Macroeconomic Overview 

According to data for 2001-02, released by the Central Statistical Organisation (CSO) on January 31, 2003, Gross Domestic Product (GDP) at factor cost at constant 1993-94 prices grew at 5.6 percent in 2001-02, as against 5.4 percent projected in February 2002. The higher growth estimate for 2001-02 is particularly significant as it comes against the backdrop of a revised estimate of a more moderate growth deceleration for 2000-01 than originally apprehended. In 2000-01, GDP at factor cost at constant 1993-94 prices grew at 4.4 percent, as against the previous estimate of 4.0 percent. The trends of key macro economic parameters are given in Table 1.1 and Figure 1.1.

1.2    The pick-up in growth of the Indian economy observed in 2001-02 was stronger than what had been initially anticipated. Data on quarterly GDP at factor cost at constant 1993-94 prices, available only for the first half of 2002-03, indicated that in the first and second quarters of the current year, year on year, GDP grew by 6 percent and 5.8 percent - rates that are markedly higher than 3.5 percent and 5.3 percent respectively, registered in the corresponding periods of the previous year. The monsoon failure, however, affected agriculture severely, with agriculture and allied GDP declining by 3.1 percent, as per the advance estimates released by the CSO on February 7, 2003. Overall GDP growth in the current year is likely to be only 4.4 percent. This agriculture-pulled deceleration in growth, in 2002-03, clouds an across-the-board improvement in the growth performance of industry and services from 3.3 percent to 6.1 percent, and from 6.8 percent to 7.1 percent, respectively, between 2001-02 and 2002-03. Indications are that, inspite of a severe monsoon deficiency, the rebound in growth observed since 2001-02 gained momentum in industry and services sectors in the current year.

1.3    The continued growth recovery in the first half of the current year is significant in view of the several downside risks prevailing in the international and domestic economy. The outlook of recovery in global economic activity and world trade has remained subdued. International financial flows have been affected by the unsettled conditions in Latin America and Turkey. Geo-political conditions have been highly volatile with the stand-off in Iraq. Moreover, the country has been affected by a most telling monsoon deficiency in two decades.

1.4    The growth recovery was accompanied by continued macroeconomic stability in terms of low inflation, orderly currency market conditions and comfortable reserves. In the past, droughts, with their impact on price and availability of foodgrains, have been particularly harsh on the poor. In the current year, notwithstanding the deficient monsoon, there were no shortages in availability of essential commodities, or flare-ups in their prices. The 52-week average inflation rate based on the Wholesale Price Index (WPI) was only 2.6 percent in mid January 2003. Prices of primary products remained below 4 percent for the larger part of the year, while inflation in manufactured products was around 3 percent. The transition to a market-based pricing regime for petroleum products was also devoid of disruptions, with fuel group inflation barely touching 5 percent for much of the year. However, the latest Gulf-related uncertainty has caused fuel price inflation to touch 6.4 percent in mid-January, 2003. Inflation, as measured by the Consumer Price Index for industrial workers (CPI-IW) declined from 4.7 percent at the beginning of 2002-03 to 3.2 percent in December 2002. The abundant stocks of wheat (28.8 million tonnes on January 1, 2003) and rice (19.4 million tonnes on January 1, 2003) held by the Food Corporation of India (FCI), while complicating the task of agricultural diversification and fiscal consolidation, did however, help to quell inflationary pulls.

1.5    In spite of volatility in global currency markets following the events of September 11, 2001, appropriate and timely policy interventions moderated the volatility in the exchange rate of the rupee, which moved in a range of Rs.46.56-48.85 per US dollar during 2001-02, with average depreciation against the US dollar amounting to 4.0 percent. During the current financial year, after reaching an all time high of Rs.49.06 per US dollar in May 2002, the rupee strengthened against the dollar and stood at Rs.47.80 per US dollar at the end of December 2002, thereby appreciating by 2.1 percent over the end-March 2002 level. The rupee, however, has depreciated against pound sterling, euro, and yen by 8.9 percent, 14.9 percent and 7.4 percent respectively between April 2002-January 2003, reflecting in part the weakening of the US dollar against these currencies.

