Economic Survey - Domestic savings continue to rise

India can today boast of being among the top nations in terms of savings, which shot up to 32.4 per cent of GDP, but government or public savings declined to make a 'negative contribution'.
The quantum of savings gave the nation a much needed platform to raise the investment level, which touched 33.8 per cent, a fact that helped the economy to "take off from a phase of moderate growth to a new phase of high growth", the Economic Survey presented in Parliament said on Tuesday.

Public savings fell from 2.4 per cent of GDP in 2004-05 to two per cent the following year, despite savings of the public sector being in positive trajectory for the third successive year, the Survey said.

Public sector contributed Rs 71,262 crore in 2005-06 due to higher savings of both non-departmental as well as departmental enterprises, the Survey said.

A dramatic element in the savings profile of the Indian economy has been the sharp rise in the savings rate of the private sector for four years in a row. The private sector rate for 2005-06 has been pegged at 8.1 per cent, the Survey pointed out.

The sector has financed a large part of its investment in the ongoing long capital expenditure cycle from such retained earnings or savings.

Household savings continued to be the dominant contributor to gross domestic savings, accounting for 30.4 per cent of the total 32.4 per cent.

Within domestic investment, difference between gross fixed capital formation and changes in stocks narrowed, indicating a recent pick up in fresh investment for creating additional capacity through fixed capital formation, especially in private sector.

Two forces have been acting simultaneously on the portfolio behaviour of Indian households: A construction boom with residential buildings financed through housing loans from banks and the progressive maturing of the domestic financial markets, the Survey said.

While the construction boom has helped inflate household savings in physical form, the maturing markets have provided incentives for higher financial savings.

There was a perceptible shift in the household portfolio in the three years ending in 2005-06. Physical savings as a proportion of GDP has declined steadily from a high of 12.4 per cent in 2003-04 to 10.7 per cent in 2005-06.

Financial savings, on the other hand, after declining from 11.3 per cent to 10.2 per cent between 2003-04 and 2004-05, more than recovered to 11.7 per cent in 2005-06.

The increase in savings rate is what is to be expected with higher growth rate of the economy and a declining dependency ratio, according to the Survey.

With the proportion of population in the working age group of 15.64 years increasing steadily from 62.9 per cent in 2006 to 68.4 per cent in 2026, the demographic dividend in the form of high savings rate is likely to continue.

With savings rate going up, private final consumption expenditure at current prices as a proportion of GDP has shown a declining trend, particularly from 2001-02.

Economic Survey - IT/ ITES sector boosts employment

The growth of the IT/ ITES sector has had a salutary effect on the employment scenario, with total number of professionals employed in the sector growing from an estimated 2,84,000 in 1999-2000 to 12,87,000 in 2005-06.

The Economic Survey released on Tuesday further pointed out that the sector has helped create an additional 30 lakh job opportunities through indirect and induced employment in telecom, power, and construction industries, among others.

Meanwhile, the Survey also pointed out that electronics hardware exports touched Rs 8,500 crore for the fiscal year 2005-06 against Rs 8,000 crore in the previous year, whereas computer software exports rose to Rs 1,03,200 crore from Rs 78,230 crore.

The production of consumer electronics increased to Rs 18,000 crore for the year 2005-06 from Rs 16,800 crore in the previous year, against industrial electronics that grew to Rs 8,800 crore from Rs 8,300 crore last fiscal.

As per the Survey, computer production stood at Rs 10,800 crore for the year 2005-06 from Rs 8,800 crore. Communication and broadcasting equipment production rose to Rs 7,000 crore from Rs 4,800 crore last year.

The Ministry of Information Technology data estimates that while the production of software for exports increased to Rs 1,03,200 crore in the year 2005-06 against Rs 78,230 crore, the domestic software production touched Rs 26,460 crore from Rs 19,630 crore in the previous year.

The annual survey highlights that total electronics exports that includes electronics hardware as well as computer software stood at Rs 1,11,700 crore as on 2005-06 (Rs 86,230 crore) .

Economic Survey - Waiving big money goodbye

Exemptions in income-tax, corporation tax, excise and customs and others incentives would cost the exchequer a whopping Rs 1,00,147 crore in the current financial year, the Economic Survey has estimated.

