CURRENT ECONOMIC SITUATION
15 JUNE 2005
PHD CHAMBER OF COMMERCE AND INDUSTRY
PHD HOUSE, 4/2 SIRI INSTITUTIONAL AREA, AUGUST KRANTI MARG, NEW DELHI 110
016
TEL : 26863801-04, FAX : 26863135, 26568392
E-mail : phdcci@phdccimail.com; Website : www.phdccimail.com

Current Economic Scenario
The question that is prominent among discussions today is whether our
economy, which has managed a robust growth for the last one year and more,
would continue to experience the same vim and vigour as exhibited in the past.
In other words, would the economy continue to remain in the high growth
trajectory in the current fiscal or would the early signs of slowdown, as evident
from some of our recent economic indicators, be manifest in the form of slower
economic performance and sluggish growth by the end of this year.
Industrial Production
Preliminary investigations suggest that it may be too early to predict the end of
the high growth phase of the Indian industry. One reason could be the
stimulating performance recorded by our industrial sector at the beginning of
this fiscal.
In fact, figures show that Index of Industrial production (IIP) has notched up an
annual growth of 8.8% per cent during April 2005 which is marginally below the
8.9% registered during the corresponding month of the preceding year.
Within industry, the manufacturing sector has recorded a ‘shining’ performance.
The manufacturing index rose by 10.0% during April 2005 against 8.8% in the
corresponding month of 2004.
At the sectoral level as many as 14 of the 17 two digit industry groups have
shown positive growth during April 2005 compared to the corresponding period
last year.

A further break up shows that the textile sector (including wearing apparel) has
shown a highest growth of 23.2% followed by 20.9% in other manufacturing
industries and 16.6% in Basic Metal and Alloy Industries. On the other hand,
wood and wood products, furniture and fixtures have shown a negative growth
of 6.3% followed by a decline of 4.6% in wool, silk and man made fibre textiles
and 2.8 percent in jute and other vegetable fibre textiles (except cotton).
However, the other sub sectors of IIP, namely the core sector of mining and
electricity have showed some slackening of growth during the month. The
growth in electricity production, was a meager 3.0% in April 2005 as compared
to an impressive 10.3% evidenced in the same month last fiscal, while mining
growth slowed down to 3.1% in April 2005 against 9.1% in the same month of
2003-04.
As per use based classification, the growth index of capital goods has shown a
significant improvement and risen to 24.5% in April 2005 as compared to 10.1%
during April 2004. The figures for April 2005 show an expansion in capital goods
industry representing investment activity in the economy.
The consumer goods sector, too, has posted a robust step up in growth at 13.1
percent compared to 6.5 percent in the corresponding month last year. Within
consumer goods, consumer durables industry stepped up production of
televisions, refrigerators, washing machines, air conditioners etc to register a rise
of 18.6% during April 2005 against 11.9 per cent during the previous period while
non-durables surged to 11.4% in April 2005 as against 5.0% in the corresponding
year indicating an overall buoyancy in demand in the economy. The
performance of basic goods (5.9% in April 2005 versus 8.0% in April 2004) has
been impressive while intermediates continued their decline to achieve 2.3%
growth as against 12.4% achieved during April 2004.

Nevertheless, despite the good show recorded by the industry in April, 2005 at
the aggregate level, there are apprehensions about whether this trend would
be sustained. This is because there are enough fundamental factors indicating
that there will be a moderation in industrial growth. An export slowdown is
expected because of the dampening of international growth rates. Besides,
experts maintain there can be saturation in the housing and car markets which
have seen a robust growth in the last few years. Already there has been a 15
percent decline in the sales of commercial vehicles over April last year. This
sector has been a very important driver of industrial expansion over the last
couple of years and such a dramatic decline cannot but hurt at the macro
economic level causing the growth cycle to slow down.
Corporate Performance
Business reports indicate that the corporate sector has recorded a shining
performance during the fiscal 2004-05. The results declared by a total of 1325
companies for 2004-05, confirm a 54.81 percent growth in net profits which has
been driven by a whopping 25.64 percent rise in net sales income.
It has also been brought out that of the 112 sectors studied, as many as 42
posted over 25 percent sales growth compared to 8 percent in the previous
year. The overall impressive corporate performance has been attributed to the
excellent performance exhibited by the housing and construction sector which
has been the star performer with a resounding 938 percent rise in net profits.
Other sectors which have evidenced a healthy growth in profits include picture
tubes, office equipment, sponge and pig iron and sugar. Industries such as
composite and alloy steel sector, shipping have also witnessed a phenomenal
rise in net profits. This is despite the fall in GDP growth in the third quarter and a

