The new paradigmatic shifts, since the liberalisation process took off, after unshackling the socialistic edifice, has brought a perceptible change in the Indian economy. The growth in real Gross Domestic Product (GDP) during the last three years, i.e. during 1994-1997, ranged from 7.2% to 7.5%. The current year, 1997-98 is an exception at 5%. While growth in industry averaged 9.5% during the same period, it is down to 4.2% for the year ended 1997-98.
The trend seems to be in symphony with the overall slowdown in the Asian markets.
Over 26% of the GDP component is dominated by the Agricultural sector, having clocked a production of 198.2 mln tons in 1996-97, while 1997-98 saw a decline to 194.1 mln tons.
The share of Gross Domestic Savings (GDS) to GDP increased to 26.1% in 1996-97 from 25.3 in 1995-96. Prior to this, the savings had stagnated at 22-23% during the entire period of 1989-95.
Gross Fiscal Deficit of the Government of India, as a percentage of GDP, has diminished from 6.1% in 1994-95 to 4.9% in 1996-97 and was targeted down further to 4.5% for 1997-98, according to the 1997-98 budgetary estimates. But due to the Central Governments turnover and runaway Government non-plan expenditure, it is estimated to have ballooned to 6.1% of the GDP.
The rate of inflation, measured by the Whole Sale Price Index, decreased from 10.4% in 1994-95 to 5.0% in 1995-96 and has been hovering around this figure till date. Consistent with this, broad money M-3 targeted to grow by 15% to 15.5% during 1997-98, shot up to 17% in the same year.
The balance of payments situation in 1997-98 remained sound. The current account deficit fell to about 1.0 % of GDP in 1996-97, reflecting mainly the slow down in industrial growth and investment and growth of net invisibles. In 1997-98, the current account deficit is expected to be about 1.5 % of the GDP, which is significantly less than the average deficit of about 2.3% of GDP during the seventh Plan period (1985-86 to 1989-90).
Total imports in 1996-97, on payments basis, recorded a growth of only 10.1% in US $ terms, compared with 21.6% in 1995-96. The demand for imports has been subdued over the last two years, reflecting moderation in industrial activity.
Inspite of the sharp deceleration in import growth, the trade deficit in 1996-97 widened by about US$ 2.9 bln (BOP basis), because the growth of exports also decelerated sharply.
The slowdown in export performance reflects a range of factors of foreign and domestic origins. The two most important factors were probably the sharp decline in the growth of value (in US$) of world trade in 1996 and 1997 and the appreciation of the rupee vis–vis the currencies of India’s major trading partners and competitors. The dramatic depreciation of some East Asian currencies during 1997 has also been a contributory factor to our export sluggishness.
There has been a significant structural transformation in the economy, promising the maintenance of a strong and sustained performance. These include the expanding role of the private sector and private investment; divestment of Government owned Public sector enterprises; commercialisation of agriculture, especially the opening up of agriculture for exports; restructuring and re-engineering of the corporate sector within industry; liberalisation of the financial sector, coupled with strengthening of the regulatory framework; public-private sector interface to improve physical infrastructure; and the gradual empowerment of the State or Provincial Governments vis–vis the Federal Government to attract foreign direct investment into the states, within the process of economic reform.
According to the provisional data from the (DGCI&S), India’s exports at US$ 33.98 bln in 1997-98 and US$ 33.11 bln during 1996-97 amounted to a lower growth rate of 2.6% and 4.1%.
Reflecting relatively larger growth of imports vis–vis that of exports, the export to import ratio which is a rough indicator of the extent to which exports can finance imports declined to 83% in 1997-98 from 85.9% during 1996-97 and 86.7% during the preceding year.
Seasonality in India’s imports, although not as distinct as in the case of exports, could also have a bearing on the trend in India’s exports. Imports constitute a major input in most of the country manufactured / processed export oriented commodities, such as gems and jewellery. Further, there are some exports items whose production depends crucially on the availability of imported raw materials, intermediate products and capital goods.
Liberalisation of the financial sector, coupled with strengthening of the regulatory framework; public-private sector interface to improve physical infrastructure and the gradual empowerment of the State or Provincial Governments vis–vis the Federal Government to attract foreign direct investment into the states, are all aimed at growth within the process of economic reform.
Overall economic growth of GDP has decelerated significantly to 5% in 1997-98 from 7.5% in 1996-97. There has also been a fall in the average rate of inflation during 1997-98 to less than 5% from 6.3% during 1996-97. The average rate of growth of the economy rose from 6% per annum in the seventh Plan (1985-90) to 6.8% in the Eighth Plan (1992-97). Growth averaged a high of 7.5% per annum in the last three years of the Eighth Plan (1994-95 to 1996-97). The drop in GDP growth in 1997-98 is attributable mainly to a sharp fall in the growth rate in agriculture and a deceleration in the growth of industry. The service sector posted a robust growth of 8.9% in 1997-98.
At a more fundamental level, the growth slow down can be traced to a combination of underlying supply factors and temporary demand factors. The former is associated primarily with the quantity, quality and cost of basic infrastructure services such as power, railways and roads (and to lesser extent ports, airports and telecom). The demand slow down is attributable to several factors including the sharp deceleration in exports since 1996-97, substantial uncertainty in domestic and international environments, tightening of money credit policies in 1995-96 and other cyclical factors. The reduction in the domestic investment-saving gap during 1996-97 and the extremely low inflation rate during 1997-98 support such a demand side explanation. Some signs of recovery are, however, observable in the sharp rise in sanctions and disbursements of All India Financial Institutions.
Total Gross domestic savings reached an all time high of 26.1% of the GDP at current market prices in 1996-97. The rise in domestic savings was primarily due to a rise in private savings. As a proportion of GDP, private savings increased from 23% in 1995-96 to a peak of 26.1% in 1996-97. High growth in GDP, low rates of inflation and the array of economic and financial measures undertaken over the past few years, were some of the causal factors. The composition of the household sector savings shows a substantial shift towards financial savings, which, as a proportion of GDP, increased by 2.1% to 10.7% in 1996-97 (from 8.6% in 1995-96).
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