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Macroeconomic Overview


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Budget 1998-99
Budget 1997-98
Budget 1996-97

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Macroeconomic Overview

Economic developments in India in 1998-99 have to be viewed against the backdrop of an exceptionally turbulent and unfavourable international economic environment. The year saw significant declines in the GDP of a number of East Asian Countries (over 15 per cent in Indonesia and 5-7 per cent in S. Korea and Thailand), continuing recession in Japan, severe financial crisis in Russia, unusual volatility in capital and forex markets of industrial countries, continuing drought in capital flows to developing countries and a sharp devaluation in Brazil in January 1999 as a result of capital flight triggered by continuation of unsustainable fiscal weakness. The extension of the East Asian crisis to countries in other continents ensured slowdown of world growth to less than 2 per cent in 1998 with little prospect of recovery in 1999. World trade growth also decelerated sharply, commodity prices fell and deflation affected much of the world economy. India was not wholly immune to these unfavourable developments.
The new, 1993-94 based GDP series recently released by the Central Statistical Organisation (CSO) shows that GDP growth decelerated significantly in 1997-98 to 5.0 per cent from 7.8 per cent in 1996-97 (Table 1.2a). The deterioration in growth was perhaps even worse, if one takes into account the fact that fully one percentage point of growth is attributed to the 20 per cent increase in real value added in the ‘public administration and defence’ sub-sector arising chiefly from pay increases to government servants. The economy recovered to an estimated growth of 5.8 per cent in 1998-99. The recovery, from the cyclical downturn that started towards the end of 1996-97, would have been firmer but for the East Asian crisis and its effect on world import demand and on international capital markets. Domestic uncertainty arising from non-economic factors also played a role in slowing recovery. Inflation rose sharply during 1998-99, because of an exceptional spurt in prices of a handful of agricultural commodities. The pressure from this source has, however, begun to abate during the last quarter of 1998-99. The inflation rate which peaked at 8.8 per cent in late September dropped steeply from December to below 5 per cent in January. Average inflation for the whole of 1998-99 will, however, be higher than the 4.8 per cent registered in 1997-98.
The deceleration in the growth of India’s exports (in US dollars) continued for the third year in succession and growth was negative for the first nine months of the year. Imports, on a BOP basis, have decelerated even more sharply, largely because of a decline in the prices of oil and other commodities, but also because of a slow down of non-DGCI&S imports. The current account deficit consequently fell from 1.6 per cent of GDP in 1997-98 to a projected 1.4 per cent of GDP in 1998-99.* Total net capital inflows in 1998-99 are expected to be lower than in 1997-98 as a result of a deceleration in the private inflows. The decline in foreign direct investment (FDI) and commercial borrowing and outflow of portfolio investment by Foreign Institutional Investors (FIIs) had been only partly off set by the inflow under Resurgent India Bonds (RIBs). Despite these trends, foreign currency reserves (exclusive of gold and SDRs) continued to increase in 1998-99, though at a slower rate than in 1997-98. These reserves went up from US $ 26.0 billion at the end of March 1998 to $ 27.4 billion by the end of January, 1999.
The marked slowdown in GDP growth in 1997-98 was largely the result of the volatility in agricultural growth, which collapsed to –1.0 per cent in 1997-98 after soaring to 9.4 per cent in 1996-97 (Table 1.2a). This masked the equally sharp slowdown in growth of GDP from manufacturing to 7.7 per cent in 1996-97 (from 15 per cent the year before). This was followed by a more modest decline to 6.8 per cent in 1997-98. Industrial growth, however, remained almost unchanged in 1997-98 as this was compensated by an increase in other sub-sectors. The increase in GDP from ‘public administration and defence’, arising from the decisions on the Pay Commission Report, which increased government employees’ salaries substantially, compensated for the slowdown in growth of other services. The increased salary level of Central government employees since 1997-98 does not seem to have resulted immediately in a proportional increase in consumption. The growth of private domestic consumption (constant price) fell from 6.8 per cent in 1996-97 to 3.9 per cent in 1997-98 (Table 1.2b). The most important proximate factor in the growth slowdown in 1997-98 seems to be agriculture which affected household income, consumption and investment.
The recovery in 1998-99 was led by the rebound in ‘agriculture and allied sectors’, which is projected by the CSO to grow by 5.3 per cent (Table 1.2a). All other major sectors of the economy, with one exception, are estimated to have decelerated. The growth of GDP from manufacturing has slipped to 5.7 per cent, that from ‘electricity, gas and water supply’ to 6.3 per cent, and mining to 0.1 per cent. ‘Trade, hotels, transport and communications’ was the only other category where growth accelerated from 5.7 per cent in 1997-98 to 6.8 per cent in 1998-99.
Although data on aggregate demand is not available for 1998-99, demand factors seem to have played a significant role in the slow recovery of manufacturing growth. The East Asian crisis and its reverberations on the world economy were an important reason for the slow recovery in industrial growth and the continuing deceleration in certain sectors. The financial crisis in East Asia and the slowdown in world trade sharply reduced the growth in world demand for many commodities. This contributed importantly to the declining trend in export growth.
In addition to the direct impact on exports, the heightened imbalance between world supply and demand put intense competitive pressure on sectors producing homogeneous products. The decline in global prices of oil by 25.7 per cent and of non-fuel commodities by 14.6 per cent in 1998, compared to a growth of –1.1 per cent and 5 per cent respectively in 1997, is one indication of this. The decline in production of mining sector and the slowdown in growth of basic goods and intermediate goods are at least partly a result of these developments in the global economy. 
Total gross domestic savings declined to 23.1 per cent of GDP in 1997-98 from 24.4 per cent of GDP in 1996-97 (Table 1.3). Public saving contributed 0.5 per cent and Private saving 0.8 per cent of GDP to this decline. Public saving has declined progressively to 1 per cent of GDP from a recent peak of 1.9 per cent in 1995-96. Both household and corporate saving contributed to the decline in private saving rate. The most noteworthy aspect was the one per cent of GDP decline in household physical saving rate. Household financial saving bucked the declining trend in saving rates, by rising to 10.3 per cent of GDP in 1997-98 from 9.8 per cent in 1996-97. This is consistent with the hypothesis that the salary arrears received by central government employees consequent on the Pay Commission decision were largely saved. 
Real Gross Domestic Capital Formation dropped marginally from 26 per cent of GDP (constant price) in 1996-97 to 25.6 per cent of GDP in 1997-98 (Table 1.4). This level is only 0.1 per cent of GDP lower than the average for 1994-95 to 1997-98, which represented a substantial step up from earlier levels. The main identifiable factor in the decline was the 0.9 per cent of GDP decline in household investment rate to 8.2 per cent of GDP. The decline in household saving in physical form and decline in household investment are perhaps linked to the large fluctuations in agriculture. Corporate investment increased by 1.2 per cent of GDP to 9 per cent, while public investment increased marginally.
Somewhat surprisingly real Gross Fixed Capital Formation remained unchanged at 23.6 per cent of GDP, a rate that is higher than the average for the same four years. Despite a drop in the household fixed investment rate to 7.8 per cent of GDP, the continuing up trend in corporate fixed investment kept overall fixed investment rate from falling. Corporate fixed investment increased from 7.9 per cent of GDP in 1995-96 to 8.3 per cent of GDP in 1996-97 and further to 9 per cent of GDP in 1997-98. This suggests that Indian corporate industry is responding to the challenge of domestic and global competition.
 

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