rise in oil prices and other raw material costs which continue to touch record
levels.
Infrastructure Industry
Our infrastructure sector has emerged as a dark cloud encircling the silver lining
with its performance leaving much to be desired. The fiscal 2005-06 has begun
on an ominous note with a continuing deceleration in the performance of the
infrastructure industries thereby reviving fears that an industrial showdown is
round the corner.
The growth rate of the Index of Infrastructure industries – which has a combined
weight of 26.68 percent in the Index of Industrial Production – has slipped to 3.6
percent in April 2005 as against 10.5 percent in April, 2004. The poor growth
performance of the core sector during the month of April, 2005 is on account of
negative growth rate recorded by the crude petroleum and refinery sectors and
dismal performance by the power utilities.
It is found that the production of Petroleum refining declined by 7.9 percent
while production of crude petroleum decreased by 0.4 percent during the
month compared to growth of 13.3 percent and 9.4 percent in April, 2004. The
decline in production of petroleum refinery products is due to the rise in prices
which is affecting consumption and causing an inventory build up. As a result,
refiners have no choice but to reduce output.
Similarly, electricity production slipped substantially in April, 2005 recording a
growth of a meager 2.9 percent compared to 10.5 percent in the same month,
a year ago. The explanation for a decline in the performance of the electricity
sector may not be that simple as there is an inadequate supply of the product.

In fact, there has not been a build up in the power capacity that was required
and this is due to problem of insolvent buyers i.e SEBs which have been unable
to check power theft. The lacklustre performance of both petroleum and
power sectors is a cause for concern as both these products, taken together,
feed directly into virtually all sectors of the economy, to a greater or a lesser
degree and their shortage would adversely affect the user industries.
Besides, during April, 2005, except for a small increase in coal production, which
logged a growth of 8.2 percent, all other sectors posted lower growth rates as
compared to the same month last year. Cement production grew by only 6.9
percent during the review month as against an impressive 16.5 percent while
finished steel production rose 7.5 percent compared to 9.2 percent in April,
2004.
In fact, the infrastructure sector has been showing a vacillating performance
since November 2004 when growth in the sector touched 5.6 percent. There has
been a continuous deceleration in performance since then. If the present trend
continues then, it is apprehended that, there would be a fall in the level of
economic activity which would cause industrial growth to taper off in another six
to seven months.
Against this backdrop, it is believed that it has become imperative to address
the issues bedeviling the infrastructure sector in order to sustain the prevailing
tempo of growth in the economy.
External Sector
Our external sector has ratcheted up a salutary performance in the current
fiscal with both exports and imports showing a healthy and sustained growth.

Our exports continued to remain in the high growth orbit at the onset current
fiscal, by notching a robust 17.20 percent growth at $65.68 billion in April, 2005
against $56.04 billion in the same month last year. Similarly, imports were valued
at $10.42 billion during the month as compared to $69.00 billion representing a
hefty 51.5 percent increase over the same month last year. The commodity
composition of imports reveals that oil imports rose from $23.34 billion in April,
2004 to $33 billion during April 2005 representing a growth of 41.37 percent
brought on by the higher prices of crude petroleum. On the other hand, non-oil
imports are estimated at $71.23 billion which is 56 percent higher than $45.66
billion in April, 2004.
However, a growing hiatus between performance of both exports and imports
has also resulted in the widening of the trade deficit which has nearly trebled to
$3.85 billion in April, 2005 from $1.29 billion in the corresponding period last year
and is a cause for concern.
Fiscal Trends : An Overview
The data released for 2004-05, contains a positive surprise as far as our fiscal
indictors are concerned. The fiscal deficit for 2004-05 has been contained at 4.1
percent of GDP which is appreciably below the revised estimates of 4.5 percent
announced in February this year. This is the lowest fiscal deficit achieved in the
last eight years.
The biggest contributor to this achievement is the significant growth in non-tax
revenues-which account for a third of Central Government’s inflows-which were
7 percent higher than that projected in the revised estimates. A rise in non-tax
income has been accompanied by a modest growth of tax revenues which has
overshot the revised estimates, albeit by a more modest 1.4 percent. A rise in

