CHAPTER 1
THE ECONOMY : AN OVERVIEW

The performance of the economy during the first three years of Ninth Five Year Plan is described in the following sections.

2. The overall performance of the economy has improved during 1998-99 compared to the previous year. As per the Quick estimates, the Gross Domestic Product (GDP) in 1998-99 records a growth of 6.8 per cent as against the growth rate of 5 per cent during 1997-98. The increase in the rate of economic growth is mainly due to higher growth in agriculture, electricity and trade. After a negative growth of 1.9 per cent in 1997-98, the agricultural GDP registered a growth of 7.2 per cent in 1998-99. ‘Electricity, gas and water supply’ and ‘trade, hotels and restaurants’ recorded higher growth at 7.9 per cent and 8.1 per cent respectively during 1998-99.

3. The sectors indicating slowdown during the year 1998-99 are ‘mining and quarrying’, ‘manufacturing’, ‘construction’, ‘transport, storage and communication’, ‘financing, insurance, real estates and business services’, ‘community, social and personal services’. On the industrial front, the rate of growth of the manufacturing sector in 1998-99 is marginally lower at 3.6 per cent as compared to 4.0 per cent in 1997-98.

4. As per the advance estimates of National Income, the GDP is estimated to grow at 5.9 per cent in 1999-2000. The estimated slow down in the growth of the economy is ascribed to low growth of 0.8 per cent in agricultural sector, mainly attributed to negative growth in wheat, coarse cereals, pulses, oilseeds and cotton. The sectors indicating higher growth are manufacturing (7.2%), electricity, gas and water supply (8%), construction (9%), community, social and personal services (9.8%) and financing, insurance, real estates and business services (10.5%).

5. Gross Domestic Savings (GDS) constituted 22.3 per cent of GDP at market prices in 1998-99. This is less than the savings rate of 24.7 per cent realised in 1997-98. Similarly, Gross Domestic Investment as a proportion of GDP has declined from 26.2% in 1997-98 to 23.4% in 1998-99. These rates are also lower than the savings and investment rate assumed in the Ninth Five Year Plan. However, these figures are not strictly comparable with the estimates contained in the Ninth Plan since the plan targets are based on the old series of NAS.

6. A high level of fiscal deficit continues to be an area of concern for the policy planners. Ever since economic reforms were initiated, achievement of a sustainable fiscal position has been a constant endeavour. But progress in this area is still limited.

7. The method of calculation of the fiscal deficit of the central government in the 1999-2000 Budget has undergone a change. Under the new method, fiscal deficit excludes the transfer of the share of net small savings collection, which is now paid from the public accounts. On this basis, the fiscal deficit of the central government is estimated to decline gradually from 4.7 per cent of GDP in 1997-98 to 4.5 per cent in the revised estimates of 1998-99 and further to 4 per cent in the Budget estimate of 1999-2000.

8. The fiscal position of the states is under severe stress and much adjustment would be required before a sustainable fiscal position can be achieved. The combined fiscal position of center and states in 1998-99 is indicated by a gross fiscal deficit of 7.26 per cent and revenue deficit of 4.27 per cent, resulting in a primary deficit of 2.17 per cent of GDP.

9. The main area of concern, as far as the centre’s fiscal position is concerned, is the slow growth of tax revenues. The Ninth Plan has envisaged an increase in the tax-GDP ratio of about 1 percentage point during the five years period. However, since 1994-95, the gross tax revenue of the central government has remained stable around 9 per cent of GDP. The ratio of direct and indirect taxes in gross tax revenue is 1:2.

10. On the expenditure side of the central government, the components, which have grown rapidly, are interest payments, defence services and pension and other retirement benefits. Total revenue expenditure is growing at an annual compound rate of more than 14 per cent since 1993-94. The expenditure of the state governments is growing at a rate of 16 per cent annually, whereas, the non-developmental expenditure is growing at a high rate of more than 20 per cent. The expenditure on administrative services has been more rapid, at a rate of 26.1 per cent.

Inflation

11. The Ninth Plan envisages a reasonable degree of price stability. The average inflation rate measured by changes in Wholesale Price Index (WPI) was 4.8 per cent in 1997-98. The inflation rate increased to 6.9 per cent in 1998-99 but declined to around 3 per cent in the first nine months of 1999-2000. This moderation in the rate of inflation was achieved against a relatively high rate of monetary expansion (M3) of about 18 per cent in both 1997-98 and 1998-99 and also increases in the administered prices of certain petroleum products in 1999-2000.

Balance of Payments

12. The export to GDP ratio declined marginally from 8.5 per cent in 1997-98 to 8.2 per cent in 1998-99. Import to GDP ratio declined from 12.2 per cent in 1997-98 to 11.4 per cent in 1998-99. In US $ terms, exports declined by 3.85 per cent in 1998-99 as compared to a growth of 4.6 per cent in 1997-98. In US $ terms, imports in 1998-99 increased by only 0.90 per cent as compared to an increase of 6.01 per cent in 1997-98. During the first nine months of the year 1999-2000, the imports increased by 9% over the corresponding period of the previous year.

13. There has been an improvement in the current account deficit, which as percentage of GDP declined from 1.3 per cent 1997-98 to 1.0 per cent in 1998-99. In tandem, India’s foreign exchange reserves during this period increased from US $ 29.4 billion to US $ 32.5 billion.

14. The economic parameters of the Ninth Five Year Plan as approved by the NDC were based on the National Accounts Statistics (NAS) with base year of 1980-81 published by the Central Statistical Organization(CSO). Since then the CSO has introduced a new series on NAS in February 1999 with the base year changed to 1993-94, which also captures the structural transformation experienced in the economy during the intervening years. Introduction of this new series necessitates recasting of plan parameters, and a reassessment of the feasibility of the plan targets. The Commission is already in the process of reformulating the macro parameters in conformity with the new series of NAS. The same is expected to be firmed up through the Mid Term Appraisal of the Ninth Five Year Plan.

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