

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.

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). The industrial groups have been ranked in descending order with respect to their average growth rates in the 3 years 2003/04 to 2005/06 and can be readily separated into 3 distinct classes—those with more than 10 per cent growth on 3-year average basis; those with average growth rates of nil to 8 per cent; and those with negative 3-yearly average growth rates. Some of the lower-placed groups—non-metallic mineral products (mostly cement), paper, manmade fibres and refinery output—show recovery in 136 the first two months of the current fiscal, and for several of them the likelihood is that it will sustain, but it remains to be seen at what level. The other categories however seem to have serious problems in retaining existing output levels. Table 5.3

Annualised Growth Rates for Manufacturing at the 2-digit level Ranked with respect to average growth during 2003/04 to 2005/06 and growth in 2005/06 (Unit: per cent)

Group	Description of sector	Weight in 1000	Average 1995–1998*	Average 2003/04–2005/06^†	2002–03	2003–04	2004–05	2005–06	2006–07(Apr–May)
(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)

The fastest growing industry groups: 10 per cent and higher
38	Other industries	25.59	25.3	16.9	0.1	7.2	18.5	24.5	31.6
26	Textile products incl. RMG	25.37	17.9	10.8	14.4	−3.2	19.2	16.4	9.6
22	Beverage, tobacco etc.	23.82	15.4	11.9	27.9	8.6	10.8	16.4	11.4
33	Basic metal & alloys	74.53	8.4	10.1	9.2	9.2	5.4	15.7	21.0
37	Transport equipment & parts	39.84	10.8	11.2	14.6	17.0	4.1	12.5	21.4
35	36 Machinery (excl. transport)	95.65	9.8	15.6	1.6	15.6	19.6	11.5	13.4
30	Basic chemicals & products	140.02	10.1	10.4	3.7	8.7	14.5	8.1	12.5
Industry groups with slow to modest growth: 0 to 8 per cent
28	Paper & paper products	26.52	10.5	8.4	6.8	15.6	10.5	−1.1	12.1
32	Non–metallic mineral products	43.97	15.0	5.3	5.1	3.6	1.5	10.6	12.2
23	Cotton textiles	55.18	8.3	4.3	−2.7	−3.1	7.6	8.5	2.9
31	Rubber, plastic, coal & Refined Petroleum Products	57.28	5.0	3.7	5.5	4.5	2.4	4.3	8.0
24	Manmade fibres, wool, silk yarn	22.58	14.6	3.5	3.0	6.8	3.5	0.2	11.9
34	Metal products (excl. Machinery)	28.1	8.8	3.1	6.4	2.6	5.7	−0.1	−4.1
20–21	Food Products	90.83	5.1	0.4	11.0	−0.5	−0.4	2.0	−7.6
Industry groups with negative growth: up to −8 per cent
25	Jute & mesta	5.9	12.3	0.0	8.3	−4.2	3.7	0.5	−2.8
29	Leather, leather & fur products	11.39	8.4	−0.9	−3.3	−3.9	6.7	−5.4	−12.2
27	Wood, products & furniture	27.01	15.6	−2.8	−17.6	6.8	−8.5	−6.8	−21.3
2–3	Overall Manufacturing	793.58	9.4	8.5	6.0	7.3	9.2	9.0	11.0
Distribution of Rates of Growth
	Median Value		9.1	5.3	5.5	6.8	5.7	8.1	11.4
	25 percentile value		5.0	3.1	1.6	−0.5	3.5	0.2	−2.8
	75 percentile value		10.5	10.8	9.2	8.7	10.8	12.5	12.5
	Number of industry groups > mean		11	8	8	6	6	7	9
	Nos. industry groups < 1/3 rd of mean		0	4	5	5	4	4	6

Note: * Averages for 3 years—1995–96, 1996–97 and 1997–98;
^† Averages for the 3-year period—2003–04 to 2005–06. Arrows indicate change and direction, with two arrows emphasising where the order of change in the rate of growth compared to last year is sizeable.
Source: As in Table 5.1 above.

2-digit level analysis

There are significant variations 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 3 years include #22 beverages, tobacco etc., #37 transport equipment, #35–36 machinery, and #26 textile products including apparel, #33 basic metals & alloys, #30 basic chemicals & products and #38 other manufactures.

The first group which is showing growth in excess of 10% on 3-yearly basis makes up as much as 54 per cent of the total weight of manufacturing industry. Almost all of these industries grew at a very rapid pace in the first two months of 2006/07.

Industries in the second group account for 41 per cent of the total weight of manufacturing. Within this group, some industries are showing strong recovery.

Principally non-metallic mineral products (chiefly cement), paper, manmade fibres and rubber etc. (mostly refinery output) account for 20 per cent of the total weight of manufacturing and about half of that in the second category and all of these industries have demonstrated strong growth recovery in the first two months of 2006/07.

We have noted the large divergence between output expansion rates in different industries in previous issues. This has become even more marked now and must in some way be reflecting comparative advantage issues at the industry level.

Prices and Inflation

In the summer of 2004 inflation had become a politically heated issue for the newly formed UPA government when WPI inflation crossed 8 per cent. Fiscal and monetary policy responses helped reduce the inflation rate in a fairly short time with WPI inflation falling to 6.6 per cent by the end of December 2004 and eventually to 5.0 per cent by March 2005.

In calendar year 2006, or more strictly from the last week of November 2005, it has been the turn of foodgrain (wheat and pulses) and for some time in May and June 2006, of vegetables and other seasonal produce. In the WPI, the inflation rate for primary food articles jumped from 4.5 per cent at the end of September 2005 to 6.7 per cent at the end of December 2005, to 6.6 per cent at the end of March 2006 and finally to 8.3 per cent at the beginning of June 2006. This was the combined result of increase in prices of foodgrain— primarily of wheat and pulses—as well as that of seasonal produce like vegetables.

Consumer Price Inflation

In May 2006, CPIIW went up to 6.3% and CPI-UNME to 5.8% and most recently in June 2006 to 7.6% and 6.5% respectively. However, the WPI shows that food prices—particularly primary food other than foodgrain (mostly vegetables) and to a lesser extent foodgrain— have been declining through June and July.

