The trends in growth rates in recent years are presented in the Table below.

QE - Quick estimate RE - Revised estimate

Q1: April-June Q2: July-Sep Q3: Oct-Dec Q4: Jan-Mar

The Indian economy has made significant strides over the last two decades. The annual average growth rose from a low level of 2.9 percent in the seventies to 5.8 per cent in the eighties and the nineties. The average growth from 1994-95 to 2003-04 worked out to 6.2 percent. Improvement in growth was accompanied by structural changes.

The year 2003-04 began in the backdrop of a drought induced deceleration in GDP growth to 4.0 percent in 2002-03, mainly because of a sharp decline of 5.2 percent in the agriculture and allied sector. Growth bounced back in 2003-04 to 8.2 percent, supported by a growth of 9.1 percent in agriculture and allied sector, 6.7 percent in industry and 8.7 percent in the services sector. Thus, the growth of the economy in 2003-04 was broad based. Revival of industrial growth witnessed in 2002-03 continued in 2003-04. According to World Development Indicators 2004, India became the fourth largest economy in the world after the US, China and Japan in terms of purchasing power parity.

The Central Statistical Organisation has released the estimates of Gross Domestic Product (GDP) for the first quarter of 2004-05. The overall growth for first quarter of 2004-05 (April-June) has been estimated at 7.4 per cent compared with 5.3 percent in the corresponding previous quarter. All the three sectors viz., agriculture, industry sector and services recorded higher growths of 3.4 percent, 6.8 percent and 9.5 percent respectively in the first quarter of the current year compared with 0.1 percent, 6.0 percent and 7.4 percent respectively in the corresponding quarter of last year.

The overall saving rate, as measured by gross domestic saving as per cent of gross domestic product at current market prices, has moved up from 23.5 per cent in 2001-02 to 24.2 per cent in 2002-03. Similarly, investment rate, as measured by gross domestic capital formation (GDCF) as per cent of gross domestic product at current market prices, which was 23.1 per cent in 2001-02, has increased marginally to 23.3 per cent in 2002-03.

3. Production of FoodgrainsProduction of foodgrains in 2003-04 was estimated at 212.0 million tonnes as compared with 174.2 million tonnes in 2002-03 and 212.9 million tonnes in 2001-02. According to the First Estimate for 2004-05, the kharif foodgrains production is estimated at 100.3 million tonnes with production of rice estimated at 71.1 million tonnes.

Foodgrain stocks amounted to 26.54 million tonnes as of August 1, 2004 as compared with the buffer stock norm of 24.3 million tonnes. Wheat procurement in the current marketing year (up to September 27, 2004) amounted to 16.80 million tonnes compared with 15.80 million tonnes in the corresponding period last year. The procurement of rice has already started for the current kharif marketing season starting October 2004. Rice procurement as at end-October 2004 stood at 7.2 million tonnes as compared with 6.8 million tonnes during the corresponding period last year.

The cumulative rainfall during June 1 to September 30, 2004 was 13 percent deficient compared with the long period average. The area sown in the kharif season in the current year indicates higher sown area under cotton and oilseeds and lower sown area under rice, pulses, coarse cereals compared with last kharif season.

Industrial production, as measured by the index of industrial production (IIP), in the year 2003-04 increased by 6.9 per cent as compared with 5.7 per cent in 2002-03.

Six infrastructure and core industries, namely, Electricity generation, Coal, Crude oil, Petroleum products, Steel and Cement which account for a share of 26.7 percent in the Index of Industrial Production (Base: 1993-94=100) recorded a growth of 5.7 per cent in April-September, 2004 as compared with 5.4 per cent recorded in April-September, 2003.

As per the revised data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S), exports in US$ terms in 2003-04 increased by 20.4 percent as compared with 20.3 percent in 2002-03. Imports grew by 25.4 percent in 2003-04 compared with 19.4 percent in 2002-03.

During April-September, 2004, in US$ terms, exports increased by 24.4 per cent to US$33,750 million as compared with 8.8 per cent in the corresponding previous period. Imports increased by 34.3 percent to US$46,404 million as compared with a growth of 21.4 per cent in the corresponding period last year. The imports of Petroleum, Oil and Lubricants (POL) at US$14,539 million have grown at 57.8 per cent compared with a growth of 6.3 percent during comparable period of the previous year.

