SECOND QUARTER GDP AT 7.9%
India’s economy grew at its fastest rate in 18 months in the quarter through September, smashing expectations and adding pressure to bring forward an interest rate rise and cut stimulus spending as inflation mounts.
Asia’s third-largest economy grew 7.9% in the past quarter from a year earlier, far above forecasts of 6.3%, but growth was expected to slow this quarter when the impact of a weak monsoon would be seen on crops.
The expansion was driven by government spending, manufacturing, services, and a better-than-forecast farming output, sending bond yields and swap rates higher as investors bet on a rise in rates and the finance minister said growth could hit 7% in the fiscal year ending in March 2010.
“This data could be a green light for the Reserve Bank of India to hike rates, and there are greater chances of this by end of the calendar year,” said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore.
“The exit from the fiscal stimulus by the government may also be earlier post the GDP data.”
Prior to the data, most economists had predicted a rate rise sometime between January and April 2010.
In the June quarter, India’s economy grew 6.1% from a year earlier, and Prior-Wandesforde said that by his calculation the last quarter’s growth was the sharpest on a quarter-by-quarter basis since quarterly data began in 1996.
Manufacturing output grew 9.2% in the quarter as consumers bought more cars and other goods.
Larger neighbour China, which along with India is helping to pull the global economy out of its worst recession in decades, clocked growth of 8.9% during the same quarter.
MINT
Showing posts with label stimulus. Show all posts
Showing posts with label stimulus. Show all posts
Tuesday, December 01, 2009
Thursday, May 14, 2009
ECONOMIC AGENDA FOR THE NEW GOVERNMENT
* The New Government Expected To Give Further Stimulus To Economy.
* Urgent Need To Boost Investments, Particularly In Infrastructure.
* Challenge Of Keeping The Fiscal Deficit Under Check.
* A Number Of Policy Reforms On The Table
The policy initiatives of the new government are certainly going to determine how quickly the Indian economy will recapture its high pace of growth. There are a number of pending economic issues that need the urgent attention of the new policymakers. The real challenge for the new government lies in stimulating the economy on the one hand, and at the same time controlling the fiscal deficit on the other hand. The fiscal deficit has already reached near 12% of the gross domestic product (GDP), which is clearly not sustainable.
Waiting For The Third Stimulus:
After the announcements of two stimulus packages by the outgoing government in December 2008 and January 2009 respectively, the planning commission Deputy Chairman Montek Singh Ahluwalia had suggested that the country will need a third stimulus, which can be announced by the new government. One needs to wait and watch what kind of fresh stimulus comes from the new government now. For the purpose of countering the economic slowdown, the government can reduce corporate taxes and remove income tax surcharge. As a measure to push the rural demand, the scope of the National Rural Employment Guarantee Scheme can also be extended so that more people would come under its net. A further push to infrastructure can also be a part of the fresh stimulus package.
Continuation Of The Economic Reforms:
There has been a consistency in pursuing the economic reforms during the past 10 years, although there was a change of guard in 2004 when the United Progressive Alliance (UPA) replaced the National Democratic Alliance (NDA) at the centre. The dependency of UPA on the left parties was a stumbling block for UPA in pursing the reforms at full pace, yet the UPA government managed to implement a number of reforms. The continuation of the reform process, not in words but in action, is required to keep the engine of growth turned on.
Focus on Infrastructure:
There is a general consensus that infrastructure development has to be accorded key priority. The Prime Minister's Committee on Infrastructure has already projected earlier that India will require investments worth $500 billion and $1.5 trillion for the 11th Five-Year-Plan (2007-2012) and the 12th plan period 2012-2017 respectively. The government had announced in the Interim Budget presented in the Parliament in February 2009 that 9% of the country’s GDP will be spent on infrastructure by 2014, from the current 5%. If the new government successfully pursues this path, it will be a great push to the growth rate of the country.