This is a pointer that Budget 2007-08 may continue with the rationalisation of tax incentives and exemptions, especially on the indirect tax side.

The Survey has highlighted that tax expenditures — exemptions and incentives — distort resource allocation and stunt productivity.

In Budget 2006-07, based on a comprehensive review of the tax exemptions, the Government had withdrawn eight such exemptions in customs duties, 68 in central excise duties and six in service taxes.

On the direct tax side, tax benefits available to certain cooperative banks and for income from investment in infrastructure and certain other eligible businesses were withdrawn.

With revenues remaining buoyant and the economy on a strong growth path, observers reckon that the time may be ripe for the Finance Minister, Mr P. Chidambaram, to take certain "bold steps" on the tax exemptions front.

The Economic Survey has projected gross tax-GDP ratio in 2006-07 (BE) at 10.8 per cent (after the recent upward revision in GDP) as against 10.3 per cent in 2005-06 (prov).

The direct tax-GDP ratio, which was only 1.9 per cent in 1990-91, is expected to improve to 5.1 per cent in 2006-07.

Economic Survey - Slowdown likely in bank credit growth

The Economic Survey for 2006-07 has indicated that bank credit was "unlikely" to grow as fast as it had in the recent past.

It has however predicted that bank credit would continue to outpace the gross domestic product (GDP) in terms of growth in years to come.

This may imply that bank credit growth this fiscal would be lower than the 30 per cent levels recorded in the last two years. In 2005-06, bank credit grew by 30.8 per cent.

At the same time, the Economic Survey has also highlighted that both credit as well as money, as a proportion of GDP, are low in India by international standards.

Rural outreach

It The Economic Survey also said that the inflation-related supply side problem of primary commodities requires a continuation of the move to integrate the rural sector in general and agriculture in particular with the organised financial sector. "Increasing the outreach of the banking system to these hitherto neglected sectors remains a major unfinished task of economic reform," the Survey added.

With buoyant capital flows through the balance of payments, monetary and credit policies would have to steer a careful path of maintaining the international competitiveness of domestic economic activities.

Non-food credit growth

The Economic Survey has noted that higher-than-expected GDP growth, particularly in manufacturing, appears to be driving the demand for non-food credit.

Non-food credit by scheduled commercial banks (SCBs) expanded by Rs 2,59,435 crore during the current year up to January 19, 2007. This represented 22.27 per cent increase to the non-food credit of Rs 2,12,176 crore observed during the corresponding period of the previous year.

In 2005-06, the growth in non-food credit extended by SCBs was 31.8 per cent. This was higher than the growth of 27.5 per cent in 2004-05.

As regards agricultural credit, the Survey has noted that the total flow of institutional credit up to December 31, 2006, stood at Rs 1,49,343.16 crore (provisional). This constituted 85 per cent of the annual target of Rs 1,75,000 crore for the current fiscal.

Economic Survey - `Drumbeats of infrastructure getting louder'

With infrastructure now showing signs of progress and providing impetus to economic growth, the Economic Survey has suggested that insurance and pension funds can be used to meet the massive investment need of $320 billion in infrastructure during the XI Plan.

An indicator of the economy's progress, the document, tabled in Parliament on Tuesday, says: "Outlook in infrastructure will depend on how investment in infrastructure is facilitated".

It injects a note of optimism when it observes that infrastructure — for years perceived as a constraint on growth — is showing signs of progress in areas such as power, roads, ports and airports.

In this contest, it points to the fact that the overall index of six core industries, having a direct bearing on infrastructure and accounting for 27 per cent of weight in the Index of Industrial Production (IIP), registered a growth of 8.3 per cent during April-December, 2006 as against the 5.5 per cent registered a year ago. Referring to the projection of investment of Rs. 14,50,000 crore ($320 billion) required in the core sector during the XI Plan, it said investment in infrastructure required long-term funds with long payback periods, which would be possible if insurance and pension funds were utilised.

The pre-budget Survey goes on to add, "Thus, success on the infrastructure front will be facilitated by the development of a vibrant bond market, and pension and insurance reforms."

