PMEAC: Review of Economy 2010-11

Economic Advisory Council To The Prime Minister

Review of Economy 2010-11

Content

1. Growth Performance and Outlook
2. International Economic Conditions
3. Structural Factors
4. Sectoral: Agriculture, Industry and Services
   -Agriculture
   -Industry and Services
5. External Sector
6. Prices
7. Monetary Conditions and the Financial Sector
   -International Conditions-
   -Domestic Conditions
8. Government Finances
9. Concluding comments
   -Principal Constraints
   -Agriculture
   -External Payments
   -Physical Infrastructure
   -Inflation Management

Growth Performance and Outlook:

The Council’s July 2010 Economic Outlook had taken the view that the economy would grow by 8.5 per cent in 2010/11. The better than expected performance of the Indian economy in 2009/10 had been factored in to this projection. In the event, growth in the first half of 2010/11 has been higher at 8.9 per cent. The Council felt that, in the second half, the rate of growth will be somewhat moderated. The CSO Advance Estimates for 2010/11 show that this has indeed transpired.It has placed full year growth at 8.6 per cent. This is marginally higher than the estimate the Council had made in July 2010.

The 2010 South West monsoon was a normal one, with average precipitation marginally higher than normal. However, eastern parts of the country received deficient rainfall. The recently released Second Advance Estimates for the year shows strong growth in kharif foodgrain and oilseed output compared to 2009/10. But the levels are lower than that achieved in the bumper year of 2007/08 and 2008/09. The estimates for the rabi season are also favourable. This is due both, to the good South West monsoon, as well as the comfortable status of our reservoir position. Rabi rice output is presently placed at 13.85 million tonnes, marginally lower than the record levels reached in 2007/08 and 2008/09. Overall rice output is now placed at 94 million tonnes, one of the largest ever harvests. It is likely that with favourable weather conditions continuing, we will have the largest ever wheat harvest, at 81.5 million tonnes. Kharif pulses output is a record 6.5 million tonnes and total output for the year at 16.5 million tonnes is an all-time record. Kharif oilseed output has been revised sharply upward to 182.2 lakh tonnes, the second largest on record. Cotton and sugarcane harvests have also been revised upward marginally. Overall, from the farm perspective, output conditions are likely to result in good economic growth in 2010/11, and has been assessed in the CSO’s Advance Estimate to be 5.4 per cent.

GDP arising from the industrial sector (mining & quarrying, manufacturing, electricity, gas & water supply and construction) showed very strong growth of 11.3 per cent in the first quarter of 2010/11. This was in line with the growth achieved in the last two quarters of 2009/10. In the second quarter of 2010/11, growth in GDP arising from industry declined to 8.9 per cent. The principal factor that governed this change was the sharp drop in manufacturing GDP growth from 13 per cent in the first quarter to 9.8 per cent in the second. We expect further moderation in manufacturing output growth in the second half of 2010/11, resulting in an average growth of 8.1 per cent in the industrial sector.

Growth of GDP in the services sector was 10.1 per cent in 2009/10 and 9.5 per 4. cent in the first half of 2010/11. The Council expects service sector growth to show a slight pickup in the second half of the year, thus averaging 9.6 per cent growth for the year as a whole.

Both in the Economic Outlook released in July 2010, and in the earlier Review 5. of the Economy released in February 2010, the Council had taken a view that economic growth in 2011/12 will be about 9 per cent. It had revisited the view on the components of GDP in July 2010, somewhat reducing the projected growth rate for industry and increasing it for services. The Council continues to be of the view that it is possible to achieve growth of 9 per cent in 2011/12, while slightly refashioning the GDP components. The farm sector is now expected to grow by 3 per cent, the industrial sector by 9.2 per cent and the services sector by 10.3 per cent. Per capita GDP at factor cost is projected to increase by 7.5 per cent in 2011/12, as against 7.1 per cent in 2010/11. These adjustments reflect ongoing changes observed in the industrial and services sector, both in respect of the domestic economy and global prospects.