Economic Downhill
By Gopal K Agarwal,
Monthly
economic round-up
The month of August witnessed
several important events having serious economic implications. The first was
the economic outlook report of the Government of India for the year 2005-09.
This report gives mixed indications on economic front the overall picture is
not very healthy The highlight of the report estimates the economy to grow at
7.7 per cent in the next year as against nine per cent in 2007-08. The growth
in the agricultural sector is to fall at two per cent as against 4.5 per cent last
year. These are because of sharp inflation in global commodity prices and
tightening in credit following sub-prime crisis in the US. These factors are
leading to lowering of growth and causing pressure on our fiscal system through
larger subsidy bills and supply constrained in physical and social
infrastructure like electricity, water, road/rail transportation and
agriculture. The investment rate is expected to remain the same, but savings
are projected to decline. The capital inflows are also expected to fall to
$70.9 billion from $108.03 billion last year. Inflation will remain the prime
cause for concern in spite of all the efforts of the government. The
government is also faced with an uphill task on the focal front, Its fiscal
deficit target will overreach from growing off-budget liabilities, which are
estimated to be at five per cent of GDP.
India's high credit growth is a
cause of concern, according to IMF's latest Global Financial Stability report,
and is one of the areas of potential concern. It said that swapping dollar debt
for yen. which led to the forex derivative mess, although high, but manageable
and not a cause for concern. In its report, it said that even after some
efforts made by the central bank to rein in loan growth through a series of
monetary and prudential measures, credit continues to grow at close to 25 per
cent. In order to arrive at risks in the financial markets of the emerging
market economies, IMF assessed fundamental conditions in those countries that
are separate from those related to sovereign debt. One of the major indicators
that are looked at is the growth in bank credit. Other indicators are the
current account deficit as a percentage of GDP. the ratio of bank credit as a percentage
of GDP and external position as percentage of GDP Though there is no potential
threat on other parameters for India. Credit growth poses a potential threat.
Under this background, there was
some relief to the exporters when rupee breached 44 marks. This is good news
for exporters, but importers specially oil companies will have to face the
pain of expensive dollars. According to a Nasscom study, this trend will help
software company's earnings. The Indian software sector is expected to register
10- fold increase in revenues over the next seven years.
The government announced on August 15 a change in the provident fund investment policy, where the government has allowed private sector-managed provident funds and superanmat ing trusts to have greater exposure in stock markers. They can now directly invest up to 15 per cent of their investible funds in shares of companies on which derivatives are available in BSE and NSE. The other changes made in the investment patiers include merger of central government se curities, state government secun ties and units of gilt mutual funds into a single category and allow ing investment up to 55 per cent of the investible funds; providing a flexible ceiling for various category of instruments, instead of fixed investment ceiling as a present. This policy change will provide more liquidity to the equity market, but allowing private players to manage provident fund investments in capital market in dangerous.
(The writer is National Convener, BJP Economic Cell.)