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 2005. It started to move up beginning in November 2005, when both the principal consumer price indices— the CPI-UNME and CPI-IW—reported inflation of around 5 per cent and more. In May 2006, CPI-IW went up to 6.3 per cent and CPIUNME to 5.8 per cent and most recently in June 2006 to 7.6 per cent and 6.5 per cent respectively, well into the distinctly uncomfortable zone of above 6 per cent, and now 7 per cent.

However, the WPI shows that food prices—particularly primary food other than foodgrain (mostly vegetables) and to a lesser extent foodgrain—have been declining through June and July. Thus, year-on-year inflation for primary food other than foodgrain which had hit 8.1 per cent in early June (and averaged 7.7 per cent for the month) had dropped off to 2.7 per cent and 1.4 per cent in the first and second weeks of July 2006 respectively. The inflation rate for foodgrain had reached a peak value of 9.5 per cent in the second week of June, but has come down to 7.1 per cent at the end of the second week of July 2006.

In manufactured food products, the items showing high WPI inflation have been grain mill products and sugar which hit highs of 13.6 per cent and 8.4 per cent respectively in early June 2006. In bothcases there has been some relief with the inflation rate for the two product categories falling by mid-July to 9.9 per cent and 5.6 per cent respectively.

These should eventually show up in a lower inflation rate for the consumer price indices as well in July 2006—unless there is a material difference in the direction of inflation rates in the wholesale and retail market, of which, there is little evidence available till date.

Wholesale or Producer Prices (WPI)

In the current fiscal inflation has been more difficult, the pressure coming mostly from foodgrain and to some extent nonfood primary articles, namely, industrial minerals.

WPI Inflation was quiescent in 2005/06 and the year ended at 4.1 per cent, much below the target range that had been indicated bythe RBI of 5 per cent. However, in the current fiscal inflation has been more difficult, the pressure coming mostly from foodgrain and to some extent non-food primary articles, namely, industrial minerals. For a brief while in May and June price pressure had also come from primary food other than foodgrain, i.e. vegetables, but that has passed with inflation in this general category dropping to 1.4 per cent for the week ending 15 July 2006 from over 8 per cent in mid-June 2006.

There is little reason to believe that the recent strengthening of manufactured goods inflation towards the 4% level would presage increases significantly beyond this level.

However, manufactured goods inflation has been picking up in the course of the first four months of the current fiscal and “core” inflation is close to 4 per cent. The trend line for 3-month compounded inflation rates for manufactured goods is also around 4 per cent. The pass-through of the increase in petroleum prices with the exception of High Speed Diesel is total, unlike the case with non-industrial consumers. Prices of industrial raw materials—such as ferrous and nonferrous metals—have clearly peaked out and the most likely scenario over the next year is one of some degree of easing, rather than further increases in price. Under these circumstances, there is little reason to believe that the recent strengthening of manufactured goods inflation towards the 4 per cent level would presage increases significantly beyond this level.

In primary articles, prices of wheat and pulses will continue to remain strong for the rest of this fiscal year. Some further price pass through for automotive fuels (motor spirit and high speed diesel) is inevitable during the course of the year. However, considering all of these factors, it is more than likely that WPI inflation at the end of March 2007 will be close to 5.0 per cent and contained within the present indicative range of the RBI of between 5.0 and 5.5 per cent.

Composition of Inflation

The product category-wise contribution to inflation is analysed at Table 6.2. In the previous issue, we had noted that while petroleum products, metals and chemicals have expectedly contributed heavily to inflation, the large contribution from foodgrain and other primary food items is something of a break from the trend in the recent past. This break with previous periods has become more pronounced in 2006 with the contribution of foodgrain to overall inflation doubling in magnitude in the quarters ended March and June 2006 and the generally sharp increase in the contribution of primary articles to overall WPI inflation. 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 2005
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	2.2	1.0	6.7	5.0	5.9
2004	6.5	0.1	3.4	9.1	6.6	6.8
2005	4.8	3.9	3.9	9.9	3.9	3.3
Last week of month from December 2005 onwards—year–on–year basis
31 Dec 05	4.6	6.3	6.9	8.0	3.1	2.9
28 Jan 06	4.0	8.5	7.2	7.8	2.0	1.9
25 Feb 06	4.2	7.9	5.5	8.6	2.1	2.2
25 Mar 06	4.1	9.3	5.3	8.9	1.7	1.7
29 Apr 06	3.9	8.9	2.9	8.3	1.9	2.2
27 May 06*	4.7	9.5	6.1	9.4	2.6	2.5
24 June 06*	4.8	8.2	7.2	7.9	2.8	3.1
Last 6 weeks—June and July 2006—year–on–year basis
3 June 06*	4.7	8.8	8.0	8.0	2.8	2.7
10 June 06*	5.2	9.5	7.4	9.9	2.9	2.9
17 June 06*	5.4	9.0	8.1	9.9	2.9	3.2
24 June 06*	4.8	8.2	7.2	7.9	2.8	3.1
1 July 06*	5.0	8.2	7.4	7.3	3.2	3.5
8 July 06*	4.7	7.5	2.7	7.3	3.6	3.9
15 July 06*	4.5	7.1	1.4	7.2	3.7	3.9

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, that excludes primary food items and energy from the index
Source: Office of the Economic Adviser, Ministry of Commerce & Industry, Government of India, up to press release of July 28, 2006.

Table 6.2

Sources of Wholesale Price Inflation over the past 12 months—quarterly (Unit: per cent)

