The Economic Survey 1995-96 noted that India recorded one of the fastest
recoveries from a macroeconomic and balance of payments crisis. It also stated that the
growth achieved in the post-crisis period was a noteworthy achievement by international
standards and was more sustainable than the growth in the immediate pre-crisis period.
Data which has become available since then shows an even more buoyant outcome
(Table 1). Overall economic growth of GDP at factor cost, after rising to 6.3 per cent in
1994-95, accelerated further to 7 per cent in 1995-96. More remarkably, this is the first
time that a growth rate of this magnitude was not due to exceptional agricultural growth.
Since 1970-71, there have been only five years in which the growth rate reached or
exceeded 7 per cent. Every one of these years was associated with a growth rate of 10 per
cent or higher in the agriculture, forestry and fishing sector. In 1995-96, not only was the
growth of this sector low, at 2.4 per cent, it was lower than the average growth of the
agriculture and allied sectors over the nineties. The high growth was therefore due
mainly to the 11.7 per cent growth of industry and construction sector and the 7 per cent
growth of the services sector (Table 2). Overall economic growth during the first four
years of the Eighth Plan averaged 5.9 per cent per annum, a rate significantly higher than
the Plan target of 5.6 per cent.
Industrial production grew by 12.4 per cent during April 1995 to February 1996,
while agricultural crop production is estimated to have grown by only 0.9 per cent. The
decline in foodgrain production by 0.4 per cent in 1995-96, coupled with high levels of
open market sales, has reduced public food stocks from a record level of 35.6 million
tonnes in July 1995 to 22.7 million tonnes in April 1996. At this level, food stocks are 50
per cent larger than the prescribed buffer stock norms. However, the watchword must be
prudent and cautious management. On the inflation front, the resurgence of inflationary
pressure in 1994-95 was significantly reversed in 1995-96. Inflation, as measured by the
WPI, dropped from a high of about 12 per cent in January 1995 to a low of 4.2 per cent
(provisional) on June 22, 1996. The recent increase in administered prices of petroleum
products is likely to result in a one time jump in the rate of inflation, with a gradual
tapering off to the underlying inflation rate.
The economic reforms have led to a marked and favourable turnaround in the
performance of the external sector since the crisis of 1991. Highlights include:
a strong and sustained recovery in export growth;
a pronounced rise in the ratio of exports to imports from the level prevailing at
the turn of the decade;
a substantial decline in the current account deficit as proportion of GDP from
the unsustainable level of 3.2 per cent in 1990-91;
strong growth in foreign direct investment flows since 1991-92 and in foreign
portfolio investment flows since 1993-94; and
an increase in foreign currency reserves from $2.2 billion in March 1991 to
over $20 billion in March 1995 which, however, declined to $17 billion in
March, 1996.
However, during 1995-96, though export growth remained buoyant at 21 per cent in
dollar terms, the balance of payments came under some pressure from the continued
surge in import growth (which had started in 1994-95), a substantial decline in portfolio
investment flows in the form of GDRs and a sizeable increase in debt service payments
on liabilities accumulated in earlier years.
During April-May 1996, both export and import growth have slowed from last
year's pace. Exports grew by 14.4 per cent, in dollar terms, over the corresponding period
of 1995, while imports grew by 23.4 per cent (DGCI&S data). The recent aggregate
import growth figures, however, mask two potential trends, one positive and the other
negative. While non-POL import growth at about 17.2 per cent in the first two months of
1996-97 is about half that for the corresponding period of last year, POL growth has
almost tripled to 47.6 per cent. This is at least partly attributable to non-adjustment of
domestic oil prices for two and a half years, delays in decontrol of energy prices and lack
of fair and transparent procedures for entry of private producers in the energy sector. The
apparent slowdown in the growth of exports is also a cause for concern. However,
foreign investment flows have remained buoyant, with net FII inflows exceeding $1
billion in the first quarter of 1996-97. Foreign currency reserves have risen from $17.0
billion at the end of March 1996 to $17.5 billion at the end of June 1996.
Though no official estimates are as yet available on savings and investment
performance during 1995-96, there are some early indications of likely trends. The
continued high growth in capital goods production, the acceleration in the growth of
cement production and the higher growth of capital goods imports in 1995-96 suggests
that private fixed investment continued to grow strongly in 1995-96. Data on aggregate
savings performance is not available and the indications regarding net flow of savings
through the financial system is somewhat mixed. While there was continued substantial
growth of commercial bank credit to the non-food commercial sector, and gross
disbursements by development financial institutions also recorded a sizeable increase of
18 per cent, the amount of capital raised through the primary market issues declined by
as much as 24 per cent in 1995-96 and inflows through GDRs were low.
The expansion in bank credit to the commercial sector would have been higher but
for the continued high levels of borrowing required by the Central Government to
finance its fiscal deficit, which exceeded the budget estimate of Rs.57,634 crores and
rose to Rs.64,010 crores (RE) in 1995-96. The buoyant demand for investible funds by
the private sector combined with continued strong need for borrowings by Government
ensured that nominal interest rates remained high despite the decline in the rate of
inflation observed during 1995-96. Thus, by the end of the last fiscal year, although the
point-to-point rate of annual inflation had dropped below 5 per cent, most banks were
still lending to prime customers at interest rates in the range of 17 to 20 per cent. Sooner
or later such high real interest rates (in excess of 12 per cent) are likely to hurt the growth
of investment and production. The only way to ease the availability of investible funds to
producers and investors without risking the resurgence of inflation and pressure on the
external sector is to reduce the borrowing requirements of Government, that is, the fiscal
deficit.
There are also some indications that the slow pace of economic reform in key
government-dominated infrastructure sectors, such as electric power, and unresolved
problems and constraints in the agricultural sector could undermine the recent pattern of
accelerating aggregate economic growth. Since the latter part of 1995-96 and including
the first two months of 1996-97, the rate of growth of electricity production has been
slowing. The rail and road transport system and port capacities are also under strain.
These are areas where economic reforms have been slow to take-off. Similarly, the
growth of agriculture and allied sectors which was on the low side at 2.4 per cent in
1995-96, is projected again at 2.3 per cent by CSO for 1996-97 even assuming a normal
monsoon. Sustained acceleration in overall GDP growth requires an acceleration in
agricultural growth to around 4 percent per year.
In a nutshell, sustaining the high growth trajectory attained in the last two years will
require compression of the fiscal deficit, quick reforms in critical infrastructure areas,
reinvigoration of agricultural growth and continued strength in the external sector.
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