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INTRODUCTION

The Indian economy has moved decisively to a higher growth phase in comparison to theprevious years. The projected economic growth rate for the current year is nearly around8.7% which is a significant achievement. In order to meet the targeted growth rate of 9%

for the 11th Five year Plan there was acceleration in domestic investment and savings rate.But there are also certain shortcomings with respect to this phenomenal increase in growthrate as the economy was not prepared to face the challenge of inflation in the economy. Theworld prices of crude oil, commodities and food grains have risen sharply since the lastyear. Among the commodities the price of copper, iron ore, tin are elevated. So the basicchallenge for the government is to keep the inflation under check and manage the capitalflows more effectively. Especially now since the rupee has appreciated, the export sector isaffected to a great extent and there has been a slowdown in the consumer goods segment.Though this is a boom for the Indian economy it has affected the employment status of those working in the multinational companies as the dollar value has depreciated and theyare unable to meet the expectations of the employees with regard to the pay packages. Buton the other hand the companies importing goods from other countries will benefit greatly.

Now our great concern is that in order to increase the growth rate according to our settarget as per the 11th Five year Plan we need to have certain additional reforms. Expertsestimate that by 2025, India's share in world GDP is expected to rise from 6% to 11%wherein that of US will witness a fall from 21% to 18%. India is expected to be the 3rd largest economy in the world by 2025. The country has seen a growth of 9.0 percent during2005-2006, 9.4 percent during 2006-2007 and 8.7 percent in 2007-2008. Growth is of interest not for its own sake but for the improvement in public welfare that itbrings about. Economic growth, and in particular the growth in per capita income, is a broadquantitative indicator of the progress made in improving public welfare.

Per capita consumption is another quantitative indicator that is useful for judging welfareimprovement. It would therefore be appropriate to start by looking at the changes in real(i.e. at constant prices) per capita income and consumption. The per capita income of Indians has gone up as much as 14.2 per cent in 2006-07, enabling them spend more onmanufactured products like mobiles and health care services, while increasing their savings.This would also explain the reason for the tremendous increase in the growth rate of manufacturing as well as the service sector by 10.7% and 9.4% respectively. The pace of economic improvement has moved up considerably during the last five years (including2007-08). The rate of growth of per capita income as measured by per capita GDP atmarket prices (constant 1999-2000 prices) grew by an annual average rate of 3.1 per centduring the 12-year period, 1980-81 to 1991-92. It accelerated marginally to 3.7 per centper annum during the next 11 years, 1992-93 to 2002-03. Since then there has been asharp acceleration in the growth of per capita income, almost doubling to an average of 7.2per cent per annum (2003-04 to 2007-08).This means that average income would now

double in a decade, well within one generation, instead of after a generation (two decades).If adjusted against inflation, the per capital income at current prices rose by 8.1 per centduring the year and was estimated at Rs 22,553 as against Rs 20,858 for the previous year.Analysts said the spurt in households' income levels explains the boom in retail sector, saleof more two and four wheelers, mobiles and branded products in urban and non-urbanareas. Commenting on the impact of 9.6 per cent GDP growth during 2006-07 on householdincome, HDFC Chief Economist AbheekBaruah said, "Since the pie has increased, it would bereflected in the personal income". On an average, the households spent as much as Rs20,714 at current prices, about 70 per cent of their income, and saved the remaining. In the

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previous year, the households spent 71.83 per cent of their income and saved the rest.Interestingly, the highest growth in personal expenditure was noticed in communicationsector that comprises mobiles, TV and newspapers. The total spent on this sector grew asmuch as 35.6 per cent during the year.

Key - Sectoral Contribution

1.1 Agriculture

Agricultural sector in particular has seen the most dismal performance for the Indianeconomy in spite of the fact that more than 58% of the country depends on agriculture,directly or indirectly and there are more than 115 million farming families in the country.From strong roots of a growth of 9.1% in 2003-2004, it has fallen down to 2.7% during2007-2008. India is the largest producer of jute, tea and jute like fibre. At the same time,the country is the largest consumer of tea in world as well. India imports tea to more than80 countries and accounts for 14% of world tea trade. India's milk production is also thehighest in the world. In terms of area, India has the 1st rank in total irrigated land in theworld. The country is placed 3rd among cereal production, having the 2nd largest positionwhen it comes to wheat and rice and the largest in the world for production of pulses.