Reining in the fiscal deficit:
India’s total fiscal deficit including the central and state deficits is estimated to reach at about 12% of GDP, which has become a major worry for the country. Most economists believe that the new government will have to take immediate steps to control the situation. In fact, the global factors have derailed India’s fiscal reform process that was going very smoothly as per targets during the past four to five years. When the global crude oil prices moved up very sharply in 2008, it resulted in highly inflated subsidy bill – particularly for the oil subsidy and fertilizer subsidy. Then, the global slowdown impacted the growth rate of India too, and resulted in lower than expected tax revenues. Also, the Indian government decided to revise the salaries of its employees by a fat margin at each level. A loan waiver programme for poor farmers also put a heavy burden on the exchequer. And, in order to counter the slowdown, the government came out with two stimulus packages. While all these steps were required and aimed at benefiting large sections of the society as well as the economy, these measures certainly inflated the fiscal deficit to such a high level that was not seen in the recent history of India.
Now, the new government will have only two ways to control and reduce the fiscal menace – reducing its expenditure and increasing the revenues. Both the options are not easy at the moment. At a time when the Indian economy has considerably slowed down, the tax revenues can’t be expected to increase. Increasing the tax rates will certainly not be a wise decision, as history suggests that tax rate hike in troubled period for economy always turns out to be counter-productive. R.K. Gupta, Managing Director of Taurus Mutual Fund that manages the equivalent of more than $100 million of stocks, warns that while a tax rate hike may lead to more tax evasions and ultimately not increase the tax revenue for the government, it might actually reduce the growth rate of the economy further.
On the other hand, reducing the expenditure is easier said than done. A systemic change aimed at expenditure reforms is the need of the hour. Dr. D.K. Joshi, Director and the Principal Economist at Mumbai-headquartered rating agency CRISIL said that as long as the growth rate was high and tax revenue was good, the government managed to run its business even without expenditure reforms, but it couldn’t be ignored any more. He said, “The new government would have to clearly spell it out how it plans to curtail its expenditures. Also, it would have to chalk out a clear roadmap regarding stimulus packages. How much stimulus it wants to provide and for how long? And then, how it plans to revert to fiscal prudence?”
PSE Disinvestment: A Right Prescription
The government has an option of selling its shareholding in a number of public sector enterprises (PSEs) to private sector, which can bring it much needed money. But commencing the disinvestment programme is a politically sensitive issue and reaching a consensus among the political parties is difficult. Also, even if the government manages to pursue this programme, it will have to use the proceeds very prudently. As Dr. Joshi warns, the proceeds of disinvestment should be used strictly for infrastructure creation, not for merely giving subsidies.
Goods & Services Tax
A unified goods and services tax (GST), a major reform of indirect taxes in India, is already proposed to be introduced from April 01, 2010. It’s advisable to have a single tax rate for all goods and services barring few exceptions across the country. Since there is not much time left, the new government should immediately chalk out the detailed implementation plan for the same. It shouldn’t be a difficult task because generally there is a political consensus on this issue. The Indian industry has already welcomed this initiative and is keenly waiting for its implementation.
Reducing Petroleum Subsidy:
The retail prices of petroleum products are determined by the Government of India due to political considerations. The situation caused a major trouble for the economic health of the government last year when the crude oil prices sky-rocketed in global markets. The oil marketing companies, most of them majority-owned by the government, were forced to sell products at their retail outlets at prices much below cost. It caused havoc on their balance sheets and almost every oil marketing company stalled all kinds of investments. Now, post elections, it will be politically easier for the government to opt for market-linked prices. As the global crude oil prices have cooled off considerably from their peak levels, linking the retail prices to market conditions won’t cause any major upward revision in the retail prices. Hence, it could be the best time for switching to market-linked prices from the administered prices
* The New Government Expected To Give Further Stimulus To Economy.
* Urgent Need To Boost Investments, Particularly In Infrastructure.
* Challenge Of Keeping The Fiscal Deficit Under Check.
* A Number Of Policy Reforms On The Table
The policy initiatives of the new government are certainly going to determine how quickly the Indian economy will recapture its high pace of growth. There are a number of pending economic issues that need the urgent attention of the new policymakers. The real challenge for the new government lies in stimulating the economy on the one hand, and at the same time controlling the fiscal deficit on the other hand. The fiscal deficit has already reached near 12% of the gross domestic product (GDP), which is clearly not sustainable.