	Weight	25 Jun 2005	24 Sept 2005	31 Dec 2005	25 Mar 2006	25 Jun 2006

Overall WPI inflation	100.00	4.30	4.34	4.62	4.06	4.84
Primary Articles	22.03	0.23	0.54	1.10	1.19	1.56
Foodgrain	5.01	0.28	0.22	0.28	0.46	0.41
Other primary food	10.39	0.36	0.48	0.71	0.56	0.75
Raw cotton	1.36	−0.29	−0.26	0.09	−0.02	0.02
Oilseeds	2.67	−0.12	−0.22	−0.33	−0.21	−0.14
Commercial Energy	14.23	1.39	1.66	1.14	1.27	1.12
Petroleum products	6.99	0.98	1.20	0.82	0.92	1.00
Manufactured Goods	63.75	2.28	1.44	2.06	1.06	1.75
Dairy products	0.69	0.00	0.00	0.00	0.03	0.03
Grain mill products	1.03	0.04	0.02	0.09	0.13	0.13
Sugar, khandsari & gur	3.93	0.44	0.39	0.21	0.24	0.30
Edible oil	2.76	−0.17	−0.24	−0.18	−0.07	−0.02
Tea & coffee processing	2.76	0.01	0.11	0.18	−0.08	−0.08
Cotton textiles	4.22	−0.47	−0.56	−0.13	0.05	−0.06
Manmade Textiles	4.72	−0.09	−0.18	−0.15	−0.20	0.17
Paper & paper products	2.04	0.04	0.05	0.02	0.11	0.13
Rubber & plastic products	2.39	0.02	0.10	0.15	0.11	0.13
Chemical material & products	11.93	0.46	0.34	0.30	0.42	0.46
Non–metallic minerals	2.52	0.18	0.19	0.18	0.22	0.33
Iron and steel	3.64	0.33	0.33	0.29	−0.27	−0.18
Non–ferrous metals	1.47	0.17	0.19	0.19	0.25	0.36
Machinery & machine tools	8.36	0.66	0.42	0.25	0.33	0.29
All other manufactured goods	15.14	0.67	0.15	0.52	0.18	−0.11

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

Credit and Investment

Credit flow from the banking system to the commercial sector continued to expand rapidly through 2005/06 by 32 per cent—about the same as it had been in 2004/05. Although the recovery in credit off-take had begun in 2002/03, the last two years have seen a phenomenal pace of expansion (Tables 7.1 & 7.2). 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	06–07	02–03	03–04	04–05	05–06	06–07

Q–1 (June)	19,308	3,091	30,985	57,092	15,484	7,030	586	7,100	3,683	607
Q–1 (June)	19,308	(−16,074)	(−2,070)	(4,205)
Q–2 (Sept)^†	46,834	41,034	95,533	157,284		−752	−12,107	2,677	−1,571
Q–3 (Dec)	64,765	64,484	179,274	235,777		−2,031	−13,127	7,818	−108
Q–4 (Mar)	104,204	125,088	254,484	407,078		−4,499	−13,518	5,159	−430
Q–4 (Mar)	104,204	(138,978)	(274,315)	(354,192)

FY	Investments					Total Accomodations

	02–03	03–04	04–05	05–06	06–07	02–03	03–04	04–05	05–06	06–07

Q–1 (June)	−5,724	−2332	−2,332	−3,287	1,964	6,111	−1,385	28,717	54,187	17,447
Q–2 (Sept)^†	−5,675	−1,838	−2,312	−10,961		40,825	39,484	93,286	146,677
Q–3 (Dec)	−2,719	−3,445	2,509	−16,464		61,472	61,363	181,848	219,668
Q–4 (Mar)	−1,802	−3,687	1,722	−14,200		101,791	121,725	256,271	392,478

Note: * The figures in parentheses show the change in non-food credit when the comparison is made with the reporting Friday immediately succeeding 31 March, rather than the last reporting Friday of March. That is, with respect to 1 April 2005, 2 April 2004 and 4 April 2003 in lieu of 18 March 2005, 19 March 2004 and 21 March 2003.
^† For years previous to 2005–06, for the second quarter, since the fortnight straddles the end of September and the first week of October, the aggregates as at the end of the first week of October have been used, that is 1st, 3rd, 4th, 5th, and 6th October of 2004, 2003, 2002, 2001and 2000 respectively.
Source: Reserve Bank of India, Weekly Statistical Supplement various issues up to July 21, 2006.

Table 7.2

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	06–07	02–03	03–04	04–05	05–06	06–07

Q–1 (June)	16.8	16.2	22.4	29.7	32.7	21.2	−17.1	−14.8	4.0	−7.8
Q–2 (Sept)^†	17.5	15.8	24.9	31.5		6	−29.8	3.4	2.4
Q–3 (Dec)	18.4	16.7	31.7	31.6		−0.6	−30.0	20.4	−6.3
Q–4 (Mar)	19.5	18.4	31.6	31.8*		−8.3	−27.3	14.3	1.7*

FY	Investments					Total Accomodations

	02–03	03–04	04–05	05–06	06–07	02–03	03–04	04–05	05–06	06–07

Q–1 (June)	−2.0	0.5	−1.7	4.1	−9.8	14.3	14.1	19.6	26.6	29.5
Q–2 (Sept)^†	−4.4	3.8	−6.1	−3.7		14.3	14.3	21.4	24.9
Q–3 (Dec)	−0.7	−1.6	2.6	−15.6		15.5	14.4	28.6	27.6
Q–4 (Mar)	−0.6	−4.0	1.7	−12.4*		16.7	15.8	28.6	28.3*

Note: ^†For years previous to 2005–06, in the second quarter, since the fortnight straddles the end of September and the first week of October, the aggregates as at the end of the first week of October have been used, that is 1st, 3rd, 4th, 5th, and 6th October of 2004, 2003, 2002, 2001and 2000 respectively.
* The last reporting fortnight in 2005/06 was 31 March 2006, while the corresponding fortnight one year ago was 1 April 2005. In order to compute the year-on-year expansion rates, the comparison for 31 March 2006 was done with respect to 1 April 2005, rather than the last reporting Friday of 2005–06 which would have been 18 March 2005.
Source: Reserve Bank of India, Weekly Statistical Supplement various issues up to July 21, 2006.

In the current year (2006/07), credit growth appears to have continued to expand strongly, the expansion in the first quarter over the level of credit outstanding at the end of the previous year being 1.1 per cent which was higher than the 0.4 per cent of last year measured on comparable basis (Table 7.3). Up to the end of the first week of July the comparable number this year was 2.5 per cent, significantly higher than the 1.1 per cent at the same point in time last year. Table 7.3

Comparable Numbers for Credit Growth in 2005/06 and 2006/07

	Non Food Credit Outstanding	Increase since last reporting Friday of the previous financial year		Increase since 1 April 2005 or 31 March 2006 for 2005–06 and 2006–07 respectively

	Rs Crore	Rs Crore	Proportion	Rs Crore	Proportion

18 March 2005	1,059,308
1 April 2005	1,112,194
24 June 2005	1,116,399	57,092	5.4%	4,205	0.4%
8 July 2005	1,132,142	72,834	6.4%	19,948	1.8%
31 March 2006	1,466,386
23 June 2006	1,481,870	15,484	1.1%	15,484	1.1%
7 July 2006	1,504,135	37,749	2.5%	37,749	2.5%

Source: Non-Food Credit outstanding on 1 April 2005 from Survey of Commercial Banking, Monthly Bulletin, Reserve Bank of India, June 2006.