tax revenue has been on account of buoyant industrial activity contributing to
excise revenues, booming imports adding to customs receipts and soaring
profits boosting corporate and capital gains taxes. Furthermore, the
government has also been successful in realizing Rs.4400 crore from public
offerings as against the target of Rs.4000 crore.
On the expenditure side, total expenditure has been contained and is lower
than revised estimates by 7 percent. A further break-up shows that plan
expenditure has fallen short of revised estimates by 3.8 percent while non-plan
expenditure has been reduced by a more modest 0.6 percent.
However, it needs to be noted that while the government has succeeded in
restraining the fiscal deficit, the same is not the case with regard to revenue
deficit. Indeed, the revenue deficit has surged to 3.26 percent of GDP as
against 2.7 percent maintained in the revised estimates. The reason is that the
government has been unable in rein in its unproductive expenditure which is
unsustainable and likely to act as a drag on growth and development.
However, the current fiscal appears to have begun on a good note with an
improvement in revenue deficit which, as a percentage of budget target, was
28.3 percent in April, 2005 as against 30.5 percent in the corresponding period in
the previous year.
The improvement in revenue deficit could be attributed to marginally higher
revenue receipts during April, 2005 accounting for 0.5 percent of target as
compared to 0.3 percent of budget target achieved in April, 2004.
The fiscal deficit in April, 2005 as a proportion of budget target was 18.8 percent
which is only marginally better than 19.1 percent in April, 2004. Total expenditure
in April, 2005 as a percentage of budget target was better at 5.9 percent as

against 6.3 percent last year, mainly on account of a lower non-plan
expenditure.
Taking cognizance of the noteworthy fiscal performance, the Finance Minister
has hinted that the center’s fiscal deficit would be less than 4.1 percent of GDP
in 2005-06 as against the budgeted 4.3 percent. The optimism on doing better
than last year stems from expected revenue buoyancy as well as the intent to
curtail government borrowings for the current year.
Such a more towards fiscal discipline would arguably be the most important
step towards a hospitable macro economic environment in the country and
would auger well for sustained economic growth.
Capital Inflows
Foreign Direct Investment has picked up to US$ 4.47 billion during April-February,
2004-05. Total portfolio investments during the period were $7.31 billion during
this period taking total foreign investment flows to $11.78 billion. The inflow of
commercial bank deposits of the non-resident Indians declined by $1.67 billion
during April-February, 2004-05. This is in sharp contrast to the net inflows of $3.87
billion during the corresponding period of the previous year.
Inflation
Inflation rate as measured by the wholesale price index has gone up from 5.4%
in 2003-04 to 6.4% in 2004-05. The rates has picked up from 4.5% in April 2004 to a
peak level of 8.5% in August 2004 and then slowed down to 4.9% in February
2004. It edged up to 5.2% in March 2005.

The rise in prices could be attributed to a steep climb in fuel prices, which rose
from 6.3 percent in 2003-04 to 10 percent in 2004-05 and a pick-up in prices in
the manufacturing sector. The sector recorded an inflation of 6.1 percent in
2004-05 as compared to 5.6 percent in 2003-04.
However, at the onset of the current fiscal, there has been a down ward
movement in the rate of inflation as measured by Wholesale Price Index. This is
borne out by the fact that the annual rate of WPI based inflation has dropped
to a two month low and eased to 5.20 percent for the week ended 28th May,
2005 as against 5.38 percent in the previous week and 5.61 percent in the
corresponding week of the previous year. This is on account of easing of prices
of metal products, even as prices of other industrial products and food have
gone up marginally.
The point to point rate of inflation based on Consumer Price Index for Industrial
workers (CPI-IW) is 4.2 percent in March, 2005.
Stock Market Trends
After reaching an all time high of 6915 in the first week of March, 2005, the
sensex has continued to drop and by end April the sensex was down by 11
percent. Industry-wise data reveals that the decline in April was widespread.
The current downtrend could be attributed to lower investments by foreign
institutional investors. The positive features such as hopes of better quarterly
corporate results and expectation of normal monsoon has failed uplift the
market.

On the other hand, the primary capital markets has continued to attract funds in
April, 2005 through the response is relatively subdued as compared to the same
period last year. Resources raised by domestic floatations stood at Rs.3329 crore
in April, 2005 which was lower than Rs.4646 crore raised in April, 2004.
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