Indian Economy Review 12-13

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REVIEW OF THE ECONOMY
2012/13

ECONOMIC ADVISORY COUNCIL TO THE PRIME MINISTER

NEW DELHI

April 2013

BLANKS

ECONOMIC ADVISORY COUNCIL TO THE PRIME MINISTER

Dr. C. Rangarajan Dr. Saumitra Chaudhuri Dr. V. S. Vyas
Dr. Alok Sheel

Chairman Member Member Secretary

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Economic Advisory Council to the Prime Minister E-Hall Vigyan Bhawan Maulana Azad Road New Delhi ii

CONTENTS
I. Overview 1 11 11 15 16 20 20 27 29 35 37 37 38 41 42 45 48 48 50 iii

II. The Economy Investment Savings Trends in Financial Corporate Results III. External Sector Merchandise Trade Invisible Earnings CAD – Estimate for 2012-13 and Projection for 2013-14 Managing the Capital Account IV. External conditions, Inflation and Fiscal Situation International Economic Conditions Domestic Inflation Monetary Policy Fiscal Situation V. Conclusions Appendices Table I Table II

BLANKS

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REVIEW OF THE ECONOMY

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I. OVERVIEW
1. In August 2012, the EAC had projected a likely growth rate for the economy of 6.7 per cent, a year-end inflation rate of between 6.5 and 7.0 per cent and a current account deficit (CAD) of 3.6 per cent of GDP. At the end of the fiscal year, while the inflation forecast has turned out to be accurate, the actual growth rate at around 5.0 per cent is much lower than what was projected, while the CAD is likely to be considerably higher at about 5 per cent of GDP. With respect to GDP growth, the extent of divergence between the projected growth rate of the economy and the actual outcome is disconcertingly large. It does not seem to have flowed from weakness in the conventional structural parameters. In August 2012, the Council had projected that at current prices, gross domestic capital formation (GDCF) would be 35.5 per cent and gross domestic fixed capital formation (GFCF) would be 30.0 per cent of GDP. The Advance Estimates released by the CSO for 2012-13 in Feb 2013, suggest that GDCF was 35.4 and GFCF 30.0 per cent of GDP. The ratio of total consumption to GDP as per the Advance Estimates was a little higher (68.7 per cent) than that projected by the Council (67.5 per cent) in August 2012, which partly comes from the wider than expected trade deficit, even after adjusting for gold. It should however not be overlooked that the denominator, namely GDP at market prices as per the Advance Estimates, is lower than what was projected, which to an extent puts a slightly misleading gloss on both investment and consumption ratios when computed with respect to GDP. The divergence between expected growth rates and actual growth rates in both 2011-12 and 2012-13 is large. Yet, overall investment and fixed investment rates have remained reasonably high (even adjusting for the smaller-than-expected GDP). At an aggregate level, the drop in domestic savings relative to investment has opened up a large current account deficit, which is considered equivalent to the “savings-gap” in conventional national accounting. It would, however, for the most part be erroneous to draw such an inference, as this would not lead to a decline in the rate of growth over the short term. The other notable factor is the persistence of high rates of inflation – especially of food items – and the direct impact this may have had on profitability and through that on investment behaviour. The obverse side of this is the monetary policy 1

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Review of the Economy 2012/13

response, which simultaneously curbs demand and increases the cost of capital. The curb on demand can create, and in this instance seems to have indeed created, a wedge between food and non-food (manufactured) goods prices, and profitability. 5. All these factors – as also the generally poor condition of the global economy – were however incorporated into projections of growth made by the Council earlier. Notwithstanding this, the very magnitude of the divergence clearly points to other factors also in play. It now appears that we missed two...
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