The strong growth of bank credit inevitably increased money supply. The broad money indicator M3 has increased by 20 per cent during the course of 2005/06. In 2006/07 up to 7 July, estimates of M3 show growth at 3.3 per cent (or by Rs. 91,114 crore), higher than for the comparable period of last year of 1.7 per cent (or by Rs. 40,730 crore). From the sources side, the explanation lies not only with higher credit growth (increase of Rs. 11,301 crore), but even more so with the increase in the foreign currency assets of the RBI. The net foreign currency assets of the banking system increased this year (up to 7 July) by Rs. 76,402 crore, compared to a decline of Rs. 19,720 crore in the same period of last year, i.e. a net difference of Rs. 96,162 crore. Net non-monetary liabilities of the banking system (other than time deposits) increased by Rs. 74,891 crore, dampening almost wholly the expansionary impact of the accretion to foreign currency assets.

In any case, the RBI monetary expansion target of 15 per cent growth during 2006/07, are being exceeded, which has occasioned the Governor to state in his 25 July 2006 statement that developments “during the first quarter of 2006–07 indicate that money supply, deposit and credit growth are running well above the indicative projections, warranting caution by all concerned in this regard”.¹⁰

¹⁰First Quarter Review of Annual Statement on Monetary Policy for 2006–07, Reserve Bank of India, 25 July 2006, p. 4.

External Merchandise Trade

This section has 5 tables that provide information on the composition and direction of India's external merchandise trade, with the final table providing information on our bilateral trade with our top 100 trading partners.

Direction of Trade

In 2005/06, the most rapid increase in both our exports and imports was in our trade with East Asia, where our exports increased by 21% and imports by 31%. Within East Asia, the fastest expansion of trade growth was with South Korea where our exports rose by 72% and imports by 22%.

In 2005/06, the most rapid increase in both our exports and imports was in our trade with East Asia, where our exports increased by 21 per cent and imports by 31 per cent. Within East Asia, the fastest expansion of trade growth was with South Korea where our exports rose by 72 per cent and imports by 22 per cent. Trade also expanded rapidly with China by 18 and 49 per cent respectively for exports and imports; the total trade volume together with Hong Kong was 18 per cent for exports and 44 per cent increase for imports.

Exports to our largest trading partner—the USA— rose by 23%, but imports increased by less than 10%. With Western Europe, our exports increased by 24% and our imports from that region increased by 15%.

Exports to our largest trading partner—the USA—rose by 23 per cent, but imports increased by less than 10 per cent. With Western Europe, our exports increased by 24 per cent and our imports from that region increased by 15 per cent. With South East Asia our export rose by 23 per cent and imports by 14 per cent, while that with South Asia was 17 and 35 per cent respectively. Our exports to Africa and Latin America were well above the average at 31 and 35 per cent respectively.

Composition of Trade

Total imports (in rupee terms) rose by 26 per cent, bullion imports decreased by 1 per cent and crude petroleum rose by 45 per cent. Non-oil, non-bullion imports were up by 22 per cent, somewhat slower than in the previous year (36 per cent). Import of capital goods increased by 20 per cent and manufacturing intermediates by 33 per cent [see Table 8.2]. Table 8.1

Export, Import and Merchandise Trade Balances by Geographic Regions 2004–05 and 2005–2006 (Unit: Rs. Crore)

	Exports		Imports		Trade Balance

	2004–05	2005–06	2004–05	2005–06	2004–05	2005–06

Total—Global	375,340	454,800	501,065	630,517	−125,725	−175,727
China	25,233	29,757	31,892	47,458	−6,659	−17,791
Hong Kong	16,588	19,734	7,774	9,597	8,814	10,137
South Korea	4,680	8,053	15,765	19,230	−11,085	−11,177
Japan	9,561	10,886	14,536	15,728	−4,975	−4,843
Taiwan	2,779	2,728	4,907	6,071	−2,128	−3,343
Sub-total East Asia	59,414	71,404	74,874	98,174	−16,033	−27,016
USA	61,852	76,166	31,458	34,436	30,394	41,730
Canada	3,895	4,466	3,485	3,963	410	503
North America	65,747	80,632	34,943	38,399	38,804	42,233
Euro-zone	59,809	72,407	62,632	74,845	5,410	5,348
Western Europe	81,905	101,637	112,002	129,026	−21,864	−19,604
West Asia	61,249	71,382	40,500	44,901	20,749	26,481
S E Asia	37,350	46,059	39,130	44,661	−1,780	1,398
South Asia	21,195	24,818	6,304	8,503	14,891	16,315
Africa	23,299	30,511	17,407	19,776	5,892	10,735
Latin America	9,466	12,786	8,993	10,612	473	2,174
Oceania	3,784	4,346	17,760	22,349	−6,415	−3,120
FSU + East Europe	7,388	8,111	10,530	15,178	−3,142	−7,067
Unspecified	1,680	843	136,420	195,891	−134,740	−195,048

Note: The trade data does not direction of trade for crude petroleum and refined products, for the most part, particularly crude which is reported under “unspecified”.
Source: Monthly Foreign Trade Statistics of India (principal commodities & countries), Imports and Exports & Re–exports, Directorate General of

Table 8.2

Summary of Changes in the rupee value of Merchandise Imports Financial years of 2003–04, 2004–05 and 2005–06 (Unit: Rs. Crore and per cent)