Foreign exchange reserves (excluding Gold, SDRs & reserve position in IMF), which were US$107.45 billion at end-March, 2004, stood at US $115.65 billion as on October 29, 2004.

During 2003-04 broad money (M₃) grew by 16.6 per cent as compared with 14.7 per cent last year. During the current financial year 2004-05 (up to October 15, 2004) M₃ grew at 6.0 per cent (net of conversion of non-banking entity into banking entities, 5.8 percent) compared with 7.9 per cent during the corresponding period of last year. On a year-on-year basis, broad money growth was 14.4 percent as on October 15, 2004 (net of conversion of non-banking entity into banking entities, 14.5 percent) compared with 11.7 percent a year ago.

Non-food credit in 2003-04 recorded an increase of 18.4 per cent as compared with an increase of 26.9 per cent (net of mergers, 18.6 per cent) last year. There are distinct signs of pick up in non-food credit from the third quarter of 2003-04. Non-food credit during current financial year 2004-05 (up to October 15, 2004) has grown at 16.2 per cent (net of conversion of non-banking entity into banking entities, 12.1 percent) compared with an increase of 5.9 per cent last year. During the current year (up to October 15), non-food credit amounted to Rs.1,30,235 crore (net of conversion of non-banking entity into banking entities, Rs.97,553 crore) compared with Rs.39,943 crore in the corresponding period last year.

The point to point annual rate of inflation in terms of Wholesale Price Index (WPI) at the end of March, 2004 was 4.6 percent as compared with 6.5 percent at the end of March, 2003. In the current financial year 2004-05, the point-to-point WPI inflation rate for the week ended October 23, 2004, was 7.38 percent (provisional) as compared with 5.13 percent on the corresponding date last year.

The inflation rate of the primary articles was 4.92 percent as compared with 4.22 percent on the corresponding date of last year. Prices of the manufactured goods recorded an increase of 7.03 percent as against an increase of 5.46 percent last year. The fuel group registered an increase of 11.19 percent during this period compared with 5.13 percent recorded on the corresponding date last year.

The recent increase in inflation rate has been mainly due to increase in prices of basic metals (iron and steel) in the manufactured products, fruits and vegetables and iron ore in the primary articles group and petroleum products in the fuel, power and lubricants group. The recent initiatives taken by the Government and the Reserve bank of India are likely to soften the inflation in coming months. These initiatives include reduction in the customs and excise duty on petroleum products, reduction of customs duty on steel and increase in cash reserve ratio by the RBI from 4.5 to 5.0 percent.

The point to point rate of inflation, based on the Consumer Price Index –Industrial Workers (CPI-IW) has increased from 3.1 percent in August, 2003 to 3.19 per cent in July, 2004 and further to 4.6 percent in August 2004. 

During the current year the Fiscal Responsibility and Budget Management Act has been operationalised and the rules under the Act have been notified. The rules mandate the Central Government to reduce the revenue deficit by 0.5 percent of GDP or more at the end of each financial year. The target set out for fiscal deficit reduction is 0.3 percent of GDP or more at the end of each financial year.

The Budget for 2004-05 has targeted a reduction in the revenue deficit to 2.5 percent of GDP from 3.6 percent in 2003-04 (RE). Fiscal deficit is budgeted at 4.4 percent of GDP compared with 4.8 percent in the previous year. The reduction in revenue and fiscal deficits budgeted in 2004-05 are more than the minimum reductions mandated in the rules.

Gross tax collections during April-September 2004 of the current year 2004-05 amounted to Rs.1,12,843 crore (36 percent of the BE compared with 38 percent of BE last year) registering a growth of 19.6 percent. Revenue deficit during April-September 2004 is higher at 78.7 percent of BE compared to 58.3 percent of BE last year. Fiscal deficit during April-Septmber 2004 is 38.7 percent of BE compared with 52.7 percent of BE last year.

