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Macroeconomic Overview


Macroeconomic Overview
Money and Prices
Fiscal Developments
External Sector
Issues and Priorities


Macroeconomic Overview

"Overall economic growth of GDP has decelerated significantly to 5 per cent in 1997-98 from 7.5 per cent in 1996-97. There has also been a fall in the average rate of inflation during 1997-98 to less than 5 per cent from 6.3 per cent during 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 per cent in 1997-98", says the Economic Survey for 1997-98 which has been placed in both Houses of Parliament today.
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 are associated primarily with the quantity, quality and cost of basic infrastructure services such as power, railways and roads (and to a 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.Total gross domestic savings, reached an all time high of 26.1 per cent of GDP at current market prices in 1996-97. The rise in domestic savings was primarily due to a rise in private savings.
Gross domestic capital formation (adjusted), as a proportion of GDP at current market prices has continued to surge ahead of gross domestic savings rate to attain a high of 27.3 per cent in 1996-97.
Agricultural production in 1997-98 is likely to be lower than last year's record output especially of foodgrains and commercial crops. Foodgrain output will, however, be higher than in 1995-96. The production of foodgrains during 1997-98 is expected to be 194.1 million tonnes compared with 199.3 million tonnes during 1996-97, representing a decline of 2.6 per cent.
Industrial production has grown by 4.2 per cent in 1997-98. This is composed of a growth rate of 4.9 per cent in mining, 3.6 per cent in manufacturing and 6.8 per cent in electricity. As per the use-based classification intermediate goods and basic goods grew at 6.9 per cent and 7.0 per cent respectively, whereas consumer goods registered growth rate of 4.6 per cent and capital goods suffered a decline of 4 per cent. Thus, the decline in investment seems to be an important factor in the continuing industrial slowdown in 1997-98.
The slow growth of industry in 1997-98 followed growth of 7.1 per cent in 1996-97, which was much lower than the 12.1 per cent growth achieved in 1995-96.
Given the background of slowing industrial growth, the Budget for 1997-98 cut personal and corporate income tax rates across the board. The credit policy (of April 1997) reduced the Bank Rate, abolished the statutory liquidity ratio (SLR) on inter-bank deposit and reduced the cash reserve ratio (CRR). The resultant easing of monetary conditions was reflected in a reduction in nominal interest rates.
During 1997-98, the number of industries subject to industrial licensing was reduced from 14 to 9. The investment limit on plant and machinery in the small-scale sector was enhanced to Rs. 3 crore from Rs. 60 lakh/75 lakh for small scale industrial undertakings/ancillary industrial undertakings. The limit for tiny
sector was correspondingly raised to Rs.25 lakh from Rs.5 lakh. Fifteen items, hitherto reserved exclusively for manufacture in the small sector have been dereserved
In 1997-98, the list of industries eligible for foreign direct equity investment under the automatic approval route by RBI has been expanded. Nine high priority industries in metallurgical and infrastructure sectors and 13 other priority industries that were eligible for 74 per cent and 51 per cent foreign equity
investment respectively, have been opened up for 100 per cent equity investment by NRIs/OCBs. Foreign equity investment limits in mining (3 categories of industries) has also been enhanced to 100 per cent for NRIs/OCBs. The existing ceiling of 24 per cent for aggregate portfolio investment limit for NRIs/OCBs/FIIs can now be raised to 30 per cent of the issued and paid up capital of the company with the approval of the Board of Directors and special resolution by the general body of the company.
11. Measures for public sector reform included enhanced autonomy for nine selected Public Sector Enterprises referred to as "Navaratnas", and subsequently for GAIL and MTNL. Greater functional and operational autonomy has been granted also to 97 other profit-making public sector enterprises referred to as "Mini-Ratnas" for making them more efficient and competitive.
12. Six basic industries (electricity generation, coal, steel, crude oil, refinery throughput and cement) with a weight of 28.8 per cent in the Index of Industrial Production (IIP), averaged a growth of 4.6 percent for April-February 1997-98, higher than the 3.5 percent growth during April-February 1996-97.

13. Policies to encourage investment in infrastructure included redefining "infrastructure" to cover telecom, oil exploration and industrial parks for the purpose of fiscal incentives. An Infrastructure Development Finance Company has been set up to encourage innovative means of financing. External
commercial borrowing parameters for infrastructure projects were liberalised and fiscal incentives provided for infrastructure projects. The Telecom Regulatory Authority of India has been set up. The capital base of the National Highway Authority of India was expanded substantially to Rs. 500 crore. The Tariff Authority for Major Ports was established. Ordinance for setting up a Central Electricity Regulatory Commission (CERC) at the Centre and State Electricity Regulatory Commissions (SERCs) in the States has been promulgated on April 25, 1998.


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