Item	2003–04	2004–05	Change in 2004/05	2005–06	Change in 2004/05

Sub-total—food items	17,027	17,637	3.6%	16,177	−8.3%
Vegetable oils—edible	11,683	11,077	−5.2%	8,716	−21.3%
Pulses	2,285	1,778	−22.2%	2,347	32.0%
Cashew nuts	1,372	1,805	31.6%	2,090	15.8%
Fruits & nuts	802	1,101	37.2%	1,377	25.1%
Sugar	63	976	1456.9%	652	−33.2%
Sub-total—agricultural raw materials	3,625	3,339	−7.9%	2,966	−11.2%
Raw cotton	1,570	1,136	−27.7%	688	−39.4%
Raw wool	871	867	−0.4%	886	2.2%
Raw Silk	629	637	1.3%	773	21.3%
Natural rubber	220	429	94.9%	275	−36.0%
Raw hides and skins	229	226	−1.4%	257	14.0%
Sub-total—ores & minerals	13,424	26,726	99.1%	34,530	29.2%
Metalliferrous ores & metal scrap	5,955	11,091	86.3%	16,693	50.5%
Coal, coke & briquettes	6,483	14,371	121.7%	16,380	14.0%
Other crude minerals	591	688	16.5%	912	32.5%
Sulphur & un-roasted pyrites	396	576	45.4%	545	−5.3%
Sub-total—manufactured intermediate goods	114,262	154,139	34.9%	204,416	32.6%
Electronic goods*	34,492	44,901	30.2%	58,406	30.1%
Other commodities*	11,944	18,988	59.0%	26,790	41.1%
Organic chemicals	12,689	17,597	38.7%	20,797	18.2%
Iron and steel	6,492	11,193	72.4%	18,815	68.1%
Artificial resins, plastic material	4,972	6,546	31.7%	9,895	51.2%
Inorganic chemicals	5,838	8,014	37.3%	9,704	21.1%
Non-ferrous metals	4,360	5,887	35.0%	8,157	38.6%
Manufactured fertilizers	2,301	4,311	87.4%	7,236	67.8%
Manufacture of metals	3,169	4,128	30.2%	5,316	28.8%
Chemical material & products	2,902	3,681	26.8%	4,600	24.9%
Pharmaceutical products*	2,958	3,169	7.1%	4,515	42.5%
Wood and wood products*	3,269	3,994	22.1%	4,066	1.8%
Other textile yarn, fabrics, made-ups*	1,963	2,593	32.1%	3,641	40.4%
Pulp and waste paper	1,880	2,199	17.0%	2,471	12.4%
Manmade filament/spun yarn	1,912	2,189	14.5%	2,451	12.0%
Paper board & manufactures	1,411	1,504	6.5%	2,252	49.8%
Dyeing, tanning & colouring material	1,601	1,853	15.7%	2,203	18.9%
Printed books, newspapers etc*	1,356	1,658	22.3%	2,095	26.4%
Newsprint	1,611	1,766	9.6%	1,915	8.5%
Synthetic & reclaimed rubber	1,070	1,410	31.7%	1,539	9.2%
Crude fertilizers	615	1,301	111.5%	1,350	3.8%
Cotton yarn & fabrics	653	880	34.7%	1,229	39.7%
Leather	786	956	21.6%	1,029	7.7%
Silk yarn & fabrics	530	803	51.6%	959	19.5%
Primary iron & steel, pig, iron etc	429	802	87.3%	806	0.5%
Essential oil & cosmetic prep	419	552	31.5%	634	15.0%
Sub-total—capital goods	51,986	70,783	36.2%	85,269	20.5%
Machinery except electrical & electronic	21,797	30,633	40.5%	43,806	43.0%
Transport equipment	14,833	19,444	31.1%	13,940	−28.3%
Professional instruments	5,653	6,877	21.6%	8,747	27.2%
Electrical machinery	4,008	5,369	34.0%	6,472	20.5%
Machine tools	2,114	2,788	31.8%	4,730	69.7%
Computer s/ware in physical form	1,761	2,994	70.0%	3,962	32.3%
Project goods	1,820	2,679	47.2%	3,613	34.9%
Pearls, precious & semiprecious stones	32,757	42,338	29.2%	40,469	−4.4%
Sub-total—Bullion	31,506	50,099	59.0%	49,540	−1.1%
Gold	29,946	47,348	58.1%	47,383	0.1%
Silver	1,560	2,751	76.3%	2,157	−21.6%
Crude petroleum & products	94,520	134,094	41.9%	194,640	45.2%
Total	359,108	501,065	39.5%	630,527	25.8%
Memo items
Non-oil imports	264,588	366,971	38.7%	435,887	18.8%
Non-oil, non-bullion imports	233,082	316,872	35.9%	386,347	21.9%
Non-oil, non-bullion, non-diamond	200,324	274,534	37.0%	345,878	26.0%

Note: *A significant part or even the whole of these categories are final consumer goods and not manufacturing intermediates.
Source: As in Table 8.1 above.

Exports of manufactured goods (22 per cent) rose slightly more than did the total (21 per cent). Notably rapid export growth was evident in the following items (previous year growth figure in parentheses):

Other important export categories that did reasonably well were cotton apparel (24 per cent, previous year 3 per cent), pharmaceuticals & fine chemicals (21 per cent, previous year 17 per cent) and manufactures of metals (21 per cent, previous year 37 per cent). Exports of leather & leather manufactures and iron & steel lagged behind (Table 8.3). Table 8.3

Summary of Changes in the rupee value of Merchandise Exports Financial years of 2003–04, 2004–05 and 2005–06 (Unit: Rs. Crore and per cent)