1.6    Foreign currency assets at end-March 2002 amounted to US $51.05 billion, up by US $11.5 billion over US $39.5 billion at end-March 2001. Out of this increase, a large part (US $9.10 billion) was realized during the second half of 2001-02. Reserve accretion accelerated in the first three quarters of the current financial year, with foreign exchange reserves reaching a record high of US $73.58 billion at the end of January 2003, with an increase of US $19.47 billion over the level of end-March 2002. A recent Reserve Bank of India (RBI) study shows that the major sources of reserve accretion in the current fiscal till end-November 2002 have been a surplus in the current account, non-debt creating capital flows and valuation gains. In spite of the interest rate differential of 3-4 percent between the rates abroad and in India, there is no evidence to suggest that arbitrage through debt capital was substantial. Thus, at least upto November 2002, arbitrage may not have played a major role in accumulation of reserves. It is estimated that as much as two-thirds of the reserve accretion was on account of non-debt capital flows. Growth in foreign exchange reserves has facilitated a further relaxation of foreign exchange restrictions and a gradual move towards greater capital account convertibility.

1.7    The rapid growth in reserves was partly the result of a strong current account. After twenty-three years, the current account of India's balance of payments recorded a surplus _ equivalent to 0.3 percent of GDP _ in 2001-02. Stagnant exports and falling imports brought down the trade deficit by 0.5 percentage points in 2001-02. The current account showed a surplus mainly because of buoyant net invisible inflows equivalent to 2.9 percent of GDP, which, at US $14.05 billion, were the highest in the last decade. Invisibles are doing well in the current year too, primarily on account of heavy inflow of remittances. This, coupled with a sharp rise in exports, considerably enhances the possibility of recording a surplus in the current account for the second successive year. According to DGCI&S data, exports in dollar terms are currently (April-December, 2002) growing at 20.4 percent. Year-on-year exports in dollar terms grew by 34.3 percent in December, 2002. The surge in exports has occurred in spite of the sluggish pace of global economic recovery, and the slight appreciation of the rupee vis-à-vis the dollar, and has contributed to domestic industrial growth.

1.8    While merchandise exports have grown well in 2002-03, services exports have also been an important area of success reflected in net invisible inflows of US $14 billion in 2001-02. India's share in world commercial services trade is larger than India's share in world merchandise trade. While software exports is a well-known success story, India is now an important venue for many tasks in services such as financial accounting, call centres, processing insurance claims, and medical transcription. The future potential for growth in these areas appears to be considerable.

1.9    The strengthening of the balance of payments has impacted on the monetary sector, with net foreign exchange assets (NFA) of RBI emerging as an important source of reserve money. From 9.1 percent as at end-March 1991, the share of net foreign exchange assets in reserve money, which had reached 78.1 percent by the end of 2001-02, became 100.7 percent on January 24, 2003, which is close to a currency board situation. Similarly, the NFA to currency ratio increased gradually from 14.4 percent as at end-March 1991, to 105.2 percent as on March 31, 2002, and further to 127.7 percent on January 24, 2003. For liquidity management, the substantial increase in foreign exchange assets was partly neutralised by the decline in RBI's net domestic credit. In the current financial year, RBI credit to the government remained negative, and reserve money grew by 2.9 percent up to January 24, 2003, as compared with 4.7 percent in the corresponding period of last year.

1.10    The money multiplier - the ratio of broad money (M₃) to reserve money - which had increased from 4.3 to 4.4 in the previous year, increased further to 4.8 as on January 10, 2003. In the current financial year up to January 10, 2003, broad money grew at 9.8 percent (net of merger of ICICI and ICICI Bank) as compared with 11.2 percent in the corresponding period of last year. The year-on-year growth in M₃, as on January 10, 2003, amounted to 12.8 percent (net of mergers) compared with 14.5 percent last year.

