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LATEST NEWS UPDATES | Will India be the world's fastest growing economy?

Will India be the world's fastest growing economy?

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published Published on Jun 8, 2010   modified Modified on Jun 8, 2010


The India growth story is enviable. Despite plaguing problems, India has emerged stronger and resilient to the global crisis so far.

India is expected to be the world's fastest growing economy by 2018, according to Economist Intelligence Unit (EIU), the research arm of the Economist magazine.

India, the second largest growing economy will overtake China as the fastest growing major economy with an average of eight per cent in the next five years, the report stated earlier this year. China witnessed 11.9 per cent growth in the same quarter.

There is much to cheer for India's economy as it grew at its fastest pace in six months in the quarter through March 2010, propelled by government and consumer spending.

Indian economy has been one of the least affected by the global crisis. "In fact, India is one of the growth engines, along with China, in facilitating faster turnaround of the global economy. Risks, however, remain," the Economic Survey said in February this year.

The economy grew by 8.6 per cent in the last quarter of 2009-10, pushing up the overall growth to a better-than expected 7.4 per cent. After the global economic slowdown, the GDP had moderated to 6.7 per cent in 2008-09 after recording a growth rate of 9 per cent in the three preceding years.

Prime Minister Manmohan Singh said an annual economic growth rate of 10 per cent is needed to address poverty, India's biggest problem.

Finance Minister Pranab Mukherjee is bullish on India's growth prospects. The government expects the economy to grow 8.5 per cent in the current fiscal year as it expects a better farm output.

Meanwhile, inflation continues to haunt the common man. Will the government succeed to bring down the inflation rates and push growth? While the growth rate signals a strong recovery, there is much more to be done for an inclusive growth.

India's growth

The size of the economy rose to Rs 62,31,171 crore (Rs 62.3 trillion) in the last fiscal, up 11.8 per cent over Rs 55,74,449 crore (Rs 55.7 trillion) in FY09.

The economy of India is the eleventh largest economy in the world by nominal GDP and the fourth largest by purchasing power parity (PPP).

In February, the Economic Survey had projected the economy to grow by 7.2 per cent this fiscal with industrial and services sectors growing at 8.2 and 8.7 per cent, respectively.

It said full recovery is likely over the next two fiscals with up to 8.75 per cent growth in 2010-11 and nine per cent the subsequent year.

In 2009, India's gross domestic product (PPP) stood at $3.548 trillion, and was the fourth largest economy by volume.

India's service industry accounts for 62.6 per cent of the country's GDP while the industrial and agricultural sector contribute 20 per cent and 17.5 per cent respectively.

The ups & downs

The country's agriculture sector recorded the lowest growth in five years, at 0.2 per cent, in fiscal year 2009-10 due to widespread drought.

Agriculture and its allied sectors had grown at 1.6 per cent in 2008-09. The agriculture sector contributed around 17 per cent to the country's total economy in the 2009-10 fiscal.

The weak monsoon had impacted farm production mainly in the third quarter of the last fiscal, as it declined by 1.8 per cent. In 2008-09 also, farm production had contracted in the third quarter -- by 1.4 per cent.

However, manufacturing output grew 16.3 per cent on year in the quarter as consumers bought more cars and other goods, while farm output grew an annual 0.7 per cent helped by a good winter harvest.

Mining and quarrying also posted robust growth of 10.6 per cent in 2009-10, against 1.6 per cent during 2008-09. Construction also grew along expected projections at 6.5 per cent.

Trade, hotels, transport and communications grew at 9.3 per cent in 2009-10 as compared with 7.6 per cent in 2008-09.

Finance, insurance, real estate and business services grew at 9.7 per cent against 10.1 per cent in 2008-09, while community, social and personal services grew at a markedly lower rate of 5.6 per cent, compared with 13.9 per cent in 2008-09.

Per capita income grows

The per capita income grew by 10.5 per cent to Rs 44,345 in 2009-10 against Rs 40,141 in the year-ago period, according to the government data.

The per capita income was slightly higher than Rs 43,749 as calculated by the Central Statistical Organisation (CSO) in its advance estimates for FY10. However, per capita income grew by 5.6 per cent last fiscal if it is calculated on the basis of 2004-05 prices, which is a better way of comparison and broadly factors inflation.

