GDP up 7.4% as India’s growth picks up speed

India was the second fastest growing major economy globally during 2009-10, even as US grappled with unemployment and the Eurozone slid into a crisis.

The Indian economy grew 7.4 per cent for 2009-10, with a better than expected growth of 8.6 per cent in the Jan-March quarter. This growth came on back of a drought last year, which hit agriculture.

Better still for the economy, growth for the coming year 2010-11 is being pegged at an even higher 8.5 per cent. Over the medium term, stronger economic growth would mean higher corporate profits, salary hikes and a buoyant stock market. On Monday, the Union finance minister, Mr Pranab Mukherjee, said that the growth momentum of the fourth quarter would continue with 8.5 per cent growth in FY11. “The growth numbers are pleasant but not really surprising, because we were expecting them to be robust which they have turned out to be. This clearly indicates the momentum which is there in the economy and the expectations that the 8.5-percentage points estimation for 2010-11 is going to be a clear possibility,” said the finance secretary, Mr Ashok Chawla. Other estimates on FY11 are more cautious, but still peg growth at over 8 per cent. The Prime Minister, Dr Manmohan Singh, had said last week that the government is targeting an overall growth of 10 per cent for the country. The recovery is evident in other areas as well. Corporate profits are already recovering with many of the major players beating expectations. Large companies, including IT majors, have also announced pay hikes in the past few months.

The strong growth could see a roll-back of the stimulus measures brought out to combat the slowdown. The government had already cut back some of these sops during the budget. Another possibility going ahead is an interest rate hike by the RBI, to rein in inflation.

Rosaiah presents Rs. 1.13 lakh cr. budget

Treading the path of Y.S. Rajasekhara Reddy, Andhra Pradesh Chief Minister K. Rosaiah presented a Rs. 1.13 lakh crore budget for 2010-11 in which he assigned high priority to welfare and enforced cuts into certain sectors of development. He neither proposed fresh taxes nor increased the existing ones while presenting the budget, the 16th in his career and first as Chief Minister.

The budget outlay is Rs. 8,516 crore higher than that of the current fiscal (Rs. 1.05 lakh crore). This hike is of little significance since it will be neutralised by inflation. Over 60 per cent of the revenues for the budget are expected to be raised from the State’s own resources and the balance contributed by the Centre in the form of tax-sharing and grants. An important announcement was the revival of the Constituency Development Fund with allotment of Rs. one crore each to members of the Assembly and the Legislative Council.

The budget comprises plan outlay of Rs. 40,313 crore (including money for Centrally-sponsored schemes) and non-plan outlay of Rs. 73,347 crore. Plan funds, meant for creating capital assets, have been reduced by Rs. 1,579 crore (from Rs. 41,892 crore in 2009-10). On the other hand, non-plan expenditure, has been hiked by a whopping sum Rs. 10,095 crore because of the higher wage bill of the employees and higher subsidies to the poor.

Mr. Rosaiah walked into the House with a suitcase in hand and read out the 29-page text in 70 minutes. Congress members thumped desks when he recalled the contribution of Y.S. Rajasekhara Reddy in the areas of welfare and development and listed out schemes such as Arogyasri and subsidies to farmers while Telugu Deam members pooh-poohed them.

Referring to the “trials and tribulations” the State was undergoing in the wake of the agitations for and against Telangana statehood, Mr. Rosaiah said that but for these developments, the growth rate of Andhra Pradesh would have been excellent despite global slowdown. He appealed to everyone to ensure peace as this was the least an investor would expect. “Sink your differences and join hands with the government to place the State back on track and achieve a 7 per cent growth rate.” He justified the weightage given to welfare saying that the wealth created would have to be distributed to the less fortunate. All welfare schemes and subsidies would be continued and pensions paid to AIDS patients.

Direct allocations

The overall outgo for the weaker sections is more than Rs. 20,000 crore, including direct allocations to each section, the massive scholarship/tuition fee reimbursement benefit and subsidies under various schemes such as Indiramma and rice scheme. For the first time, a sum of Rs. 300 crore was provided for scholarships to upper caste students.

Rosaiah presents tax-free budget

Notwithstanding a grim financial picture in the face of a troubled political situation, Andhra Pradesh Chief Minister K. Rosaiah on Saturday, presented a tax-free budget for 2010-11 with an outlay of Rs. 1,13,675 crore and a projected expenditure of Rs. 1,13,660 crore.

The budget estimates, presented to the State Assembly, show a fiscal deficit of Rs. 12,983 crore, which will be about Rs. 1,300 crore less than the revised estimates for the 2009-10 fiscal, and a revenue surplus of Rs. 3,548 crore, up from Rs. 2,942 crore.

The grim picture that the government, including the Chief Minister himself, has been projecting for the past few months did not reflect in the budget as revenue receipts showed no significant fall except for a meagre Rs. 558 crore and not Rs. 8,000 crore as feared. As per the revised estimates for 2009-10 fiscal, revenue receipts stood at Rs. 78,406 crore while the projected revenues for 2010-11 are Rs. 90,648 crore.