Agricultural sector though heavily subsidized and funded by the government lacks thetechnological upliftment and the practices in the sector even today are mostly third world.The prime areas that can boost agricultural income in the country include horticulture,organic farming livestock & fisheries, commercial crops and agro-processing. The timelymonitoring of minimum support price for agricultural products will result in high sustainedagricultural growth and improvements in rural infrastructure. Practices like strengtheningR&D, improvements in post harvest management technologies, reforms in legislations willestablish a stronger support system for the country's agricultural sector. A substantialamount of labour goes to waste in the form of excess labour in the agricultural sector.Absorbing such labour in other sectors, particularly industry is required. There is a need forincreased awareness for public investment in agriculture, especially in irrigation, ruralinfrastructure and agricultural research and development. The scenario of availability of

better institutional credit for farmers has certainly improved, but the emphasis also needs tobe on better access to this credit.

Growth in Agricultural sector (Percentage)

1.2 Manufacturing

Manufacturing sector growth in India has fallen sharply in the last seven years as comparedto the first seven years post reforms. Manufacturing growth was down from 10.2% in thefirst half to an estimated 9.4% for the full year. That implies a growth of 8.7% in the secondhalf. The consumer durables sector in particular has witnessed slowdown mainly due tohardening of interest rates. The industries that saw acceleration in growth includedchemicals, food products, leather, jute textiles, wood products and miscellaneous

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Urban non-manual employees 6.7 6.13 Industrial workers 6.7 6.17 CPI agricultural labour 7.8 7.75

Consumer inflation in particular has affected all sectors of the workforce. The lack of penetration of proper educational infrastructure in rural India and also in most cities means

that workforce is highly disseminated and at times not in the right job fit. Currently, just11% of India's college-age population is enrolled in higher education, which lags behindboth developed and some developing nations. The government is pushing to increase thatto 15% in the short term. Indian infrastructure

Infrastructure includes: road, rail, air and water transport, electric power,telecommunications, water supply and irrigation which account for a combined weight of 26.68 per cent in the index of industrial production (IIP). This segment has reported agrowth of 8.6 percent as against 05-06. Sectoral Growth

Sector Growth (%) Electricity 7.6 Petroleum refinery products 9.8 Cement 8.3 Finished carbon and steel 6.6

According to Planning Commission, a massive US$ 494-billion of investment is proposed forthe Eleventh Plan period (2007-12), which would increase the share of infrastructureinvestment to 9 per cent of GDP from 5 per cent in 2006-07. This translates roughly intoUS$ 40 billion of annual additional investment. Some of the projects planned for the next

five years include:

* Additional power generation capacity of about 70,000 MW* Construction of Dedicated Freight Corridors between Mumbai and Delhi, and Ludhiana andKolkata* Capacity addition of 485 million MT in major ports, 345 million MT in minor ports* Modernisation and redevelopment of 21 railway stations* Development of 16 million hectares through major, medium and minor irrigation works

Projected Sector wise share

SECTOR (%) Electricity 30.4 Telecommunication 15.4 Railways 13.7 Private sector 30

Telecommunication, construction and power together have attracted a combined cumulativeFDI of US$ 6.815 billion over the period April 2000 to August 2007.In fact, infrastructurehas been instrumental in emerging as the leading destination for private equity in Asia(excluding Japan). Some of the major players in this segment include 3i, Citigroup,

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Blackstone Atherstone India Invest, PFC, AMP Capital, Macquarie Infrastructure Group, DLF-Laing O'Rourke among others Other Major Infrastructure Sectors:

1. Port

The Indian port sector has emerged the unsung hero in India's efforts to increase its globalpresence. The country's booming economy along with its foreign trade has given atremendous boost to the sector, which has been instrumental in increasing India's share inworld trade from 1.1 per cent in 2004 to 1.5 per cent in 2006.

2. Indian railways Indian Railways is the world's fourth largest rail network and second largest under a singlemanagement. It is also the world's fourth largest freight carrier, carrying 1.49 million tonne(mt) of freight daily. Contributing to the development of India's industrial and economiclandscape for over 150 years, it accounts for about 2.3 per cent of GDP and employs about

1.5 million people directly.

