The Hindu Business Line : An overview of the economy

Madam Speaker, at the time of the presentation of the Interim Budget, I had given a detailed analysis of the economic situation. Without repeating myself, I would like to highlight that the development course charted by the UPA Government in the last five years has been possible due to a step up in the growth rate of the economy and improved revenue buoyancy.

The principal growth driver in this period has been private investment, which has been predominantly funded by domestic resources. During the year 2008-09, there has been a dip in the growth rate of GDP from an average of over 9 per cent in the previous three fiscal years to 6.7 per cent. It has affected the pace of job creation in certain sectors of the economy and the investment sentiments of the business community. It has also resulted in considerably lower revenue growth for the government. Another feature of the year 2008-09 was a sharp rise in the wholesale price index to nearly 13 per cent in August 2008 and an equally sharp fall close to 0 per cent in March 2009. While a detailed analysis of the developments has been presented in the Economic Survey-2008-09, tabled in both houses of Parliament last Thursday, I draw your attention to a few aspects.

The structure of India’s economy has changed rapidly in the last 10 years. External trade and external capital flows are an important part of the economy and so is the contribution of the services sector to the GDP at well over 50 per cent. The share of merchandise trade (exports plus imports) as a proportion of GDP has more than doubled over the past decade to 38.9 per cent in 2008-09.

Similarly, trade in goods and services taken together has also doubled to 47 per cent during this period. Gross capital flows rose to a peak of over 9 per cent of GDP in 2007-08 before falling in the wake of the global financial crisis. The significant increase in the inflow of foreign capital is important, not so much for bridging the domestic savings-investment gap, but for facilitating the intermediation of financial resources to meet the growing needs of the economy.

This growing integration of the Indian economy with the rest of the world has brought new opportunities and also new challenges. It has made the task of sustaining high growth more complex. Over the past month, we have critically evaluated Government’s efforts at both short-term economic recovery as well as medium term economic growth. The economic recovery and growth is a cooperative effort of the Central and State Governments. That is why, for the first time, I held a meeting with Finance Ministers of States as part of the preparations for this Budget. I intend to make this an annual feature.

TOWARDS ECONOMIC REVIVAL

Short-term measures: To counter the negative fallout of the global slowdown on the Indian economy, the Government responded by providing three focused fiscal stimulus packages in the form of tax relief to boost demand and increased expenditure on public projects to create employment and public assets. The RBI took a number of monetary easing and liquidity enhancing measures to facilitate flow of funds from the financial system to meet the needs of productive sectors.

This fiscal accommodation led to an increase in fiscal deficit from 2.7 per cent in 2007-08 to 6.2 per cent of GDP in 2008-09. The difference between the actuals of 2007-08 and 2008-09 constituted the total fiscal stimulus. This fiscal stimulus at 3.5 per cent of GDP at current market prices for 2008-09 amounts to Rs 1,86,000 crore.

These measures were effective in arresting the fall in growth rate of GDP in 2008-09 and we achieved a growth of 6.7 per cent. There are signs of revival in the domestic industry and the foreign investors have also returned to the Indian market in the last couple of months. It is possible that the two worst quarters since the global financial meltdown in September 2008 are behind us. While the global financial conditions have shown improvement over the recent months, uncertainties relating to the revival of the global economy remain. We cannot, therefore, afford to drop our guard. We have to continue our efforts to provide further stimulus to the economy.

Madam Speaker, what I unfold now are only the ‘First steps’. It will be my endeavour to make the process of budget formulation more participatory and a continuous exercise.