1.11    Inspite of the slower growth of money supply, the current year has been characterised by easy liquidity conditions. There are signs of a pick-up in non-food credit and a fall in interest rates, including in the yields on government securities. Upto January 10, 2003, non-food credit (net of mergers) increased by 11.4 percent, as compared with 9.1 percent in the corresponding period of last year. A revival in industrial activity may lead to a further increase in the off-take of non-food credit. Food credit declined by 7.1 percent in the current financial year as compared to an increase of 33.0 percent in the corresponding period of last year, mainly on account of the drought, and higher off-take of food-grains in the current year. Priority sector advances of public sector banks formed 43.1 percent of net bank credit at the end of March, 2002. The corresponding percentage for private banks was 40.9 percent, higher than the prescribed target of 40 percent. However, there were shortfalls under priority sector sub-targets set for the agricultural sector. A declining trend in sanctions and disbursements by All-India Financial Institutions was observed mainly on account of a reduction in the number of project proposals seeking financial assistance, the weak financial position of IDBI and IFCI, and the spread of universal banking.

1.12    Facilitated by relatively lower inflation, interest rates continued to soften during the year. The RBI reduced the bank rate by 25 basis points to 6.25 percent in October 2002. At its present level, the bank rate is the lowest since 1973. The cash reserve ratio (CRR) was reduced by 50 basis points to 5.0 percent from June 1, 2002, and further to 4.75 percent from the fortnight beginning November 16, 2002. The PLR of five major commercial banks declined from 11.00-12.00 percent to 10.75-11.50 percent in the current year. A noticeable development in the current year is sub-PLR lending by commercial banks. Yields on government securities continued to maintain their downward trend. The yield on 7.4 percent 12-year government paper reached a low of 6.13 percent on December 31, 2002.

1.13    Gross non-performing assets (NPAs) of scheduled commercial banks increased by Rs. 7,164 crore to Rs. 70,905 crore, while net NPAs increased by Rs. 3,084 crore to Rs. 35,546 crore in 2000-01. The incremental gross NPAs in 2001-02, which is more than double the amount in 2000-01, is mainly on account of the inclusion of an amount of Rs.4,512 crore in gross NPAs consequent on the merger of ICICI with ICICI Bank. There was an increase in NPAs of public sector banks, despite significant progress in recoveries. In the case of foreign banks, recoveries exceeded net accretion to NPAs. The ratios of gross and net NPAs of commercial banks to advances and total assets have been declining across all bank groups. Gross NPAs of public sector banks, at 11.1 percent of gross advances, and 4.9 percent of total assets, are higher than those of private sector and foreign banks. Advances to non-priority sectors accounted for the bulk of the outstanding NPAs in the case of both public sector banks (53.5 percent) and private banks (77.9 percent). At the end of March 2002, 25 out of 27 public sector banks (PSBs) had capital to risk-weighted asset ratio (CRAR) above the prescribed minimum level of 9 percent. Of these, as many as 23 banks had CRAR exceeding 10 percent. Two PSBs, two private sector banks, and one foreign bank, did not fulfill the minimum CRAR. The CRAR of scheduled commercial banks, as a whole, increased from 11.2 percent at end-March, 2001 to 11.8 percent at end-March, 2002.

1.14    Capital markets continued to be subdued. The NSE-50 index, which was at 1,087 in January 2002, was at 1,073 in January 2003, showing no significant change. This weakness in the secondary market led to a small volume of issuance on the primary market. However, the drop in the Indian equity market in the period after December 2001 is smaller than that in many other countries. Unlike the heavy inflows in the preceding years, there was a small outflow of foreign portfolio investment from India between April to November 2002.

1.15    The subdued conditions in domestic capital markets, however, conceal important structural reforms. The equity market has absorbed a new market design, with rolling settlement and equity derivatives trading. Liquidity, which was adversely affected in July 2001, has bounced back to strong levels from March 2002 onwards. In 2001, two Indian exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), ranked third and sixth among exchanges all over the world, sorted by the number of transactions.