Going by current trends in industrial and infrastructure growth, growth of exports, comfortable foreign currency reserves, pick up in non-food credit, the prospects for economic growth in the current year are promising. As a result of the steps taken by the Government, inflation is likely to soften. The effect of the deficiency in kharif rainfall is expected to result in lower agriculture production during the kharif season. However, the overall agricultural production during 2004-05 is expected to be affected only marginally due to the higher sowing during the rabi season. The industrial recovery observed since 2002-03 is found to be broad based. There is a sustained improvement in the performance of the capital goods sector. A significant growth in the import of capital goods augurs well for investment climate. The service sector is expected to do well on the back of good performance of commodity producing sectors. With the global economy strengthening and broadening, Indian economy is expected to do well in 2004-05. The effect of the rise in the International crude oil prices on the economy and the fiscal situation will be major concerns in the management of the economy in coming months.

Latest projections regarding global output growth indicate that the world economy is expected to grow by nearly 5 per cent in the year 2004. Increasing corporate profitability, accompanied by rising employment and accommodating macroeconomic policies, are expected to sustain the upbeat momentum for global output growth. A robust turnaround by the US economy, strong recovery signals in Japan, and high growth expectations in Emerging Asia on account of good performances by India and China, are seen as the major drivers behind the buoyant outlook for the global economy. Nevertheless, risks to global recovery continue to persist, mainly in the form of the unprecedented rise in global energy prices, the impact of rising interest rates on movement of global capital flows and the continuing trade imbalances between major economies of the world.

India achieved a surplus in the current account of its balance of payments for the third successive year in 2003-04, reflecting the growing strength of its external sector. Despite a trade deficit of US$15.4 billion, a robust invisibles account (US$26 billion) from buoyant inflows of private transfers and software services, led to a surplus of more than US$10 billion in the current account. The capital account surplus, at more than US$ 20 billion in 2003-04, was almost double its level in the previous year, mainly due to heavy foreign investment receipts on account of large portfolio inflows. The current and capital account surpluses, taken together, resulted in reserve accretion of more than US$31 billion during the year, on BOP basis.

BOP estimates for the first quarter (Q1) of the current financial year (April-June 2004-05) point to a continuation of the trends witnessed in the recent years. The current account has recorded a surplus of around US$1.9 billion in the first quarter. Despite a higher trade deficit in the first quarter of 2004-05 (mainly on account of higher crude oil prices and strong growth in non-POL imports), compared to the corresponding quarter of 2003-04, a buoyant invisibles account due to sustained inflows of private transfers and software service receipts, has resulted in maintenance of a surplus in the current account. The capital account has also recorded a surplus of US$5.5 billion on account of strong inflows under loans and banking capital. The size of the capital account surplus, however, is somewhat lower than that observed in April-June 2003-04. Foreign investment (net) inflows have been lower during the first quarter of 2004-05 compared to the corresponding previous period mainly due to a sharp fall in portfolio flows. Reserve accretion, on BOP basis, is estimated at US$7.5 billion during April-June 2004-05.

The nominal value of the Indian Rupee showed a consistently appreciating trend against the US Dollar over the period May 2002 – April 2004. During this period, however, the Rupee depreciated against other major currencies like the Euro, Pound Sterling and the Japanese Yen. From May 2004, the Rupee started weakening against the US Dollar as well. Since September 2004, the Rupee has firmed up against the US Dollar, while showing a fluctuating trend against other currencies. Exchange rate of the Rupee continues to be broadly market-determined with the Reserve Bank of India (RBI) intervening only occasionally for curbing excessive fluctuations.

India’s total foreign exchange reserves (including foreign currency assets, gold, Special Drawing Rights and the reserve tranche in the IMF) were estimated at US$ 113 billion at the end of March 2004. At this level, the accretion during the year 2003-04 amounted to more than US$37 billion (including valuation change, which is not included in BOP calculations). As on October 29, 2004, India’s total foreign exchange reserves were estimated at US$ 121.2 billion, indicating an accretion of US$ 7.2 billion during the year 2004-05 so far. At present, India is one of the top reserve-holding emerging market economies. Safety, liquidity, and return, continue to be the guiding principles of the RBI in managing the country’s foreign exchange reserves.

External Debt Management Unit

Deptt. of Economic Affairs

While details on external debt stock, share of concessional debt and proportion of short-term debt in total debt and forex reserves are available for end-June 2004, data on other debt indicators relate to the financial year 2003-04. International comparison is based on external debt statistics for end December, 2002.