Per capita income (at 2004-05 prices) stood at Rs 33,588 in FY10 against Rs 31,821 in the previous year, according to estimates of national income released.

Per capita income means income of each Indian, when the national income is evenly divided among the country's population of 117 crore (Rs 1.17 billion).

Fiscal deficit rises

India's fiscal deficit soared by 34 per cent to Rs 35,000 crore (RS 3.5 trillion) in the first ten months of the financial year against Rs 262,000 crore (Rs 2.62 trillion) a year ago, mainly on account of the stimulus measures taken by the government to prop up the economy hit by the global financial crisis.

This makes the April-January fiscal deficit at 87.2 per cent of the budgeted estimate of Rs 401,000 crore (Rs 4.01 trillion) for the current fiscal. To spur economic activities, the government had initiated massive spending programmes and slashed duties from December 2008 in three stage following the global financial crisis that began in September 2008.

However, partially rolling back the stimulus in Budget 2011, the Government has raised excise duty by 2 per cent to 10 per cent and enhanced tax rates on other products making consumer goods like cars, ACs and several other items expensive.

India's resources

India ranks second worldwide in farm output. The farm sector, which accounts for 17-20 per cent of the economy is expected to do well in 2011 as a normal monsoon has been forecast for this year.

India is the largest producer of milk, cashew nuts, coconuts, tea, ginger, turmeric and black pepper in the world and accounts for 10 per cent of the world fruit production.

India is also a mineral rich country with huge reserves of coal, iron, manganese, mica, bauxite, titanium, chromite, limestone and thorium. India's huge thorium reserves account for about 25 per cent of world's reserves.

India's oil reserves, found in Bombay High, parts of Gujarat, Rajasthan and eastern Assam, meet 25 per cent of the country's domestic oil demand. India's total proven oil reserves stand at 11 billion barrels.

FDI in India

The EIU predicted an inflow of investments through Foreign Institutional Investors (FII) at $75 billion by 2014.

As the fourth-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI); India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery.

Despite a surge in foreign investments, rigid FDI policies have impacted the fudn flow to India.

Exports & foreign exchange

Continuing its growth momentum for the sixth consecutive month, India's exports grew by a staggering 36.2 per cent in April to $16.88 billion.

Last April, exports had shrunk nearly 30 per cent to $12.4 billion in line with a nine per cent contraction in global trade as a result of the global financial crisis. India's exports fell for 13 straight months starting October 2008, before turning positive in November 2009.

Imports also increased in April by 43.3 per cent to $27.3 billion from $19.05 billion a year ago. Trade deficit for April was $10.4 billion, against $6.7 billion in the year-ago period.

Forex

Reserve Bank of India Governor D Subbarao said the country's foreign exchange reserves are good and there is no threat to it from the euro zone crisis.

Reversing the trend, India's foreign exchange reserves inched up marginally to $273.364 billion during the week ended May 21 compared to $273.300 billion, a week earlier.

Big challenges

Despite its growth, a plethora of challenges haunt the economy. Rising wages, property prices and inflation are looming problems. The economic growth has created two Indias - one rich and getting richer, the other poor and getting poorer.

Equitable distribution of wealth still remains a challenge. Millions of people are yet to receive any tangible benefit from the India's economic growth.

More than 78 million homes do not have electricity. Nearly 300 million people earn less than Rs 50 a day.

The inflation numbers have been consistently higher than the official forecasts. The wholesale price inflation vaulted above the RBI's end-March 2010 inflation forecast of 8.5 per cent in January and crossed the 10-per cent mark in February.

On a year-on-year basis, Wholesale Prices-based inflation in December 2009 was 7.3 per cent, while food inflation was 19.77 per cent.

Higher food prices were mainly because of supply-side constraints, compounded by poor monsoons in 2009.

The development of infrastructure, removing corruption, bureaucratic inefficiencies add to its burden of woes.

India's challenges are serious and should be dealt with effectively for the economy to really prosper and achieve the economic targets.

Rediff.com, 8 June, 2010, http://business.rediff.com/slide-show/2010/jun/07/slide-show-1-will-india-be-the-worlds-fastest-growing-economy.htm


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