“The global economic slowdown has impacted the economy of all States in the country, much more than what we initially anticipated. Of late, the GDP growth rate has been showing signs of recovery which would surely be reflected in the growth rates of revenues in near future,” Rosaiah, who presented a record 16th budget and the first as Chief Minister, observed.

IMF sees recovery but there are caveats

The International Monetary Fund in the latest update to its World Economic Outlook sees economic prospects across the globe improving substantially. While some of its previous reports had said that the worst of the crisis was over and that recovery was on, the latest update (January 26) points out that the recovery is much faster than anticipated.

In fact, compared to its last update (October 2009), the IMF has significantly marked up its forecasts for several countries and regions.

Global output is forecast to go up by 3.9 per cent and 4.3 per cent in 2010 and 2011, respectively, above the October forecasts of 3.1 per cent and 4.2 per cent. Advanced economies too are expected to fare better than originally anticipated, with growth rates of 2.1 per cent and 2.4 per cent for 2010 and 2011, respectively. Last year, these economies (as a group) contracted by 3.2 per cent. The U.S., which had a negative growth of 2.5 per cent, will post positive growth rates of 2.7 this year and 2.4 per cent in the next year.

India, China lead

However, in what has by now become common knowledge, it is the developing countries led by China and India that have picked up the slack and remain in the forefront of the global recovery. According to the IMF, the category “Emerging markets and developing economies” will grow by 6 per cent and 6.3 per cent in 2010 and 2011. China and India lead the table with projected growth rates of 10 per cent and 7.7 per cent, respectively, in 2010 and 9.7 per cent and 7.8 per cent in 2011.

The sharp recovery in these two countries has been well recognised. Already many countries in the region are benefiting from China’s growth. Japan’s exports have turned positive after a long slump mainly because of the demand from China. The fact that the Indian economy has been on an even keel even during the worst phase of the recession and has now entered a higher growth trajectory has rekindled capital flows, both foreign direct investment (FDI) and foreign institutional investment (FII).

The IMF report, while being more optimistic about global economic prospects than at any time during the past two crisis ridden years, nevertheless sounds a caution or two. Advanced economies are still dependent on government stimulus measures, which obviously cannot be continued indefinitely. Sooner than later, private demand must take over. The timing of the exit — when individual countries could withdraw the stimulus and other ‘anti-crisis’ measures — is best left to individual countries.

In many countries, the stimulus measures cannot be withdrawn immediately. Some of them risk a return to recession if such measures are withdrawn soon. There are some positive signs, to be sure.

Financial markets have rebounded since the lows of last March. Economic conditions have improved and the wide ranging policy actions of governments have helped. Risk appetite has returned and capital markets have reopened. In the U.S., consumption demand has been surprisingly strong and has contributed to the rebound in confidence. In all advanced economies, inflation is expected to be contained.

Challenges remain

However, policymakers still face extraordinary challenges as they seek to unwind the unprecedented fiscal, monetary and financial support they provided to keep their economies and financial markets from collapsing. High unemployment rates, rising public debt and high levels of individual indebtedness in some countries present further challenges to the recovery.

Due to the still fragile nature of recovery, fiscal policies should remain supportive of economic demand in the near term. Fiscal stimulus planned for 2010 should be implemented in full. However, in many countries, there are growing concerns about fiscal sustainability. Countries should, therefore, work towards devising strategies for exiting from the stimulus packages.

Financial sector reform

A crucial task ahead for policymakers in the developed countries is to repair the badly damaged financial sector. Policymakers will also need to move boldly to reform the financial sector with the objectives of reducing the risks of future instability. Attention should also be bestowed on how the potential fallout of financial crises would be borne in future, while at the same time making the sector more effective and resilient.

In a special message to India and other emerging economies, the IMF says that these countries will have to design policies to manage a surge of capital inflows.

Macro-prudential policies can be used to address the potential of bubbles at an early stage by limiting a build-up in risks.

Higher vegetable prices push up food inflation

After dipping marginally for a few weeks in a row, food inflation changed tack yet again to move up to 17.40 per cent for the week ended January 16 from 16.81 per cent in the previous week, mainly on account of higher prices of eggs and vegetables.

The official data on wholesale prices of primary food articles and fuels, coming as it did a day ahead of the third quarterly review of credit policy on Friday, dashed all hopes of any early respite from high food inflation which had touched its 10-year peak of close to 20 per cent in December last.

In the event, although the current bout of food inflation is more of a supply-side problem, the Reserve Bank of India is likely to signal a further monetary tightening by hiking some of the key policy rates to suck out excess liquidity and thereby rein inflation.

The general expectation among analysts is that the apex bank would raise the cash reserve ratio (CRR) — the chunk of deposits that banks are mandated to park with the RBI — by at least 50 basis points so as to suck out more than Rs.20,000 crore from the money in circulation. Alongside, there could also be a marginal increase of about 25 basis points in the repo (short-term lending to banks by RBI) and reverse repo (short term borrowing) rates to signal a staggered exit from the soft money policy.

Such a step is deemed necessary as there are chances of the high food inflation seeping into the manufacturing and other sectors and thereby lead to a surge in overall inflation.