India: The Indian Economy – Coming Out Of Recession


Raghbendra Jha

There are clear indications that the Indian economy is coming out of the recession that has been plaguing it for almost two years now. In December 2002 the Government presented a mid-year review of the Indian economy. The GDP growth target was revised upwards to between 5 and 5.5 per cent. Figures out for July-September 2002 reveal that the index of industrial production (IIP) grew at 6.1 per cent. What is more remarkable is that this marked the fourth consecutive quarter of acceleration in the growth of the IIP. The IIP now stands at a ten quarter high, although this growth has been uneven.

The acceleration in growth seems to be linked to three key drivers at present — exports, rural demand and construction. Exports have increased by 13.5 per cent during the first half of 2002-03, as against a near stagnation in the same period last year. That may have contributed more than a percentage point of incremental industrial growth this year. After 23 years of current account deficits, India now has a current account surplus. India’s credit rating is likely to improve in the near future. The latest issue of Far Eastern Economic Review rates India as one of the most important destinations for venture capital.

The six core industries grew at 5.7 per cent during the first half of 2002-03, significantly higher than the 1.5 per cent in the same period last year. Within this category, cement and steel grew at more than 9 per cent, reflecting higher construction activity. The consumer non-durables segment has registered an impressive 14 per cent growth during April-September 2002, hinting at a recovery in rural demand because of last year’s high agricultural growth. Despite the drought, agricultural growth is expected to be positive – of the order of 1 per cent. In an unmistakable sign that recession is about to end, the capital goods segment has bounced back to 9 per cent growth in the first half this year, after a decline in production last year. The growth was even higher at 12.6 per cent during the second quarter. Reforms also appear to be back on track. In particular, after a three month period of introspection the government has announced that it will go ahead with the privatisation of oil majors – although the modus operandi of such disinvestment will be different for different firms.

The sustainability of this revival depends on several factors. First, the impact of the current drought has to be factored in. Export growth will depend critically on a revival of the US economy and the success of India’s on-going attempts to forge ties with the ASEAN group. Investment revival will depend upon the ability of the government to rein in the fiscal deficit in the February 2003 budget. However the fundamentals of the economy – low inflation, comfortable liquidity, large foreign exchange reserves, adequate food stocks and falling interest rates – appear strong.

WATCHPOINT: A significant factor is the government’s February 2003 budget, which may determine whether or not the current economic upturn is to continue.


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