1.16    Risk management functions performed by the Clearing Corporation of India Limited (CCIL) for bonds and foreign exchange transacted by telephone, has imparted a new level of safety with regard to settlement risk. In January 2003, government bonds started trading on stock exchanges, ushering in a new level of transparency and market access for the government bond market. This is a welcome move away from bilateral negotiation towards anonymous screen-based order matching.

1.17    Recent legislative amendments to the SEBI Act have put SEBI on a better footing in terms of enforcement of proper market conduct. This should help reduce the extent of market malpractice and improve market efficiency. The UTI Act was repealed to break UTI into UTI-1 and UTI-2, with UTI-2 handed over to a new set of owners.

1.18    Public finances, both at the Centre as well as the States, which have been under pressure since 1997-98 after the implementation of the Fifth Central Pay Commission's recommendations, deterio-rated further in 2001-02. The fiscal deficit of the Central Government, as a proportion of GDP, which had increased continuously from 4.1 percent in 1996-97 to 5.6 percent in 2000-01, rose further to an estimated 5.9 percent in 2001-02. The primary deficit of the Central Government (excluding loans to States against small savings collections), after turning into a small surplus in 1996-97, started deteriorating thereafter, reaching a level of 1.4 percent of GDP in 2001-02. The lack of fiscal consolidation at the State level is revealed by a similar deterioration of their combined fiscal deficit, again as a proportion of GDP, from 2.7 percent in 1996-97 to 4.3 percent in 2000-01, and further to a revised estimate of 4.6 percent in 2001-02. The consolidated fiscal deficit of the Centre and the States was 10.0 percent of GDP, according to the revised estimates for 2001-02.

 1.19    During the first nine months of the current year, central finances displayed considerable improvement with the fiscal deficit at Rs. 86,269 crore, slightly lower than the figure of Rs. 89,014 crore observed in April-December 2001. However, the remaining part of the year could see some pressures on both revenue and expenditure. Unanticipated weakening of the growth momentum may affect revenue collections. Expenditure management would also pose larger challenges because of enhanced food subsidies on account of higher farm support prices, higher fertilizer subsidy from augmented retention prices, larger subsidies resulting from distribution of liquefied petroleum gas (LPG) and kerosene at below market prices, and unanticipated expenditure on drought relief. The disinvestment programme is running behind schedule, and there is likely to be a shortfall in capital receipts under this head. During the year, the Central Government also had to provide Rs. 938 crore of budgetary resources for rehabilitation of the UTI.

1.20    At the level of the States, while a large number of initiatives like Fiscal Responsibility legislations, and medium-term fiscal reform programmes, have been undertaken, pressure on the fiscal front continues. While the expenditure composition, both for the Centre and the States continues to reflect a preponderance of wages, salaries, interest payments, and subsidies, there has been some welcome relief on the interest payments front with the softening of interest rates in recent months. The high fiscal deficit continues to complicate the task of conducting counter-cyclical fiscal policies and augmenting outlays on the much needed social and physical infrastructure, and poverty alleviation programmes.

1.21    A significant reform in the current year was the dismantling of the administered price mechanism for petroleum products from April 1, 2002, exactly as per the schedule announced in 1997. Reforms picked up speed in the third quarter of the current year. The winter session of Parliament saw the passage of several important Bills, including Securitisation and Reconstruction of Financial Assets and Securities Bill, 2002, the Securities and Exchange Board of India (Amendment) Bill, 2002, the Unit Trust Of India (Transfer of Undertaking and Repeal) Bill, 2002, Prevention of Money Laundering Bill, 2002, the Companies (Amendment) Bill, 2002, the Companies (Second Amendment) Bill, 2002 and the Competition Bill, 2001. The announcement about the disinvestment strategy for Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), in December 2002, cleared the uncertainty over privatisation.