- Posted June 18, 2014 by
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Overview of Indian Economy
Despite a number of reform announcements by the UPA II government at the fag end of its tenure, India’s growth story remained muted throughout the financial year 2013-14. While all economic indicators showed a dismal performance, the major challenge before the new government is to kick-start the growth rate cycle, which is sluggish under 5 percent.
India started the fiscal year 2014-15 on a buoyant note but it was merely a show of market which was driven by foreign investors (FIIs) triggered by the Narendra Modi euphoria. But the main concern is the sustainability of the current market rally, which will finally be guided by the fundamentals of our economy that is yet to get back on track. Short term excitement will not be able to fuel the steam in the long run.
Nonetheless, with Budget 2014-15 around the corner, India faces major challenges. Some of them are – implementation of structural reforms like GST, DTC, further relaxation in FDI norms, government’s stand on retrospective tax and passing of insurance bill.
Here is an overview of the Indian economy:
India’s economic growth remained below 5 percent mark second year in a row at 4.7 percent in 2013-14, but the industry is hopeful of a rebound with a stable government headed by Narendra Modi who is considered pro-business.
India’s fourth quarter growth stood at 4.6 percent. Decline in manufacturing and mining output eclipsed the overall growth during the entire fiscal.
As per government data, the economic growth remained below 5 percent for two consecutive years after a gap of almost 25 years. Earlier from 1984-85 to 1987-88, the economic growth rate remained below 5 percent.
The country’s economy, or gross domestic product (GDP), had expanded at 4.5 percent in 2012-13, the slowest pace in the previous decade.
Subdued prices of vegetables, cereals and dairy products pushed down retail inflation to a three-month low of 8.28 percent in May. Retail inflation, measured on consumer price index (CPI), was 8.59 percent in April. In February 2014, retail inflation was at 8.03 percent, followed by consecutive rise in March (8.31 percent) and April. As per the data released by government, food inflation also fell slightly to 9.56 percent in May against 9.66 percent in April.
Fiscal Health :Fiscal Deficit
The fiscal deficit for 2013-14 fiscal may finally turn out to be 4.5 percent of GDP. The fiscal deficit, which is the gap between expenditure and revenue, was 4.9 percent of GDP in 2012-13. The interim Budget for 2014 has projected the fiscal deficit for 2014-15 fiscal at 4.1 percent of GDP or Rs 5.29 lakh crore.
Current Account Deficit
As per the latest data, India’s CAD sharply narrowed to 1.7 percent of the GDP or USD 32.4 billion in 2013-14 from a record high of 4.7 percent in FY’13. For the January—March quarter, CAD – a measure of the inflow and outflow of foreign currency — stood at USD 1.2 billion or 0.2 percent of GDP, as against USD 18.1 billion, or 3.6 percent of GDP in the same period of the previous fiscal, according to the RBI.
The highest ever CAD reported in 2013-14 had led to a slew of problems, including a heavy drop in the value of the rupee, which touched an all-time low of 68.85 against the US dollar last August. However the rupee has strengthened since then and recovered up to about 58 vs dollar since then. It is, however, under pressure again due to the Iraq crisis.
Foreign Direct Investment
Foreign Direct Investment into India grew 8 percent year-on-year to USD 24.3 billion in 2013-14. Foreign investment inflows more than doubled to USD 3.53 billion in March this year from USD 1.52 in the same month last year. The highest FDI came in services (USD 2.22 billion), followed by automobiles (USD 1.51 billion), telecommunications (USD 1.3 billion), pharmaceuticals (USD 1.27 billion) and construction development (USD 1.22 billion) in 2013-14. Singapore led the FDI inflows into India with USD 5.98 billion, followed by Mauritius (USD 4.85 billion), the UK (USD 3.21 billion) and the Netherlands (USD 2.27 billion).
Foreign Institutional Investment
The net investments by FIIs into Indian equity markets since the beginning of 2014 have crossed USD 5 billion over Rs 30,000 crore), while the same for debt markets also stands near USD 5 billion (about Rs 29,000 crore)- taking the total to close to Rs 60,000 crore.
This includes net investments of about Rs 1,500 crore so far in April. This is despite a net outflow of about Rs 7,000 crore from debt markets, as equity markets have seen a net inflow of over Rs 8,500 crore this month till April 25, the latest trading session. They invested Rs 20,077 crore in Indian stocks in March, compared with Rs 1,404 crore in February and Rs 714 crore in January.
The strong inflows in the recent months have taken the cumulative net investments of FIIs into India to close to USD 197 billion, while their investments in rupee terms is a bit away from Rs 10 lakh crore level.
India’s exports grew by 3.98 percent to USD 312.35 billion in FY 2013-14 while imports dipped by 8.11 percent during the period. Imports declined to USD 450.94 billion, narrowing the trade deficit to USD 138.59 billion in the last fiscal. In FY 2012-13, trade deficit stood at USD 190.33 billion. The overall shipments in 2013-14 fell short of the target of USD 325 billion fixed by the government for the period.