1. Total External Debt and Indebtedness Indicators

• India’s external debt stood at US $ 112.6 billion at end-June 2004 as compared to US $ 112.5 billion at end-March 2004 (Table 1).
• The key external debt indicators have progressively improved over time. The external debt burden measured by debt-GDP ratio declined from 28.7 per cent at end-March 1991 to 17.6 per cent by end of March 2004. The debt service ratio i.e. total debt service payments as a proportion of gross current receipts, improved from 35.3 per cent in 1990-91 to 15.8 per cent during 2002-03. However, it increased to 18.3 per cent during 2003-04 owing to redemption of Resurgent India Bonds and prepayments. Excluding these exceptional transactions, debt service ratio worked out to 10.4 per cent during 2003-04.

• bjbjÏ2Ï2_ ___,ä_­X_­X_Á!___ÿÿ__ÿÿ__ÿÿ__ˆ_¼_¼_¼_¼_¼_¼_¼__Z__¢o_¢o_¢o_8_Úo_œ_es and prevailing low level of interest rates, the Government of India considered premature retirement of high cost loans.
• The Government of India prematurely repaid sovereign loans, both multilateral and bilateral, amounting to US $ 2.9 billion in 2002-03 and US $ 3.8 billion during 2003-04. In addition, non-Government loans where the Government stands as a guarantor were also prepaid to the extent of US $ 0.6 billion during 2002-03 and 2003-04 (Table 6).

Government has put in place a liberal FDI policy and most of the sectors have been placed under the automatic route, except for a small negative list. Amongst others, most of the manufacturing and mining sectors, are on the 100% automatic route with only a few exceptions. Highways and roads, ports, inland waterways and transport, urban infrastructure are also on the 100% automatic route. FDI is also permitted in Telecom, Airports, Civil Aviation and Oil and Gas Pipelines within certain equity limits.

All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route except the following categories where Government approval for FDI/NRI/OCB through the FIPB shall be necessary:-

4. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted on the automatic route.

In the Budget speech for 2004-05, Finance Minister has announced that FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports. Accordingly it has been proposed to raise the sectoral cap for FDI in telecommunication from 49 percent to 74 percent; in civil aviation from 40 percent to 49 percent; and in insurance from 26 percent to 49 percent. In order to achieve the goal to make the environment in India attractive for investors it has been proposed to establish an Investment Commission which will have the broad authority of the Government to engage, discuss with and invite domestic and foreign business to invest in India. It is also proposed that many of functions of FIPB could be put on the automatic route, and leave FIPB as a one-stop service centre and facilitator.

FDI flows remained stable during 2003-04 despite slowing down of FDI flows to the developing countries in general. Although Mauritius continues to be the single largest source of FDI into India, its relative significance has been declining. FDI from Mauritius declined sharply during the last two years, constituting 26.1 per cent of total FDI flow to India in 2003-04 as against 32.2 per cent in 2002-03 and as much as 62.3 per cent in 2001-02. The bulk of FDI was channelised into services, computers (hardware and software) and engineering industries.

In the recent past, there have been discussions in various fora regarding the coverage of foreign direct investment (FDI) statistics in India, which mainly include equity capital, vis-à-vis the data published by some other countries which include equity capital, reinvested earnings (retained earnings of FDI companies) and other capital (inter-corporate debt transaction between related entities).

In an effort to bring the reporting system of FDI data in India into alignment with international best practices, the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India (GoI), in consultation with the Reserve Bank of India, constituted a committee in May 2002. The Committee comprised officials from the Reserve Bank and the DIPP. The Committee studied the relevant conceptual and methodological issues and identified the data gaps involved in order to make necessary recommendations for strengthening the collection, compilation and reporting of FDI data. The Committee submitted its Report in October 2002 recommending that the FDI statistics should include, besides equity capital, ‘reinvested earnings’ (retained earnings of FDI companies) and ‘other direct capital’ (inter-corporate debt transactions between related entities) in accordance with the international best practices. The Committee also recommended that the steps be taken jointly by the Reserve Bank and the DIPP to expand the coverage of FDI statistics in India.

