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ON THE PATH OF RECOVERY AND GROWTH
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Macroeconomic Overview: According to data for 2001-02, released by the Central Statistical Organization on January 31, 2003, gross domestic product at factor cost at constant 1993-94 prices grew at 5.6 per cent in 2001-02, as against 5.4 per cent 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 per cent, as against the previous estimate of 4.0 per cent.

The pick-up in the 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 per cent and 5.8 per cent rates that are markedly higher than 3.5 per cent and 5.3 per cent 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 per cent, 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 per cent. 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 per cent to 6.1 per cent, and from 6.8 per cent to 7.1 per cent, respectively, between 2001-02 and 2002-03. Indications are that, in spite of a severe monsoon deficiency, the rebound in growth observed since 2001-02 gained momentum in industry and services sectors in the current year.

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. Geopolitical conditions have been highly volatile with the stand-off in Iraq. Moreover, the country has been affected by a most telling monsoon deficiency...

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 was only 2.6 per cent in mid-January 2003. Prices of primary products remained below 4 per cent for the larger part of the year, while inflation in manufactured products was around 3 per cent. The transition to a market-based pricing regime for petroleum products was also devoid of disruptions, with fuel group inflation barely touching 5 per cent for much of the year.

However, the latest Gulf-related uncertainty has caused fuel price inflation to touch 6.4 per cent in mid-January, 2003. Inflation, as measured by the consumer price index for industrial workers declined from 4.7 per cent at the beginning of 2002-03 to 3.2 per cent in December 2002. The abundant stocks of wheat...and rice...held by the Food Corporation of India, while complicating the task of agricultural diversification and fiscal consolidation, did however, help to quell inflationary pulls.

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 dollar during 2001-02, with average depreciation against the dollar amounting to 4 per cent. During the current financial year, after reaching an all time high of Rs 49.06 per dollar in May 2002, the rupee strengthened...and stood at Rs 47.80 per dollar at the end of December 2002... The rupee, however, has depreciated against pound sterling, euro, and yen by 8.9 per cent, 14.9 per cent and 7.4 per cent respectively between April 2002-January 2003, reflecting in part the weakening of the dollar against these currencies.

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