Waiting For The Third Stimulus:
After the announcements of two stimulus packages by the outgoing government in December 2008 and January 2009 respectively, the planning commission Deputy Chairman Montek Singh Ahluwalia had suggested that the country will need a third stimulus, which can be announced by the new government. One needs to wait and watch what kind of fresh stimulus comes from the new government now. For the purpose of countering the economic slowdown, the government can reduce corporate taxes and remove income tax surcharge. As a measure to push the rural demand, the scope of the National Rural Employment Guarantee Scheme can also be extended so that more people would come under its net. A further push to infrastructure can also be a part of the fresh stimulus package.
Continuation Of The Economic Reforms:
There has been a consistency in pursuing the economic reforms during the past 10 years, although there was a change of guard in 2004 when the United Progressive Alliance (UPA) replaced the National Democratic Alliance (NDA) at the centre. The dependency of UPA on the left parties was a stumbling block for UPA in pursing the reforms at full pace, yet the UPA government managed to implement a number of reforms. The continuation of the reform process, not in words but in action, is required to keep the engine of growth turned on.
Focus on Infrastructure:
There is a general consensus that infrastructure development has to be accorded key priority. The Prime Minister's Committee on Infrastructure has already projected earlier that India will require investments worth $500 billion and $1.5 trillion for the 11th Five-Year-Plan (2007-2012) and the 12th plan period 2012-2017 respectively. The government had announced in the Interim Budget presented in the Parliament in February 2009 that 9% of the country’s GDP will be spent on infrastructure by 2014, from the current 5%. If the new government successfully pursues this path, it will be a great push to the growth rate of the country.
Reining in the fiscal deficit:
India’s total fiscal deficit including the central and state deficits is estimated to reach at about 12% of GDP, which has become a major worry for the country. Most economists believe that the new government will have to take immediate steps to control the situation. In fact, the global factors have derailed India’s fiscal reform process that was going very smoothly as per targets during the past four to five years. When the global crude oil prices moved up very sharply in 2008, it resulted in highly inflated subsidy bill – particularly for the oil subsidy and fertilizer subsidy. Then, the global slowdown impacted the growth rate of India too, and resulted in lower than expected tax revenues. Also, the Indian government decided to revise the salaries of its employees by a fat margin at each level. A loan waiver programme for poor farmers also put a heavy burden on the exchequer. And, in order to counter the slowdown, the government came out with two stimulus packages. While all these steps were required and aimed at benefiting large sections of the society as well as the economy, these measures certainly inflated the fiscal deficit to such a high level that was not seen in the recent history of India.
Now, the new government will have only two ways to control and reduce the fiscal menace – reducing its expenditure and increasing the revenues. Both the options are not easy at the moment. At a time when the Indian economy has considerably slowed down, the tax revenues can’t be expected to increase. Increasing the tax rates will certainly not be a wise decision, as history suggests that tax rate hike in troubled period for economy always turns out to be counter-productive. R.K. Gupta, Managing Director of Taurus Mutual Fund that manages the equivalent of more than $100 million of stocks, warns that while a tax rate hike may lead to more tax evasions and ultimately not increase the tax revenue for the government, it might actually reduce the growth rate of the economy further.
On the other hand, reducing the expenditure is easier said than done. A systemic change aimed at expenditure reforms is the need of the hour. Dr. D.K. Joshi, Director and the Principal Economist at Mumbai-headquartered rating agency CRISIL said that as long as the growth rate was high and tax revenue was good, the government managed to run its business even without expenditure reforms, but it couldn’t be ignored any more. He said, “The new government would have to clearly spell it out how it plans to curtail its expenditures. Also, it would have to chalk out a clear roadmap regarding stimulus packages. How much stimulus it wants to provide and for how long? And then, how it plans to revert to fiscal prudence?”