Item	2003–04	2004–05	Change in 2004/05	2005–06	Change in 2004/05

Agricultural Products	34,619	38,078	10.0%	45,254	18.8%
Ores & minerals	10,885	22,819	109.6%	27,402	20.1%
Leather & manufactures	9,939	10,881	9.5%	11,626	6.8%
Textiles and products	58,779	60,906	3.6%	71,012	16.6%
Chemicals and products	40,777	53,049	30.1%	61,015	15.0%
Metals and products	25,726	37,942	47.5%	42,183	11.2%
Engineering goods	22,985	30,793	34.0%	43,280	40.5%
Other manufactured goods*	89,660	119,889	33.7%	152,799	27.5%
Total of manufactured products	247,863	314,443	26.9%	382,143	21.5%
Agricultural Produce
Marine products	6,106	6,469	6.0%	6,356	−1.8%
Oil meals	3,348	3,178	−5.1%	4,826	51.9%
Rice—other than basmati	2,175	3,945	81.4%	4,144	5.0%
Rice—basmati	1,993	2,824	41.7%	3,030	7.3%
Cotton raw incl. waste	942	423	−55.2%	2,792	560.7%
Meat & preparations	1,714	1,905	11.1%	2,648	39.0%
Cashew	1,700	2,477	45.7%	2,563	3.5%
Spices	1,544	1,883	22.0%	2,218	17.8%
Coffee	1,086	1,069	−1.5%	1,677	56.9%
Tea	1,637	1,840	12.4%	1,632	−11.3%
Pulses	329	603	83.4%	1,103	83.0%
Fresh fruits	784	862	10.0%	1,101	27.7%
Guar-gum meal	508	689	35.7%	1,042	51.2%
Tobacco, not manufactured	804	940	16.9%	1,028	9.3%
Miscellaneous processed items	1,059	908	−14.2%	979	7.8%
Castor Oil	656	1,078	64.3%	934	−13.3%
Fresh vegetables	954	863	−9.5%	911	5.6%
Dairy products	162	459	184.0%	786	71.3%
Sesame seeds	709	709	0.0%	735	3.7%
Processed fruits & juices	344	369	7.4%	600	62.6%
Wheat	2,391	1,460	−38.9%	557	−61.8%
Sugar	1,217	150	−87.7%	557	272.6%
Other cereals	398	794	99.7%	513	−35.4%
Groundnut	544	547	0.5%	501	−8.5%
Processed vegetables	291	362	24.5%	473	30.5%
Poultry products	254	282	11.2%	326	15.7%
Floricultural products	250	223	−11.0%	305	36.7%
Tobacco, manufactured	295	315	6.6%	302	−3.8%
Spirit & beverages	122	139	14.3%	271	94.6%
Mineral Produce
Iron ore	5,173	14,726	184.6%	17,093	16.1%
Processed minerals	2,880	3,619	25.7%	5,034	39.1%
Other ores & minerals	2,434	4,168	71.2%	4,969	19.2%
Manufactured Goods
Gems & jewelry*	48,586	61,834	27.3%	68,830	11.3%
Refined Petroleum Products*	16,397	31,404	91.5%	50,979	62.3%
Cotton apparel & accessories	22,009	22,663	3.0%	28,104	24.0%
Pharmaceutical & fine chemicals	15,213	17,858	17.4%	21,579	20.8%
Machinery & instruments	12,757	16,712	31.0%	21,233	27.1%
Transport equipment	8,988	12,714	41.5%	20,218	59.0%
Manufactures of metals	11,150	15,283	37.1%	18,477	20.9%
Cotton yarn, fabric, made-ups	15,600	15,502	−0.6%	17,102	10.3%
Iron & steel	11,386	16,898	48.4%	15,544	−8.0%
“Other” commodities*	8,640	10,166	17.7%	13,312	30.9%
Plastic & linoleum products	8,054	13,627	69.2%	12,220	−10.3%
Electronic goods*	8,294	8,231	−0.8%	9,603	16.7%
Chemicals & agro-chemicals	5,293	7,248	36.9%	8,702	20.1%
Manmade yarn, fabrics, made-ups	8,093	8,819	9.0%	8,498	−3.6%
Dyes & intermediates	4,710	5,346	13.5%	7,114	33.1%
Non-ferrous metals	2,801	4,558	62.7%	6,990	53.4%
Paper/wood products	2,363	3,237	37.0%	4,431	36.9%
Apparel of Manmade fibre	3,530	3,321	−5.9%	4,382	31.9%
Rubber products except footwear	2,746	3,136	14.2%	3,921	25.0%
Carpets—excl silk—handmade	2,571	2,732	6.3%	3,575	30.8%
Leather footwear	2,541	2,956	16.3%	3,483	17.9%
Glass/ceramic/refractory products	2,629	2,863	8.9%	3,241	13.2%
Residual chemical & allied	1,652	2,302	39.3%	3,163	37.4%
Leather goods	2,478	2,632	6.2%	2,874	9.2%
Leather—finished	2,554	2,731	6.9%	2,683	−1.7%
Cosmetics/toiletries	1,645	1,625	−1.2%	2,172	33.7%
Natural silk yarn, fabrics and made-ups	1,740	1,818	4.5%	1,886	3.7%
Paints/enamel/varnishes	1,217	1,576	29.5%	1,840	16.7%
Apparel of other textile fibres	1,050	1,085	3.3%	1,838	69.4%
Handicrafts, other than carpets*	2,296	1,696	−26.1%	1,817	7.2%
Apparel made of Wool	1,285	1,561	21.4%	1,727	10.7%
Leather garments	1,384	1,480	7.0%	1,454	−1.8%
Jute hessian, floor coverings, yarn	1,114	1,241	11.4%	1,304	5.1%
Ferro alloys	389	1,203	209.4%	1,172	−2.6%
Apparel made of silk	760	852	12.1%	1,157	35.9%
Machine tools	646	794	22.8%	949	19.6%
Leather footwear components	741	805	8.7%	793	−1.6%
Project goods	387	337	−12.8%	596	76.7%
Coir & coir manufactures	357	474	32.7%	594	25.3%
Sports goods	455	460	0.9%	586	27.4%
Woollen yarn, fabrics, made-ups	268	314	17.1%	371	18.4%
Manmade staple fibre	276	395	43.2%	358	−9.5%
Saddlery & harness	242	277	14.5%	338	22.0%
Footwear of rubber/canvas	245	332	35.0%	304	−8.2%
Residual engineering Items	207	237	14.4%	284	19.9%
Silk carpets	120	127	6.0%	95	−25.5%
Grand Total	293,367	375,340	27.9%	454,800	21.2%
Memo Items
Manufactured goods excluding refined petroleum products	231,466	283,039	22.3%	331,164	17.0%
Grand total of exports excluding refined petroleum products	276,969	343,935	24.2%	403,821	17.4%

Note: A significant part or even the whole of these categories are final consumer goods and not manufacturing intermediates.
Source: As in Table 8.1.

End of MFA, Quotas and Textile Exports

We had examined Indian exports of textile items, which indicated that first, India's export of textile items had not expanded in the first half of 2005/06 and second that this was the outcome of expansion in the formerly quota restrained markets of the US and Western Europe offset by equivalent declines in formerly non-quota markets.

The Multi Fibre Arrangement (MFA) and its associated quotas ended with effect from 1 January 2005. In the previous issue we had examined Indian exports of textile items, which indicated that first, India's export of textile items had not expanded in the first half of 2005/06 and second that this was the outcome of expansion in the formerly quota restrained markets of the US and Western Europe offset by equivalent declines in formerly non-quota markets. This seemed to indicate that there had been a switch from relatively low margin (formerly) non-quota markets to higher margin formerly quota markets indicating thereby possible supply constraints in the Indian industry that failed to support the enhancement of market share.

