India: A Macroeconomic Round Up of the Indian Economy


D Tripati Rao

The Indian economy continues to march forward on the back of high growth rates for 12 successive quarters since 2003. The first quarter growth in 2006-7 has been a phenomenal 8.9 per cent. The manufacturing sector growth appears to be broad based unlike in early 2000, witnessing an impressive 11.8 per cent growth. As many as 15 sectors including steel, cement, sugar and IT have posted net profits of more than 20 per cent. In fact, corporate India is 'gung-ho' about future growth as companies with a market capitalization of more than Rs100 Crore have posted a year-on-year growth in sales and net profit of 31 per cent. The profit realization has been due to cost reductions and efficiency gains from higher sales. Double-digit industrial growth of 10.6 per cent during April-August 2006 now shows signs of robust growth led mainly by 22.9 per cent export growth in dollar terms. The business confidence index increased to 152.5 per cent in September from a decline in July 2006. The political confidence index has gone up to 103.9 per cent in October from a declined 88.9 per cent in July 2006. Together with an expected robust agricultural performance, this presents a comfortable macroeconomic environment. No wonder, the stock market is unstoppable even after crossing the 13,500 mark. However there are a few concerns amidst this 'feel good' sentiment.

Corporate profit margins have been sharply reduced owing to competition and rising input costs. Along with firming interest rates, corporate India will find it tough to sustain growth. Both short and long-term rates have shown an upward trend. In the short end of the market the call rates have increased from 5.7 to 6.75 per cent. The 91 t-Bills rate increased from 5.9 to 6.4 per cent and the 364 t-Bills moved up from 6.9 to 7.1 per cent. The 10-year G-Secs moved up from 8.1 to 8.6 per cent. The public sector banks raised prime lending rates to 11.33 per cent and private sector banks to 12.89 per cent. There is a rising pressure on credit demand as non-food credit (commercial credit) is growing unabatedly, amounting to over 30.5 per cent growth and, over the last two years, more than 30 per cent growth. Besides the upward cycle phase, interest rates are firming with rising inflationary expectations. Despite the moderation in international crude oil prices, the rate of inflation is expected to rise to 5.0-5.5 per cent. The wholesale price index has moved up to 5.5 per cent and the consumer price index has moved up to 6.3 in August compared to 3.5 per cent in the last year. The central bank has acknowledged these concerns in its Mid-term Review of Annual Policy Statement for the Year 2006-07. It points out the 'potential risks from rapid credit growth, strains on quality of credit and elevated asset prices' and assures of an active demand management policy. Much of the credit growth is driven by the fast growing sectors such as housing, commercial real estate and retail loans which raises questions regarding the sustainability of such expansion of credit.

From a macroeconomic sustainability point of view, there is a still long way to go for corporate India in so far as generating an 'inclusive' growth process by expanding employment opportunities from the gains made by technological advances. A sustained growth of over four per cent is required from the agriculture sector for this inclusive growth. The central bank must continue to nudge the commercial banks to direct a fair amount of credit to the rural and agricultural sectors.

WATCHPOINT: The economy is buoyant though there are some concerns regarding inflationary pressures, the sustainability of growth and of credit expansion and, from a macroeconomic-social point of view, regarding the inclusiveness of such growth processes.


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