"A single, unified exchange-traded market for corporate bonds would help create a mature debt market for financing infrastructure," it says further, recalling that the Committee on Infrastructure, headed by the Prime Minister, has projected Rs. 2,20,000 crore fund requirement for modernising and upgrading highways, Rs. 40,000 crore for civil aviation, Rs. 50,000 crore for ports and Rs. 3,00,000 crore for the railways by 2012.

While acknowledging that short-term problems are unlikely to disappear rapidly without resolute action, the Survey said that provision of quality and efficient infrastructure services is essential to realise the full potential of the growth impulses surging through the economy.

On the power front, it says that enough generation capacity will get added to wipe out the shortages only over the medium term. "Improving the short-term power outlook will critically depend on how fast success in slashing transmission and distribution losses (from near 40 per cent to 15 per cent) is achieved," it underlines.

However, the survey cautions that the progress on the road and highways front will depend on how rapidly constraints such as delays in land acquisition, removal of structures and shifting of utilities, law and order problem in some states, and poor performance of some contractors are removed.

In regard to urban infrastructure, the Survey called for comprehensive planning and effective monitoring. "Outlook on urban infrastructure will depend critically on how fast the finances and functional efficiency of urban local bodies are improved."

The survey notes that there exist strong, well-recognised linkages between infrastructure on the one hand, and economic growth and poverty alleviation on the other.

"Not only will infrastructure give a fillip to economic growth but a robust economic growth in turn by enhancing willingness to pay appropriate user charges, will promote investment in infrastructure", it observed adding that the outlook for infrastructural improvement looks promising.

It further says that given the experience gained in PPP (public private partnership) and concession agreements, infrastructure investments should gain momentum over comings months and years.

The pre-budget document also says that the "drumbeats of infrastructure are gradually, getting louder and in the next few years'' their rumble will be felt all over the country.

Economic Survey - Where have all the high-value notes gone?

Indians may be buying more cell phones, cars and colour television sets with the economy chugging along at nine per cent as the Economic Survey proudly points out.

But that is nothing compared to the market for high-denomination currency notes, which is growing at an even faster clip.

Consider the evidence. The Reserve Bank of India says that individuals and businesses stored Rs 75,691 crore in high-denomination currencies (Rs 500 and Rs 1,000 notes) as of March 2002.

Yet, by close of March 2006 their appetite for such currencies has grown by more than 325 per cent, to touch Rs 2,46,650 crore (RBI Annual Report 2006).

The economy hasn't grown anywhere near this rate - growing only by 45 per cent - during this period.

Far from growing, the currency in circulation, as a proportion of the total money supply, which includes bank deposits, has actually declined from a high of nearly 40 per cent in 1971-72 to a respectable 15 per cent by 2005-06.

In other words, the rise in circulation of high-denomination currency notes is despite a relative decline in the circulation of small denomination notes up to Rs 100.

So, what explains the phenomenal growth of Rs 500 and Rs 1,000 notes? The RBI thinks that the large number of ATMs and the banks' penchant for stuffing them with crisp, brand new notes is the culprit.

Banks may find dispensing cash with smaller denomination to be a logistical challenge, as that would mean frequent replenishment, reasons the RBI.

But senior bank officials have a different take on this.

They told Business Line that their ATMs are stuffed typically with Rs 500 and Rs 100 notes; in any case they do have sorters to identify ATM-quality notes, which come back to them to be sent back.

Also, with average withdrawals in the region of Rs 2,000-2,500 for a medium-sized bank, the need for stuffing the ATMs with Rs 1,000 notes is not all that high, they suggest.

One thing is certain. If these notes were not fed back into the ATMs, the banks would be saddled with a huge hoard of high-denomination notes.

The currency on hand in the banking system is nowhere near the volume of such notes in circulation.

Interestingly, the US, with far greater penetration of ATMs and with a much larger economy in purchasing power parity terms, seems to make do with a much smaller denomination of currency notes.

The $100 note is the highest denomination of the US; when derated suitably for the higher prices and the relatively larger size of its economy, it would translate into a currency denomination roughly the equivalent of Rs 250.

