Abstract
This 2004 Article IV Consultation highlights that India is on track for another year of robust growth in 2004/05. Supported by a strong monsoon, growth rebounded to 8½ percent in 2003/04, the highest level in more than a decade. In 2005, firms appear to have embarked on a new investment cycle, underpinned by strong credit growth. Inflation has been running higher, driven largely by supply-side factors. The balance of payments position remains comfortable notwithstanding the higher oil prices.
1. This statement contains information that has become available since the staff report was circulated to the Executive Board on December 23, 2004. This information does not alter the thrust of the staff appraisal.
The Impact of the Tsunami
2. Some of India’s poorest regions have been affected by the massive earthquake and tsunamis of December 26. India has suffered a large number of deaths and many poor living in the region have been displaced. Many fisheries and local businesses have been destroyed in this tragic event. The macroeconomic impact itself is not projected to be very large; the most affected regions are not heavily industrialized. Some effect is possible on tourism, although there has been no indication of large-scale cancellations by tourists. There is some concern that the inundation of some crop lands may reduce agricultural output but damage is yet to be ascertained.
3. While it is still too early to know the precise economic cost of the disaster for India, reconstruction and disaster relief appear manageable. The potential public costs have been estimated by the government, on a preliminary basis, at about ½ percent of GDP. The government has announced a first package of measures totaling Rs. 23 billion (about US$500 million, less than 0.1 percent of GDP) to rebuild fisheries and houses in the affected region. The authorities have indicated that fiscal targets for this year will not be affected. The 2005/06 budget, due in March, will present the government’s plans to deal with reconstruction efforts in the next fiscal year.
Other Recent Developments
4. Recent economic developments are broadly consistent with staff’s growth forecast for 2004/05. Second quarter growth reached 6.6 percent, slowing from 7.1 percent the previous quarter, but slightly above staff’s projection. Industrial output rose by 7.9 percent year-on-year in November, slowing from 10.1 percent the previous month.
5. Inflation has moderated. WPI inflation has declined for five consecutive weeks, reflecting mainly lower prices of primary products and manufactured goods, and now stands at 5.8 percent, below staff’s projection for end-2004/05 of 6.4 percent. CPI inflation also declined in November, to 4.2 percent.
6. The trade deficit widened in the second quarter of the fiscal year, but the external position remains sound. The trade deficit rose to US$12.3 billion (1.9 percent of annual GDP) from US$3.8 billion in the same period last year. Merchandise exports increased by 10 percent in the second quarter, but merchandise imports rose sharply, by 54 percent, led by oil imports. The rising trade deficit was partially offset by strong growth in services receipts, in particular software services, but the current account registered a deficit of US$6.4 billion. A pickup in capital inflows helped maintain reserves approximately unchanged at about US$120 billion. Preliminary data indicate that the trade deficit stood at US$20 billion for April-December, compared with US$12 billion over the same period last year. However, reserves have increased sharply, reaching US$129 billion in the first week of January, reflecting strong capital inflows.
7. Budgetary developments are in line with those described in the staff report. In the fiscal year to November, the overall central government deficit was contained to 2.4 percent of GDP (about half the annual target), as tight expenditure control continued to offset revenue shortfalls. The current deficit however reached 2.4 percent of GDP (97 percent of the annual target).
8. Several policy measures have been taken to advance the reform process:
The government lifted, for new joint ventures, the requirement that foreign firms seek approval of their partners before setting up enterprises in related fields.
The lower house of parliament passed the planned amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to enable banks and financial institutions to more easily recover bad loans.
The government issued an ordinance to set up the new pension regulator.
9. The Indian authorities informed the staff that all but one of the restrictions subject to the Fund’s jurisdiction under Article VIII, Section 2 have been removed. The staff is seeking to obtain the necessary underlying documentation to finalize its assessment.