Indian Railways consists of an extensive network spread over 109,221 km, encompassingabout 6947 stations and 17.7 million passengers.

3. R oads India has the world's second largest road network, aggregating over 3.34 million kilometers.The share of road transport in the GDP is over 4.6 per cent in 2007 (as against 3.8 per centin 2000), accounting for over two-thirds of the total transport contribution to the GDP.

4. Urban development India is getting urbanized at a faster rate than the rest of the world and, by 2030, 40.7 percent of the country's population will be living in urban areas, according to a report by theUnited Nations Population Fund (UNFPA). Social Sectors As per the UNDP's Human Development R eport (HDR ) 2007

For social sector development during 2007-08 the new initiatives include AamAdmiBima -Yojana and RastriyaSwasthyaBimaYojana. The share of the Central Government expenditureon social-services, including rural development, in total expenditure (plan and non-plan),has increased from 10.97 per cent in 2001-02 to 16.42 percent in 2007-08. Universalization

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of elementary education has become an important goal. It has, therefore, been decided tolaunch a centrally sponsored scheme viz., Scheme for Universalization of Access toSecondary Education and improvement of quality at secondary stage during the EleventhFive Year Plan. The main objective of the programme is to make secondary education of good quality available, accessible and affordable to all young students in the age group 15-16 years (classes IX and X). Balance of Payments Current Account

In the year 2005-06, the total current account balance was (43737) crorewhere as thisfigure rose to (45343) crore in 2006-2007. Current Account comprises of merchandise andinvisibles.

* The balance of the credit side of current account grew at the rate of 27.23% to 1098553crore in the year 2006-07 where as the balance of the debit side of the current accountgrew at the rate of 26.09%

* As compared to the year 2005-06 there has been 24.34% increase in the totalmerchandise in the year 2006-07 as large amount of money was received from foreignersby the way of merchandising.

* Invisibles which comprises of services, transfer and income shows a phenomenalincrease of 30.62% primarily due to 35% increase in providing software services tothe foreign countries (141356 crore). Financial services grew at the rate of 41% ascompared to 2005-06 and business services grew at the astonishing rate of 110% to86928 crore and communication services grew at the rate of 36.8%. Transfers grew at therate of 17.57% and incomes grew at the rate 47.75% to 42000 crore.

Capital Account

In 2005-06 the total balance of the capital account was 111965 crore which rose to 206389crore in the year 2006-07 posting a rise of around 84.33% as compared to the year 2005-06. Capital Account comprises of Foreign Investment, Loans, Banking Capital, Rupee DebtService and Other Capital. The following are the key highlights:

* Foreign Investment rose to 74.49% to 598106 crore due to 154.63% increase in foreigndirect investment and 63.69 % increase in portfolio investment* Loans grew at the rate of 41.31% to 246908 crore* Banking Capital grew at the rate of 74.5% to 167494 crore* Rupee Debt reduces to 725 crore from 2557 crore* Other Capital rose to 30.58% to 34540 crore The overall Net Balance in the year 2006-07 was 163634 crore as compared to 65496 crorein the year 2005-06; thus posting a phenomenal increase of 148.32%. The Total Credits increase to 2148149 crore in 2006-07 from 1503354 crore in 2005-06 posting a growth of 42.89%. The Total Debits increase from 1503354 crore to 1984555 crore with the increaseof 32%.

The growth in the Net Overall balance and in the credit balance clearly indicates the growthstory of India.

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Inflation The highlights of macroeconomic and monetary developments during 2006-07 are: The Real Economy

* The Indian economy witnessed robust growth during 2006-07 for the fourth year insuccession. According to the advance estimates released by the Central StatisticalOrganisation (CSO), real Gross Domestic Product (GDP) growth is estimated to acceleratefrom 9.0 per cent in 2005-06 to 9.2 per cent in 2006-07. The acceleration in growth during2006-07 was driven by the continued momentum in the services and the manufacturingsectors, both of which are expected to record double-digit growth. 'Agriculture and alliedactivities' growth, however, slowed down from 6.0 per cent in 2005-06 to 2.7 per cent in2006-07.