As a follow-up action to the submission of FDI Compilation Report, a Technical Monitoring Group (TMG) was constituted by DIPP in November 2002 for speedy implementation of the recommendations made by the Committee. The TMG had representatives from the Reserve Bank, DIPP, Department of Economic Affairs (DEA), Department of Company Affairs (DCA) and National Informatics Centre (NIC). The main focus of the TMG was to identify various components of FDI, which are operationally feasible and capture these components in a specified institutional framework and within a specified time period. TMG submitted its first Action Taken Report on June 27, 2003.

Figures in respect of FDI by India (Indian investment abroad), so far reported in the BoP statistics, comprised mainly the equity component similar to the treatment given to FDI inflows into India. Since the data on FDI to India are being revised according to the best international practices, there was a need to compile corresponding data on Indian investment abroad. Accordingly, comparable data on Indian investment abroad that include equity capital, reinvested earnings and ‘other capital’ have been compiled for fiscal 2000-01 and 2001-02.

In terms of standard practice of BoP compilation, the above revision of FDI data would not affect India’s overall BoP position for these two years. In other words, the accretion to the foreign exchange reserves would not undergo any change. The composition of BoP, however, would undergo changes. These changes relate to investment income, external commercial borrowings and errors and omissions. In case of reinvested earnings, there would be a contra entry (debit) of equal magnitude under investment income in the current account. ‘Other Capital’ reported as part of FDI inflow has been carved out from the figure reported under external commercial borrowings by the same amount. ‘Other Capital’ by Indian companies abroad and equity capital of unincorporated entities have been adjusted against the errors and omissions.

For 2002-03, the data on reinvested earnings are estimated as the average of the previous two years of 2000-01 and 2001-02. In the future as well, there will be a regular one-year lag in the reporting of reinvested earnings. ‘Other Capital’ could be captured on a quarterly basis and would be reported together with quarterly dissemination of BoP statistics. The estimates for data on FDI for 2002-03 in the line of figures indicated in Tables 1 and 2 are presented in Tables 3 and 4.

India has been accessing ADB’s LIBOR-based loan (LBL) product since its introduction on 1^st July 2001. Prior to that from 1986, India had accessed Pool based Multicurrency loans. Interest until 30.6.01 on the earlier loans was 6.70% (US $ loan), but, under the LBL,

1. Wef 1.7.2001 the interest rate has been LIBOR + 60 bps (currently)
2. Commitment charges are levied @0.75% on undisbursed loan balances
3. Front-end Fee: One time payment of 0.5% of total loan amount.

Normal Repayment period: 20 years plus a grace period of 5 years.

The ADB announced a waiver of front-end fees on loans approved from 1.1.04 - 30-6-05 and on outstanding loans for the period 1.7.04 - 30.6.05. The spread has been reduced to 40 bps, also ad interim. A rebate on the spread has also been offered in view of the falling LIBOR – a 35 bps rebate from 1.7.03 to 21.12.03.

Under the Graduation Policy approved by ADB in December 1998, developing countries are classifed on two criteria, viz., per capital GNP and Debt repayment in the following groups:

The Asian Development Bank, an international partnership of 63 member countries was established in December, 1966 with its headquarters in Manila, Philippines to accelerate economic and social development in the Asia and Pacific region by providing financial and technical assistance for suitable projects for economic development. India is a founder member of the Bank. As on 31^st December 2003, the Bank’s authorized capital stood at $ 51.977 billion of which $ 47.234 billion was subscribed out of which India’s contribution was 6.402% of the subscribed capital with a voting power of 5.439%.

India started borrowing from ADB (OCR resources only) in 1986, initially with $ 250 million. Including projects approved by 31.12.03, total borrowing by India is $12.911 billion for public sector (excluding terminated loans). Cumulative disbursement under ADB public sector projects until 31.12.03 was $ 6.923 billion.

A Sectoral breakup of ADB’s assistance to India is as under:

In FY ’02 & ’03, India prepaid old high-cost loans: 12 in 2002-03 with a payment of $1.34 bn and 12 in 2003-04 for $1.13 bn.

