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DANGERS TO INDIAN ECONOMY

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                                                              1
September 11,
2007 09:16 IST




While the
US Fed
continues to
give confusing
signals
regarding the
subprime
meltdown and
the status of
economic
growth in the
US, its
counterpart in
India continues
to make candid                                                                                                         Advertisement
acknowledgem
ents of the past
and projections                                              Explore Kashmir to Kanyakumari
of what lies                                                 Visit Himachal, Uttaranchal, Kerala,
ahead.                                                       Karnataka, Darjeeling, Gangtok, South
                                                             India, Goa
Although the
Reserve Bank                                               Contact Gemini Tours & Travels
of India [Get
Quote] (in its
Annual Report
2007)
reiterated its
faith in the
Indian
economy                                                                     Rediff P4C Classifieds
clocking
nothing less
than 8.5% GDP growth in this fiscal, the central bank has also put forth some key concerns that have the potential to derail the
growth engine.

1. Uneven rainfall distribution: As per the RBI, although the cumulative rainfall during the monsoon so far has been 7% above
normal, it has been very uneven in terms of temporal and spatial distribution.

The uneven distribution of rainfall has impacted the agricultural production that has decelerated from an annual average of 4.7%
per annum during the 1980s to 3.1% during the 1990s and further to 2.2% during the Tenth Plan period. Per capita annual
production of cereals declined from 192 kg during FY05 to 174 kg during FY07 and that of pulses from 15 kg to 12 kg over the
same period.

Per capita availability of foodgrains has, thus, fallen close to the levels prevailing during the 1970s.

2. Power shortage: The power shortage of around 10% and a peak hour shortage of over 13% is a deterrent to the sustained
current high growth phase. In the Tenth Plan, capacity addition was around 50% of the target.




                                                                                                                   2
Expansion of private investment in the power sector has been constrained due to perceived lack of assurance of timely payment
for power supplied or as contracted. The gas-based power plants, which account for about 11% of the installed generating
capacity, are operating below their capacity in view of inadequate supply of gas and constraints in using alternate, high-cost fuels
such as naphtha and high-speed diesel.

Transmission and distribution (T&D) losses remain unacceptably high, ranging from 30% to 45% in many states.

3. Labour issues: While it is encouraging to note that employment generation in the economy accelerated during the Tenth Plan
period (FY02 to FY07) from the preceding period, the growth in employment during the respective periods, however, still trailed the
growth in labour force over the same period.

Moreover, it was the unorganised manufacturing sector that generated more employment in recent years. The sustained growth in
industry is, therefore, vital to generate employment opportunities and to absorb the disguised labour force dependent upon the
agricultural sector.

The annual growth in employment during the Tenth Plan (2.5%) has been marginally lower than that of the labour force and as a
result, the unemployment rate rose from 2.8% in FY00 to 3.1% in FY07.

4. Consumption slowdown: Lead indicators of consumption growth i.e. growth in tourist arrivals, revenue earning freight traffic of
the railways, new cell phone connections, export cargo handled by civil aviation, passengers handled by civil aviation, cement,
steel and bank credit have shown signs of moderation in FY08 so far.

Growth of non-food credit was 23.6% in 1QFY08 as compared to 32.5% in 1QFY07. The same is expected to remain within the
range of 18% YoY to 25% YoY over the next 2 fiscals given the estimated growth rates and inflation during this period.

5. Low welfare expenditure: The shares of public expenditure on education and health in India are still low by international
standards. In 2004, the share of public expenditure on health in India at 0.9% of GDP was lower than Brazil (4.8%), China (1.8%)
and least developed countries (1.8%).

Re-prioritisation of expenditures towards social sectors along with higher capital outlays are the only means of improving the social
infrastructure and provide productivity gains.

6. Global meltdown: According to the estimates by the IMF, global growth is likely to moderate from 5.5% in 2006 to 5.2% each in
2007 and 2008. Growth in the world trade volume is also expected to decelerate from 9.4% in 2006 to 7.1% in 2007 and 7.4% in
2008.

The emergence of protectionist pressures, further rise in oil prices, persisting global imbalances, adjustment in the US on account
of housing slowdown and potential shifts in financial market sentiment pose downward risks to global growth prospects.

If these risks materialise, they could have some adverse impact on the domestic economy as well. Conditions in the subprime
mortgage sector in the US have the potential for rise in delinquencies and could lead to reassessment of risk by investors across
products and markets and retrenchment of capital from the emerging market economies, given the contagion and herd mentality.

RBI's testimony thus highlights the need for appropriate macroeconomic policies to avoid risks of financial imbalances and
recurrence of inflationary pressures while facilitating the growth momentum in an inclusive fashion. In this regard, policy priority
needs to be accorded.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly
buy/sell recommendation service and research reports on India's top companies.




