This 2006 Article IV Consultation highlights that India’s economy has continued to grow above trend, with an average growth of 8 percent in the last three years. Growth is broad based, with robust consumption, investment, and exports. With manufacturing expanding at more than 10 percent y/y, industry has joined services as an engine of growth. Net foreign investor inflows rebounded after the May/June 2006 stock market correction, and stock prices recovered smartly, reaching new historical highs. Real estate prices continue to grow at a rapid clip on the back of a credit boom.
December 20, 2006
1. This statement contains information that has become available since the staff report was circulated to the Executive Board on November 29, 2006. This information does not alter the thrust of the staff appraisal.
2. Recent data suggest stronger-than-expected near-term growth. Real GDP growth accelerated to 9.2 percent y/y in the June-September quarter, well above market and staff projections, reflecting strong services and a marked pickup in manufacturing. Industrial production growth eased to 6.2 percent y/y in October, but this largely reflected the temporary seasonal impact of holidays. Strong momentum has also contributed to a widening trade deficit. WPI inflation edged up to 5.3 percent in November, mainly reflecting rising food and manufacturing prices. On the basis of recent data, staff has revised upward GDP growth to 8.9 percent for FY2006/07 and to 8.2 percent for FY2007/08, with upward revisions to the projected current account deficit (2 percent of GDP) and inflation (5.2 percent) in FY2006/07.
3. Fiscal revenues have been stronger than anticipated. The central government’s net tax revenue grew 33.8 percent y/y during April–October, reflecting strong corporate tax receipts. State VAT collection rose over 30 percent y/y during April-September.
4. On December 8, the RBI announced increases in the Cash Reserve Ratio (CRR). The CRR will be raised by 25 basis points to 5.25 percent on December 23, and another 25 basis points on January 6, to remove some Rs. 135 billion (2.2 percent of reserve money) in excess liquidity from the market. Nonetheless, monetary conditions remain accommodative; in November, M3 grew 19.3 percent y/y, reserve money grew 17.5 percent y/y, non-food credit expanded 30.1 percent y/y, and real short-term interest rates remain at low levels compared with the past.
5. The equity market has recently experienced volatility. Between December 8 and 12, the BSE Sensex fell 5.8 percent, but subsequently stabilized. Between end-November and December 13 the rupee gained 0.1 percent against the dollar amid dollar weakening, while foreign exchange reserves now stand at $175 billion (December 8).
6. The government has cut domestic petrol and diesel prices by 4¼ percent and 3 percent respectively; LPG and kerosene prices are unchanged. The impact on inflation is likely to be limited (perhaps reducing WPI inflation by 0.1 percent). According to staff estimates, petrol is now 3½ percent above, and diesel 4½ percent below, cost-recovery levels on an import parity basis.