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GDP growth this fiscal put at 5.7 pc; Business Confidence Index up nine pc

Improved agricultural performance is expected to act as a source of higher growth in fiscal 1999-2000, pushing the gross domestic product to 5.7 per cent from 5.4 per cent in 1998-99.

According to the National Council of Applied Economic Research, higher rural demand resulting from good agricultural performance is expected to be the main pillar supporting industrial growth.

Although government borrowing will remain high, an easy money policy will help, to some extent, in improving the investment climate. Increased competition will keep prices of manufactured products down, the NCAER said in its latest quarterly update Macro Track.

It also said the rupee is expected to depreciate slowly over the year. Continued growth in software exports and remittances will contain the current account deficit within 2.2 per cent of the GDP. Budgetary incentives to the construction sector may push growth even further.

The NCAER's business expectation survey conducted last month suggested improvement on the overall economic situation, financial position and capacity utilisation but the perception of investment climate was negative.

Improved confidence level is observed when output is expanding and the investment climate is favourable. In the Business Expectations Survey conducted by the NCAER in March, the Business Confidence Index improved and if this upward trend is sustained, it would be a source of optimism for the country's industrial performance.

The overall BCI has now increased by nine per cent, improving to 86.6. While the overall confidence level improved in consumer durables, intermediates, capital goods and services, firms in the consumer non-durables sector were pessimistic.

All regions except the east report an increase in business confidence. Expectations of growth in sales, production and capacity utilisation have improved since the last survey in December.

Perception regarding export growth has also improved over the last survey. On the other hand, the import of finished goods is expected to grow slower than what was expected in the pre-Budget survey.

The present round indicates that profits are expected to fall by 3.5 per cent in the next six months. This drop is higher than the 1.4 per cent drop expected in the last survey. Pessimism regarding profits is most significant among capital goods firms.

The capital goods sector has also seen the largest fall in sales orders compared to other sector most of whom have also seen their sales orders decline, the NCAER said.

A good harvest of foodgrains and commercial crops pushed agricultural production to five per cent in 1998-99. This is expected to boost demand in the economy. Lowering of interest rates and cash reserve ratio in the Monetary Policy is also expected to improve the investment climate.

With no attempt to pump-prime in the Budget, the demand crunch faced by industry would be relieved by the growth in rural incomes. Consequently, the NCAER said, industrial output is expected to improve in comparison to 1998-99.

If the monsoon in 1999-2000 is normal and agriculture continues to do well, GDP growth would be pushed up to 5.7 per cent. This is higher than the 5.4 per cent growth the economy witnessed in 1998-99. In this scenario, industry would grow at five per cent, up from this year's growth of four per cent.

Growth in services is expected to remain buoyant. Growth rate in the service sector in real terms is expected to rise from 7.1 per cent in 1988-99 to 7.7 per cent in 1999-2000.

Agricultural growth is expected to be 4.1 per cent. Over the high base of 1998-99 this would be a fairly good performance.

The fiscal deficit in 1998-99 is projected to be 6.5 per cent of GDP. For fiscal 1999-2000, the NCAER calculated fiscal deficit as a per cent of GDP using both the new and the old definition for the sake of comparison with the 1998-99 figure. According to the old definition, the deficit will be 5.9 per cent of GDP (1980-81 base).

Inflation is expected to remain within eight per cent; it is assumed that money supply growth would be contained within the targeted levels of 15 to 16 per cent. Further, trade and industrial liberalisation have contained inflation in manufactured product prices to below five per cent in the latter half of Nineties. It is unlikely that these would rise in the current year. Volatility in prices last year was mainly due to agricultural shocks as prices of some vegetables shot up, the NCAER said.

Although depreciation of the exchange rate may not form the centre point of India's export promotion policy, it said that over the year the rupee would slowly depreciate. Currently, the RBI may not wish to let foreign investors lose confidence in the rupee and move out of the Indian financial market.

But over the year, if the rupee does not depreciate despite inflation differentials, it would lead to an appreciation of the real exchange rate and affect export competitiveness adversely. The RBI may need to intervene in forex markets to prop up the rupee as pressures of the current account deficit mount.

Artificially keeping the currency high for long periods will eventually lead to expectation of depreciation and undermine confidence. A prudent strategy would be to allow the rupee to depreciate slowly as this would not hurt either exporters or create conditions for sudden loss of confidence and a run on the rupee.

No major recovery is forecast in exports as they will continue to face stiff competition from a recovering east Asia. For Indian exports to remain competitive, the rupee must depreciate as east Asian currencies have witnessed considerable depreciation. If the rupee depreciates by 10 per cent vis-a-vis the US dollar as projected and if world GDP in 1999-2000 grows at 2.5 per cent, exports are projected to pick up slightly and grow at 2.4 per cent in dollar terms.

Assuming that imports grow at seven per cent due to the higher GDP growth, while the growth in invisibles continues to be robust, the rise in the trade deficit from 2.2 per cent in 1998-99 to 2.7 per cent in 1999-2000 will be partly offset by invisibles, containing the current account deficit to 2.2 per cent of GDP.

A variable that often acts as a leading indicator of economic Activity is money. One of the main functions of money is its use as a medium of exchange.

This results in the transactions demand for money : increased transactions in the economy would result in an increase in the demand for money. In economies that have developed financial systems, a large proportion of transactions are carried out using cheques.

Thus money, as it is usually measured, that is including currency and demand deposits, appears as a leading indicator.

In India, cheques are not universally accepted as a mode of payment. Thus an icrease in transactions results first in an increase in the holding of cash by the public. Therefore, currency with the public indicates the demand for money for transaction purposes. The cyclical component of currency with the public is synchronised with the cyclical component of the Index of Industrial Production and has led the IIP at previous turning points.

Further, it indicates that this leading indicator has been showing an upswing for over two quarters now. This is an indication of increased transactions especially in the informal sector that has limited access to banks. It could be due to the improvement in agriculture in 1998-99.

Increased activity such as the movement of foodgrains is also expected to show up in higher freight movement. Eventually this would lead to in higher sales and production of commercial vehicles. In the last quarter, there appears to be an upward swing in this variable, suggesting an increase in road transport.

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