                                                                                                                      3
Email this Article   Print this Article




                                              Company nam




                                     · My Portfolio · Live market report · MF Selector · Broker tips




                                      Get Business updates:        What's this?




                                                                                                       4
September
11,
2007 09:16
IST




W     hile
the US
Fed
continues
to give
confusing
signals
regarding
the
subprime
meltdown
and the
status of
economic
growth in                                                                                                                      Advertisement
the US, its
counterpar
t in India                                                         Explore Kashmir to Kanyakumari
continues                                                          Visit Himachal, Uttaranchal,
to make
candid                                                             Kerala, Karnataka, Darjeeling,
acknowled                                                          Gangtok, South India, Goa
gements of
the past
and                                                                Contact Gemini Tours & Travels
projections
of what lies
ahead.

Although
the
Reserve
Bank of                                                                        Rediff P4C Classifieds
India [Get
Quote] (in
its Annual Report 2007) reiterated its faith in the Indian economy clocking nothing less than 8.5% GDP growth in this fiscal, the central
bank has also put forth some key concerns that have the potential to derail the growth engine.

1. Uneven rainfall distribution: As per the RBI, although the cumulative rainfall during the monsoon so far has been 7% above normal, it
has been very uneven in terms of temporal and spatial distribution.

The uneven distribution of rainfall has impacted the agricultural production that has decelerated from an annual average of 4.7% per
annum during the 1980s to 3.1% during the 1990s and further to 2.2% during the Tenth Plan period. Per capita annual production of
cereals declined from 192 kg during FY05 to 174 kg during FY07 and that of pulses from 15 kg to 12 kg over the same period.

Per capita availability of foodgrains has, thus, fallen close to the levels prevailing during the 1970s.

2. Power shortage: The power shortage of around 10% and a peak hour shortage of over 13% is a deterrent to the sustained current high
growth phase. In the Tenth Plan, capacity addition was around 50% of the target.

Expansion of private investment in the power sector has been constrained due to perceived lack of assurance of timely payment for power
supplied or as contracted. The gas-based power plants, which account for about 11% of the installed generating capacity, are operating



                                                                                                                                 5
below their capacity in view of inadequate supply of gas and constraints in using alternate, high-cost fuels such as naphtha and high-speed
diesel.

Transmission and distribution (T&D) losses remain unacceptably high, ranging from 30% to 45% in many states.

3. Labour issues: While it is encouraging to note that employment generation in the economy accelerated during the Tenth Plan period
(FY02 to FY07) from the preceding period, the growth in employment during the respective periods, however, still trailed the growth in
labour force over the same period.

Moreover, it was the unorganised manufacturing sector that generated more employment in recent years. The sustained growth in industry
is, therefore, vital to generate employment opportunities and to absorb the disguised labour force dependent upon the agricultural sector.

The annual growth in employment during the Tenth Plan (2.5%) has been marginally lower than that of the labour force and as a result, the
unemployment rate rose from 2.8% in FY00 to 3.1% in FY07.

4. Consumption slowdown: Lead indicators of consumption growth i.e. growth in tourist arrivals, revenue earning freight traffic of the
railways, new cell phone connections, export cargo handled by civil aviation, passengers handled by civil aviation, cement, steel and bank
credit have shown signs of moderation in FY08 so far.

Growth of non-food credit was 23.6% in 1QFY08 as compared to 32.5% in 1QFY07. The same is expected to remain within the range of
18% YoY to 25% YoY over the next 2 fiscals given the estimated growth rates and inflation during this period.

5. Low welfare expenditure: The shares of public expenditure on education and health in India are still low by international standards. In
2004, the share of public expenditure on health in India at 0.9% of GDP was lower than Brazil (4.8%), China (1.8%) and least developed
countries (1.8%).

Re-prioritisation of expenditures towards social sectors along with higher capital outlays are the only means of improving the social
infrastructure and provide productivity gains.

6. Global meltdown: According to the estimates by the IMF, global growth is likely to moderate from 5.5% in 2006 to 5.2% each in 2007
and 2008. Growth in the world trade volume is also expected to decelerate from 9.4% in 2006 to 7.1% in 2007 and 7.4% in 2008.

The emergence of protectionist pressures, further rise in oil prices, persisting global imbalances, adjustment in the US on account of
housing slowdown and potential shifts in financial market sentiment pose downward risks to global growth prospects.

If these risks materialise, they could have some adverse impact on the domestic economy as well. Conditions in the subprime mortgage
sector in the US have the potential for rise in delinquencies and could lead to reassessment of risk by investors across products and
markets and retrenchment of capital from the emerging market economies, given the contagion and herd mentality.

RBI's testimony thus highlights the need for appropriate macroeconomic policies to avoid risks of financial imbalances and recurrence of
inflationary pressures while facilitating the growth momentum in an inclusive fashion. In this regard, policy priority needs to be accorded.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell
recommendation service and research reports on India's top companies.




       Email this Article    Print this Article




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