There seems to have transpired a marked improvement in export of textile items in the second half of the year. Cotton yarn, fabrics & made-up and cotton apparel exports had increased by a mere 0.2 per cent in the first half of 2005/06, comprising an increase by 13 per cent to former MFA markets, offset by a decline of 21 per cent to formerly non-quota markets (Table 8.4). However, in the second half of the year, exports of cotton yarn, fabrics & made-up and cotton apparel increased by 35 per cent overall, with increase of 45 per cent to former quota countries and of 15 per cent to former non-quota countries. Overall for the year 2005/06, exports of these textile items to all markets increased by 18.5 per cent, comprising an increase by 30.5 per cent to formerly quota-restrained markets and a decline of 3.1 per cent to formerly non-quota markets. Table 8.4

Indian exports of two key textile items by market–the first and second halves of 2005/06 (Unit: Rs in crore and per cent

	Countries	First Half of 2005–2006						Second Half of 2005–2006

		Cotton Yarn, fabrics – Made-ups		Apparel (RMG) of Cotton		Total		Cotton Yarn, fabrics – Made-ups		Apparel (RMG) of Cotton		Total

		2005–06	Increase	2005–06	Increase	2005–06	Increase	2005–06	Increase	2005–06	Increase	2005–06	Increase

1	U.S.A.	1,398	9.0%	3,505	8.1%	4,903	8.3%	2,189	50.6%	6,081	66.9%	8,270	62.2%
2	U.K.	282	−19.6%	1,452	44.0%	1,733	27.6%	365	5.6%	1,694	24.7%	2,058	20.8%
3	Germany	268	−15.7%	984	26.1%	1,251	14.0%	362	9.9%	1,488	48.0%	1,851	38.6%
4	France	183	5.6%	787	15.2%	969	13.3%	225	18.7%	1,333	31.1%	1,558	29.2%
5	Canada	108	−9.9%	339	−26.3%	447	−22.9%	157	16.6%	627	28.7%	784	26.1%
6	Italy	396	7.7%	502	21.9%	898	15.2%	593	22.9%	797	30.1%	1,390	27.0%
7	Netherlands	87	25.8%	377	−1.6%	464	2.6%	88	11.4%	633	51.7%	721	45.3%
8	Spain	154	9.5%	465	92.3%	620	61.8%	257	36.3%	681	45.7%	938	43.0%
9	Belgium	104	10.5%	128	−2.7%	232	2.8%	164	18.6%	243	60.6%	407	40.5%
10	Denmark	35	2.9%	246	58.6%	281	48.5%	44	26.4%	383	77.3%	426	70.3%
11	Sweden	73	1.0%	72	−5.3%	144	−2.2%	108	42.3%	167	101.2%	275	73.1%
12	Portugal	108	10.0%	26	77.4%	134	18.7%	156	58.4%	36	55.2%	191	57.8%
13	Ireland	14	40.6%	110	38.7%	124	38.9%	−11	−194.2%	139	18.3%	128	−0.2%
14	Norway	32	19.7%	31	−1.6%	63	8.2%	34	46.3%	58	34.4%	92	38.6%
15	Finland	17	35.8%	93	102.0%	109	88.0%	28	85.0%	116	153.8%	144	136.6%
16	Greece	33	11.2%	37	76.3%	69	38.1%	42	19.9%	36	29.0%	78	23.9%
17	Austria	24	−29.4%	15	16.3%	39	−16.7%	32	8.5%	24	21.7%	56	13.8%
Sub-total former MFA countries		3,314	2.5%	9,166	17.8%	12,480	13.4%	4,833	31.9%	14,535	49.3%	19,368	44.5%
Sub-total former non-MFA countries		3,485	−13.9%	1,812	−31.3%	5,297	−20.8%	5,285	21.1%	2,372	3.9%	7,657	15.2%
TOTAL		6,799	−6.7%	10,978	5.0%	17,777	0.2%	10,118	26.1%	16,907	40.7%	27,025	34.8%
Break up of former non-MFA markets
1	West Asia	632	−10.6%	878	−31.0%	1,510	−23.7%	832	15.0%	1,032	−3.3%	1,864	4.1%
2	Africa	701	−16.1%	142	1.1%	844	−14.3%	938	−6.5%	170	17.0%	1,108	−3.5%
3	Russia – East Europe	176	−25.3%	89	−67.4%	265	−42.9%	258	47.9%	225	−15.9%	483	9.3%
4	Latin America	213	21.8%	158	−0.1%	371	11.4%	203	17.9%	222	28.8%	425	23.3%
5	South and SE Asia	740	−21.7%	186	−30.2%	926	−23.6%	1,369	37.9%	233	6.0%	1,602	32.1%
6	China – Hong Kong	390	−30.2%	31	17.9%	420	−28.1%	717	47.2%	42	40.1%	759	46.8%
7	Korea, South	367	3.7%	5	33.3%	372	4.0%	585	35.9%	8	103.7%	593	36.5%
8	Japan	151	−19.0%	182	24.6%	333	0.2%	228	2.7%	212	29.8%	440	14.1%
9	Switzerland	18	−14.2%	67	−64.4%	85	−59.3%	29	22.3%	141	10.8%	170	12.6%
10	Australia	91	−19.3%	70	−7.8%	161	−14.7%	104	−2.6%	71	6.3%	175	0.8%

Direction of Trade

In Table 8.4 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 8.5 with a listing of the top 100 countries by total (exports + imports) value of trade in the first six months of 2005/06. Import volumes exclude crude petroleum products. Table 8.5

Export, Import and Merchandise Trade Balances Top 100 Countries by total bi-lateral trade (exports + imports)—in descending order (Unit: Rs. Crore)