The volume of high-denomination notes in circulation cannot be justified by either the size of the economy or the technology used for banking transactions.

Does it suggest that notes in such denominations are used more for hoarding illegal gains? A former senior official from the banking industry thinks that the growth in the volume of high-denomination currency notes in circulation is a useful proxy for the growth of black money in the economy.

Now, that is something for the Finance Minister to reflect on, as he gets ready to present his Budget for the next fiscal.

Economic Survey - Is `remunerative' fair

The Economic Survey warns against any drastic cut in petroleum product duties or any significant increase in foodgrain subsidy. Saying that there is need to recognise the potential contradiction between `remunerative' price for the farmer and `fair' price for the consumer, the survey indicates that the same contradiction arises in the pricing of petroleum products.

"The reconciliation of such a contradiction ought not to be in terms of an expensive compromise of fiscal rectitude,'' says the survey, thereby hinting that prudent fiscal management should not be given the go-by.

Economic Survey - Economy in high-growth trajectory

The economy seems to have decidedly `taken off' and moved from a phase of moderate growth to a new phase of high growth. That is the prominent theme of the Economic Survey 2006-07, presented to Parliament on Tuesday by the Finance Minister, Mr P. Chidambaram.

Pressing its claim, the survey points to signs of industrial resurgence, with the industrial sector growing from a low of 2.7 per cent in 2001-02, moving up to 7.1 and 7.4 per cent in 2002-03 and 2003-04, accelerating to 9.5 per cent in the next two years to touch 10 per cent in the current fiscal. Also, the growth impulses within industry seem to have spread to manufacturing.
A notable feature in the current growth phase is the high rate of investment, measured in terms of gross domestic capital formation that has steadily climbed from 31.5 per cent in 2004-05 to 33.8 per cent in 2005-06.

There are other positives. The generally laggard infrastructure index grew 8.3 per cent in April-December 2006, up from 5.5 per cent in the same period of the previous year; the public sector turned its dissavings into positive savings and the corporate sector reported a sharp increase in savings at 8.1 per cent in 2005-06, which helped it to finance a large part of its investment in the ongoing capital-expenditure cycle.

Capital inflows into the country have also remained strong and even domestic flows to the capital market have been high. Initial public offerings grew 30.5 per cent in calendar year 2006 to Rs 1,61,769 crore and on an average, there have been six IPO issues per month.

Sustaining factors

According to the survey, this growth in the economy is sustainable for a variety of reasons. First, the high growth from a growing number of the population in the working age group would lead to a rise in savings. Second, efficiency improvements in the economy since 1999-2000 reinforce the confidence in the high-growth phase. Third, opening up of new avenues in services, beyond IT and IT-enabled services, bolster confidence in the high growth rate.

The fourth positive factor is the low possibility of an `overheated' economy, typified by a strained labour force and capital stock. This can be obviated through rapid growth in capacity addition through investments. Moreover, the moderate merchandise import growth rules out indications of overheating.

The incidence of poverty is down to about 22 per cent in 2004-05 from 26.1 per cent in 1999-2000, as per the NSSO's 61st round large-scale sample survey on household consumer expenditure.

On the burning issue of inclusive growth, the survey emphasises that putting more people in productive and sustainable growth seems to be a solution but adds that inclusive growth cannot come without growth itself.

As for the downsides, the survey notes that risks for a sustained high growth could be from rapid unravelling of global macro-economic imbalances, volatile oil prices and delays in the completion of the Doha Round. "But, for the present, they appear to be limited," assures the survey.

Economic Survery - Indian indices record higher volatility

BSE Sensex and NSE Nifty rose by 46.7 and 39.8 per cent respectively in 2006, but were marked by strong volatility, going by the Economic Survey.

Indian indices for volatility of weekly returns were higher than foreign indices such as S&P 500 (US) and KOSPI (South Korea). Also, Indian indices recorded higher volatility on weekly returns during the two-year period January 2005-December 2006 as compared with January 2004-December 2005.

There was increased turbulence in the Indian markets partly owing to a sharp sell-off in May 2006 in line with trends in the global markets.