PSE Disinvestment: A Right Prescription
The government has an option of selling its shareholding in a number of public sector enterprises (PSEs) to private sector, which can bring it much needed money. But commencing the disinvestment programme is a politically sensitive issue and reaching a consensus among the political parties is difficult. Also, even if the government manages to pursue this programme, it will have to use the proceeds very prudently. As Dr. Joshi warns, the proceeds of disinvestment should be used strictly for infrastructure creation, not for merely giving subsidies.
Goods & Services Tax
A unified goods and services tax (GST), a major reform of indirect taxes in India, is already proposed to be introduced from April 01, 2010. It’s advisable to have a single tax rate for all goods and services barring few exceptions across the country. Since there is not much time left, the new government should immediately chalk out the detailed implementation plan for the same. It shouldn’t be a difficult task because generally there is a political consensus on this issue. The Indian industry has already welcomed this initiative and is keenly waiting for its implementation.
Reducing Petroleum Subsidy:
The retail prices of petroleum products are determined by the Government of India due to political considerations. The situation caused a major trouble for the economic health of the government last year when the crude oil prices sky-rocketed in global markets. The oil marketing companies, most of them majority-owned by the government, were forced to sell products at their retail outlets at prices much below cost. It caused havoc on their balance sheets and almost every oil marketing company stalled all kinds of investments. Now, post elections, it will be politically easier for the government to opt for market-linked prices. As the global crude oil prices have cooled off considerably from their peak levels, linking the retail prices to market conditions won’t cause any major upward revision in the retail prices. Hence, it could be the best time for switching to market-linked prices from the administered prices
REVIVAL TRENDS: INDIA SHINING
If historical patterns are anything to go by, the voting in of the 15th Lok Sabha or the House of the People, the directly elected lower house of the Parliament of India, will mark a starting point for a sharp ramp-up in economic activity for the country. Economic activity, as measured by industrial production index, had increased immediately after five elections out of seven polls since 1984, as political stability provided a platform for economic growth.
Economic activity has risen consecutively following the last three elections held on 1998, 1999 and 2004. A comparison of industrial production (IP) data before elections and six months after elections, shows that on five occasions, the IP index rose by 20-80 basis points, according to data from Goldman Sachs Global ECS Research.
The Interim Budget for the financial year 2009-10 announced in February by the Finance Minister of the ruling United Progressive Alliance (UPA), focused on infrastructure development, easing of Foreign Direct Investments (FDIs) norms and economic stimulus packages that set the ground for how the alliance was approaching the General Elections.
The new Government that comes in to power would be best served if it continued and augmented the “India Shining” policies that currently sustain a Gross Domestic Product (GDP) growth of more than 7% as India continues to defy negative GDP growth seen in many Western economies.
Such growth initiatives have led to an economic revival in key sectors like steel, cement, automobile, food and beverages and fast moving consumer goods (FMCG) (See Vol 4 | Issue 3 ‘Clearing The FDI Highway’) that are best not derailed.
If historical patterns are anything to go by, the voting in of the 15th Lok Sabha or the House of the People, the directly elected lower house of the Parliament of India, will mark a starting point for a sharp ramp-up in economic activity for the country. Economic activity, as measured by industrial production index, had increased immediately after five elections out of seven polls since 1984, as political stability provided a platform for economic growth.
Economic activity has risen consecutively following the last three elections held on 1998, 1999 and 2004. A comparison of industrial production (IP) data before elections and six months after elections, shows that on five occasions, the IP index rose by 20-80 basis points, according to data from Goldman Sachs Global ECS Research.
The Interim Budget for the financial year 2009-10 announced in February by the Finance Minister of the ruling United Progressive Alliance (UPA), focused on infrastructure development, easing of Foreign Direct Investments (FDIs) norms and economic stimulus packages that set the ground for how the alliance was approaching the General Elections.
The new Government that comes in to power would be best served if it continued and augmented the “India Shining” policies that currently sustain a Gross Domestic Product (GDP) growth of more than 7% as India continues to defy negative GDP growth seen in many Western economies.
Such growth initiatives have led to an economic revival in key sectors like steel, cement, automobile, food and beverages and fast moving consumer goods (FMCG) (See Vol 4 | Issue 3 ‘Clearing The FDI Highway’) that are best not derailed.
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