		Exports		Imports		Trade Balance

		2004–05	2005–06	2004–05	2005–06	2004–05	2005–06

1	U.S.A.	61,852	76,166	31,458	34,436	30,394	41,730
2	China	25,233	29,757	31,892	47,548	−6,659	−17,791
3	UAE	33,015	38,043	20,853	19,091	12,162	18,952
4	Germany	12,699	15,571	18,042	25,760	−5,343	−10,189
5	U.K.	16,540	22,783	16,023	17,259	516	5,525
6	Singapore	17,975	24,660	11,913	14,302	6,062	10,358
7	Belgium	11,277	12,632	20,619	20,832	−9,342	−8,200
8	Switzerland	2,430	2,099	26,689	28,891	−24,259	−26,792
9	Hong Kong	16,588	19,734	7,774	9,597	8,814	10,137
10	South Korea	4,680	8,053	15,765	19,230	−11,085	−11,177
11	Japan	9,561	10,886	14,536	15,728	−4,975	−4,843
12	Australia	3,236	3,594	17,184	21,478	−13,948	−17,884
13	Italy	10,271	11,024	6,170	8,096	4,102	2,927
14	Indonesia	5,988	6,068	11,762	12,988	−5,774	−6,920
15	South Africa	4,421	6,871	9,874	10,843	−5,453	−3,972
16	France	7,553	9,065	8,511	7,811	−958	1,254
17	Malaysia	4,871	5,098	10,330	10,575	−5,459	−5,477
18	Netherlands	7,211	10,874	3,556	4,601	3,655	6,273
19	Saudi Arabia	6,345	8,000	5,846	7,161	498	839
20	Russia	2,836	3,232	5,943	8,819	−3,107	−5,588
21	Sri Lanka	6,350	8,937	1,700	2,531	4,650	6,405
22	Israel	4,519	5,374	4,440	4,687	79	688
23	Thailand	4,050	4,703	3,891	5,321	160	−618
24	Spain	6,243	6,919	1,750	2,552	4,492	4,367
25	Taiwan	2,779	2,728	4,907	6,071	−2,128	−3,343
26	Brazil	3,047	4,794	3,560	3,825	−513	969
27	Canada	3,895	4,466	3,485	3,963	410	503
28	Iran	5,533	5,208	1,843	3,037	3,690	2,171
29	Bangladesh	7,329	7,227	267	526	7,062	6,702
30	Sweden	1,086	1,418	4,212	5,103	−3,125	−3,685
31	Nepal	3,339	3,805	1,554	1,682	1,785	2,123
32	Turkey	3,252	4,427	606	853	2,646	3,574
33	Qatar	941	1,112	3,023	3,958	−2,082	−2,847
34	Ukraine	933	1,132	2,420	3,370	−1,487	−2,239
35	Nigeria	2,897	4,017	218	319	2,680	3,698
36	Kuwait	1,894	2,248	1,375	2,039	519	209
37	Argentina	837	864	2,424	3,114	−1,587	−2,250
38	Egypt	1,998	2,941	686	965	1,312	1,976
39	Pakistan	2,341	3,019	427	786	1,914	2,233
40	Vietnam	2,498	3,043	389	578	2,109	2,465
41	Denmark	1,374	1,778	1,214	1,708	160	69
42	Finland	645	895	1,747	2,567	−1,102	−1,672
43	Philippines	1,852	2,169	842	890	1,010	1,279
44	Oman	1,203	1,791	93	1,136	1,110	655
45	Myanmar	509	488	1,824	2,317	−1,315	−1,830
46	Kenya	1,917	2,520	210	213	1,707	2,307
47	Jordan	576	805	1,599	1,928	−1,023	−1,123
48	Greece	1,376	2,476	107	193	1,269	2,283
49	Chile	500	665	1,553	1,915	−1,053	−1,250
50	Morocco	505	557	1,627	1,910	−1,122	−1,354
51	Mexico	1,656	1,925	371	429	1,285	1,497
52	Austria	526	576	1,179	1,515	−653	−939
53	Colombia	1,486	1,994	64	36	1,422	1,957
54	Ireland	953	1,217	823	715	130	502
55	Senegal	311	503	814	1,260	−503	−757
56	Norway	466	562	1,056	1,185	−590	−624
57	Bahrain	703	840	548	828	155	13
58	Tanzania	781	1,062	592	529	190	534
59	Czech	395	422	788	1,116	−392	−694
60	Sudan	1,426	1,388	103	140	1,324	1,248
61	Ivory Coast	454	641	719	857	−265	−216
62	New Zealand	419	624	575	867	−156	−243
63	Poland	792	987	406	472	386	516
64	Yemen	1,107	1,225	139	44	969	1,181
65	Algeria	1,039	1,189	28	65	1,011	1,124
66	Portugal	1,003	1,113	85	132	918	981
67	Ghana	823	886	230	349	592	537
68	Syria	1,138	1,211	17	22	1,120	1,189
69	Djibouti	578	1,021	14	15	564	1,006
70	Panama	251	273	408	717	−157	−443
71	Mauritius	1,160	865	32	32	1,128	834
72	Afghanistan	733	605	211	259	522	346
73	Benin	212	507	359	341	−147	166
74	Bhutan	380	439	319	393	61	46
75	Mozambique	365	610	187	222	179	388
76	Tunisia	335	353	427	448	−92	−95
77	Angola	128	665	4	14	123	651
78	Congo	419	469	99	192	320	277
79	Iraq	589	644	5	9	584	635
80	Malta	142	533	166	6	−24	527
81	Kazakhstan	366	396	69	114	297	282
82	Libya	780	456	61	52	719	404
83	Hungary	486	370	142	138	344	232
84	Peru	309	370	163	102	146	268
85	Zambia	227	286	103	179	123	108
86	Venezuela	323	414	18	42	305	372
87	Slovenia	285	336	96	102	188	234
88	Uganda	341	403	30	12	312	390
89	Lebanon	303	314	92	82	211	232
90	Ethopia	249	324	46	37	203	287
91	Guinea	231	239	124	98	107	142
92	Maldives	214	298	3	9	211	289
93	Trinidad	130	293	63	8	67	284
94	Madagascar	162	212	36	71	126	141
95	Lithuania	138	147	79	124	58	23
96	Croatia	103	127	9	131	93	−4
97	Gabon	47	72	192	185	−146	−113
98	Slovak Rep	107	73	103	178	4	−105
99	Costa Rica	74	70	159	161	−85	−91
100	Belarus	48	53	55	168	−8	−115

Source: As in Table 8.1 above.

Bilateral Trade Volumes

Our largest trading partner is the USA, followed by China and the UAE. Then come Germany, the UK and Singapore in that order (Table 8.5). The principal reason for Belgium and Switzerland to come in at No. 7 and 8 respectively, is the import of rough diamonds from Belgium and gold from Switzerland.

[Section closed on August 2, 2006]

Macro-Overview