Price Situation

* In Financial Year 2006/07 inflation rate was 6.1% (in 2005/06 ± 4.7%).

* Headline and core inflation remained at elevated levels in many economies during the firsthalf of 2006-07 reflecting high commodity prices and strong demand conditions. Althoughheadline inflation eased somewhat internationally from August 2006 levels in tandem withthe softening of international crude oil prices and favorable base effects, it remains abovethe inflation targets/comfort zones in many economies. Many central banks continued withpre-emptive monetary tightening to mitigate the second round effects, especially in the faceof continuing strong demand. Central banks in emerging market economies also raised cashreserve requirements to address concerns regarding excess liquidity arising, particularlyfrom large external flows.* In India, prices of primary food articles and manufactured products exerted upwardpressures on headline inflation in 2006-07. Wholesale price inflation was generally withinthe Reserve Bank's indicative projections of 5.0-5.5 per cent up to mid-November 2006 androse above the upper end of the band thereafter. The year-on-year (y-o-y) inflation was 5.7

per cent as on March 31, 2007 as compared with 4.0 per cent a year ago.* Measures of consumer price inflation remained above the WPI inflation throughout theyear, mainly reflecting the impact of higher food prices.* The Reserve Bank continued with the policy of gradual withdrawal of monetaryaccommodation, using various instruments at its disposal flexibly to stabilise inflationaryexpectations. The Government also took fiscal and supply-side measures to containinflation. Budget Impact: 2008 Key Highlights:

* Debt waiver for 4 crore marginal farmers to the extent of Rs 60,000 crore* CENVAT decreased from 16% to 14%* Excise duty cut for cement* Excise duty on mass consumption items abolished* Excise duty increased from 8% to 12% for packaged software* Export duty on iron ore unchanged* Fiscal deficit at 2.5% (better than targeted 3%)* No extension in 10A and 10B for the services sector

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* 20% increase in educational spending* Increase in tax slab from current Rs 1,10,000 to Rs 1,50,000 Analysis:

The Finance Minister P. Chidambaram was strong against his stand that either we are for

the farmer or against the farmer. He announced a debt waiver for marginal farmers to theextent of Rs 60, 000 crore of which Rs 50,000 crore would be written off and the balance Rs10,000 crore would be in the form of one time settlement. This would hit the PSU bankswho had floated this amount. Even though the Finance Minister mentioned that he wouldensure that the banks would have enough liquidity, he did not mention them gettingcompensated for the entire amount in the form of cash. Sources say that the banks wouldget Rs 25,000-Rs27,000crore by June and the rest would be in the form of bonds. Thiswould amount to a burden of 3% on Total Net Credit for the banks. The fiscal deficit of 2.5% is on grounds of this Rs 60,000 crore not being accounted for in reaching that figure.India Inc. was particularly unhappy with the budget due to no cuts in corporate tax or peakcustoms duty. An increase in excise duty on packaged software means that companied likeInfosys will have a considerable impact on their bottom line this year. Cement, Retail and

Auto have a positive impact due to cut in excise duty and decrease in CENVAT. Refineriesthis year would have a negative impact to a certain extent due to the duty levied on importof Naphtha for Polymer. This will hit Reliance in particular. Keeping in mind that Reliancealone contributes 4% to the country's GDP, this could have a considerable impact on thecountry's growth. An increase in the tax slabs means that people will have more money tospend. This increase in consumption is expected to benefit the Retail sector during the year. Contribution to Consumer Spending and Potential Savings

Tax Slab (Rs lakh) Tax rate (%) Minimum savings (Rs) 1.5-3 10 4120 3-5 20 24700 More than 5 30 45320

Conclusion: The evidence demonstrates that the economy is clearly on its way to sustained growth butwhat is critical in the coming years is a combination of inflation control, increased consumerspending, adequate liquidity and emphasis on development of industry & educationalinfrastructure. In the long run, the emphasis will have to be on decreasing the amount of dependence on the services sector and taking concrete measures to develop agriculture inthe country. This can be only possible with sound governmental reforms, increased R&Dspending and adequate import of technology and training. The future for the economy looksbright heading into the second year of the 11th 5 year plan

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