Annual disbursement since 1986 is as under: -

(In US $ million)

The ADB earlier concentrated on projects in the States of MP, Kerala, Rajasthan, Karnataka, Chattisgarh, Assam and Gujarat. At GOI’s request, they have started preparatory work for projects in all of the North East and Uttaranchal and a loan for rehabilitation of infrastructure in J&K.

6. Status of Projects CY 2003:

The following projects were approved by ADB Board during CY ‘03 :

Name of the Project Amount

5. National Highways Sector I 400.00

6. Chhattisgarh State Roads 180.00

Total 1430.00

____________

FIIs are required to obtain an initial registration with the Securities and Exchange Board of India. They also need to obtain certain permissions under FERA from the RBI through an application routed through SEBI under a single window approach. For granting registration to the FII, SEBI takes into account the track record of the FII, its professional competence, financial soundness, experience and such other criteria that may be considered relevant. There are no restrictions on the volume of investments by the FIIs. There are no lock-in periods prescribed for such investments made by the FIIs. Regular FIIs Investments in a company are subject to ceilings - Individual FII investment limit 10% of the paid up capital of a company and the aggregate investments by all FIIs subject to a limit of 24% in a single company which could be increased up to 30% by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its General Body. This raising of limit was announced during the Budget Speech 1997-98. This limit was further raised to 40% and 49% in the Budget announcements 2000-01 and 2001-02 respectively. In September, 2001 this limit was further raised upto the sectoral cap/statutory ceiling, as applicable, by the Indian company concerned. In June, 1998, the aggregate investment limits are separate and exclusive of portfolio investment limits for NRIs category.

2. A number of measures have been taken to facilitate and encourage FII investment inflows. Initiatives include:

(a) simplification in registration requirement of sub-accounts of FIIs:

Under the provisions of SEBI Regulations, for purposes of registration apart from the FIIs, the sub-accounts managed by the FIIs were also required to comply with detailed documentation requirement. Based on Government approval, certain amendments have been made by SEBI in terms of which, FIIs would now only be required to submit an undertaking that sub-accounts for whom they are seeking registration meet with all of the criteria mentioned in the regulations for sub-account registration. Further, no documents beyond the application and undertaking would be required to be submitted.

(b) Participation by Foreign Institutional Investors in open offers :

SEBI (FIIs) Regulation requires that the secondary market transactions by FIIs is effected through the stockbrokers registered with SEBI. These provisions had precluded FIIs from tendering their shares in an open offer made in terms of the SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 1997.

Amendments have been carried out in the Regulations to permit FIIs to tender their securities directly in response to an open offers for takeovers made in terms of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997;

(c) Investments in derivative instruments :

FIIs are permitted to trade in derivative contracts which are traded on a stock exchange without the requirement of taking and giving delivery of underlying securities.

(d) Hedging of foreign exchange risk :

FIIs have been permitted to hedge foreign exchange risk through purchase of forward cover on incremental equity investments.

*******

• The states have resolved to introduce Value Added Tax (VAT), replacing the existing systems of Sales Tax, which is one of the most significant tax reform measures at State Level.
• The Government of India constituted an Empowered Committee of State Finance Ministers, in the year 2000, to deliberate and decide on matters relating to reforms in State Level Indirect Taxes, including introduction of VAT. The Empowered Committee has arrived at consensus to introduce VAT all over the country, from 01 April 2005. Three Meetings of the Empowered Committee were held recently on 18 June 2004, 23 September 2004 and 02 November 2004, to discuss and resolve various issues connected with introduction of VAT. Hon’ble Union Finance Minister also attended the above meetings.
• The Central Government has been acting as facilitator for successful implementation of VAT by the States. Towards this end, a Committee of Technical Experts has also been constituted to work closely with the State Governments. In the Meeting of the Empowered Committee held on 02 Nov. 2004, a decision has also been taken of the vexed issue of Compensation to be paid to the States for possible loss, if any, on account of introduction of VAT. Compensation will be paid to the States @100% of loss during 2005-06, 75% during 2006-07 and 50% during 2007-08. Special assistance is being provided to 8 Northeastern, 3 newly created and 2 hill states for VAT computerization. Besides this, all necessary technical/ financial assistance is being provided to the States for VAT related publicity as well as other purposes.