G. Srinivasan

New Delhi, April 26

INDIA is one of the countries hit by the recent tsunami, but the disaster is unlikely to have much of an impact on its growth prospects with the country's growth becoming "more broad-based" in 2004.

This is the assessment of the Bangkok-based UN Economic and Social Commission for Asia and the Pacific (ESCAP) in its 2005 Annual Survey, released here by the Director-General, Research & Information System (RIS) for the Non-Aligned and Other Developing Countries (RIS), Dr Nagesh Kumar.

Assuming no major internal or external shocks and no political instability, ESCAP said India should be able to sustain real GDP growth rates in the range of 7-7.5 per cent in the lingering two years of the Tenth Plan (2005-07), underpinned by a growth rate of 2-4 per cent in agricultural value added, 7.5-8 per cent in industry and 8.5 per cent in services. The survey took due note of India's success in "stabilising the rate of inflation, which remained virtually unchanged in 2004".

India's export growth in excess of 20 per cent was the result of buoyant world demand for key manufactured exports as well as higher commodity prices and various export-facilitating measures. Imports also logged a substantial increase of 30 per cent in 2004, mainly owing to higher imports of crude oil, intermediate goods for export and capital goods. As a result, the trade deficit as a percentage of GDP increased last year.

Net invisible earnings were expected to grow robustly at an annual rate of 11 per cent in 2004, amounting to 4.2 per cent of GDP in 2004. The overall current account balance was once again expected to be in surplus, amounting to 0.5 per cent of GDP in 2004, albeit lower than the 1.8 per cent registered in 2003.

Reviewing India's growth story in 2004, the survey said GDP growth in India decelerated from 8.5 per cent in 2003 to 6.9 per cent last year, owing in large part to the slow growth in agricultural value added, caused by insipid monsoon. But, industrial growth accelerated from 6.6 per cent in 2003 to 7.8 per cent in 2004, owing to stronger private consumption and investment, as well as more rapid export growth.

India's external trade and payments situation in recent years has been marked by "a noticeable structural change towards a more stable and sustainable balance of payments". Thus, in the capital account, there was a distinct shift in favour of long-term and non-debt-creating financial flows such as FDI and portfolio investment.

Foreign investment inflows (including both FDI and portfolio investment) went up substantially from $4.5 billion in 2002 to $14.5 billion in 2003, attracted by the sound macroeconomic milieu in India, the stability of the exchange rate of the rupee, further liberalisation of foreign investment policies and relatively high returns on investment compared with other host countries.

While FDI flows witnessed a sharp spurt in 2004, the survey said portfolio investment declined.

Commenting on economic integration initiatives in South Asia, the survey singled out the decision by India, Bangladesh and Myanmar for the construction of a pipeline that would transport natural gas from Myanmar via Bangladesh to India to meet the likely demand for energy. Through this project, Bangladesh is likely to gain access to markets in India's north-eastern States, to trade transit routes to Nepal and Bhutan through India and to hydroelectric power sources in Nepal and Bhutan through India's power grid. India also agreed to import 78 items duty-free, covering 75 per cent of categories of goods exported from Dhaka, the Survey noted.

Finally, it said both India and Pakistan might benefit from the phase-out of the quota regime in textiles and clothing since "their firms will have unrestricted access to world markets and because of their domestic raw materials and textile base, particularly cotton".

(This article was published in the Business Line print edition dated April 27, 2005)
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