Larger inflows from foreign institutional investors (FIIs) and larger participation by domestic players during the later part of the year led to buoyant conditions on the bourses post a dull first half. During 2006, on a point-to-point basis, Sensex and Nifty indices rose by 46.7 and 39.8 per cent respectively.

The rise, through the year, has been attributed to growth in the profitability of Indian corporates, overall higher economic growth and other global factors such as relatively soft interest rates and fall in crude oil prices in international markets.

The market valuation of Indian stocks at the end of December 2006 stood higher than most emerging markets of Asia including South Korea, Thailand, Malaysia and Taiwan and was the second highest among emerging markets.

Retail investors

Stock markets continued to be dominated by retail investors accounting for major part of the transactions.

The gross FII turnover at Rs 20.6 lakh crore accounted for only 10.4 per cent of the total gross turnover of Rs 198.6 lakh crore in the spot and derivatives sections in 2006.

Net investment by FIIs in the equity spot market fell by around 22 per cent to Rs 36,540 crore in 2006. The number of FIIs rose by 27 per cent to 1,044 at the end of December 2006.

Going by the number of transactions, the NSE continued to occupy the third position among the world's biggest exchanges in 2006 and the BSE stood sixth slipping one step from 2005. In terms of listed companies, the BSE ranked first in the world.

Investors' wealth as reflected in market capitalisation has increased significantly by over 45 per cent during 2006.

P/E ratio

The fundamental strength of the economy was also reflected in the price-to-earnings (P/E) ratio, which was higher at a little over 20 by end December 2006 as compared to 17-18 as of end-December 2005.

As on January 12, 2007, market capitalisation (NSE) at $834 billion was 91.5 per cent of the GDP.

The NSE and the BSE spot market turnover more than doubled between 2003 and 2006.
In terms of derivatives, the turnover on NSE nearly doubled in a single year between 2005 and 2006.

Assets under management of mutual funds increased by about Rs 1.24 lakh crore to reach Rs 3.24 lakh crore in 2006.

Economic Survey pitches for pension reforms

While pension reforms refuse to make headway in the wake of political opposition, the survey has made a strong case for bringing about a vibrant pension sector in the country and has said that it would be a "highly beneficial force" in the financial system.

"Pension funds are natural vehicles for long-term investments, including equity. A modern, well-regulated pension sector, populated with professional pension fund managers will be a highly beneficial force in the financial system and improve resource flow in the form of long-term debt and equity to sound projects particularly in infrastructure," the survey said.

The Government had notified the New Pension System (NPS) on January 1, 2004, but has not been able to push ahead with a proposed legislation to bring about pension reforms in the wake of the Left parties expressing reservations over the fallout of such a system on the general public.

Insurance sector

The survey feels that pensions reforms could also benefit the insurance sector. "The pension sector can also be a major customer of insurance companies for the purpose of converting a stock of pension wealth at retirement date into a flow of monthly pension in the form of annuities," it said.

Economic Survey - Disbursements for rural infrastructure lag sanctions

Disbursements under the Rural Infrastructure Development Fund continue to lag behind sanctions, according to the Economic Survey, 2006-07. The cumulative amount sanctioned to the State governments up to January 25, was at Rs 58,795.36 crore while disbursements were at Rs 34,643.87 crore.

During 2006-07 (up to January 25) the amount sanctioned and disbursed were Rs 7,810.85 crore and Rs 3,306.60 crore, respectively.

The total corpus of RIDF, with 12 tranches, aggregated to Rs 60,000 crore and was announced by the Government in 1995-96 to boost public sector investment in agriculture and rural infrastructure.

The fund was to be raised from commercial banks defaulting on agricultural lending. The corpus is announced every year during the budget. So far, 11 tranches have been completed and RIDF-XII is on-going in 2006-07.

Initially the fund focussed on irrigation projects, development of rural roads and bridges but soon other activities were included. The activities which can get loans under the RIDF include hydel projects, community irrigation wells, soil conservation, watershed development and reclamation of waterlogged areas, grading and certifying mechanisms such as testing and certifying laboratories, fishing harbour, animal husbandry, public health and education institutions, among others.