GLOBAL SCENARIOAND ECONOMIC OUTLOOK FOR

INDIADr. SK LAROIYA

DEPARTMENT OF ECONOMICSHANSRAJ COLLEGE

UNIVERSITY OF DELHI

The global economy continued to lose growth

momentum in the face of a major financial crisis engulfing the developed markets. Most of the advanced economies especially USA, Japan and European Union are already slipped into recession

According to IMF, global economic growth is expected to decelerate to 3.9% in 2008 from 5% in 2007

Annual inflation rate moderated to 4.5% in September 2008 in 30 member OECD countries as compared to 4.7% in August 2008

The sharp decline in energy prices and other commodities would put further downward pressure on consumer prices going forward

GLOBAL ECONOMIC OUTLOOKANNUAL GDP GROWTH%

ACTUAL2006

ACTUAL2007

PROJECTED2008

PROJECTED2009

WORLD OUT PUT 5.1 5.0 3.9 3

ADVANCED ECONOMIES 3.0 2.6 1.5 0.5USA 2.8 2.0 1.6 0.1EURO AREA 2.8 2.6 1.3 0.2JAPAN 2.4 2.0 0.7 0.5OTHER ADV. COUNTRIES 4.5 4.7 3.1 2.5EMERGING DEVELOPING COUNTRIES 7.9 8.0 6.9 6.1AFRICA 6.0 6.3 5.9 6.0COMMONWEALTH OF INDEPENDENT STATES 8.2 8.6 7.2 5.7DEVELOPING ASIA 9.9 10.0 8.4 7.7CHINA 11.6 11.9 9.7 9.3INDIA 9.8 9.3 7.9 6.9BRAZIL 3.8 5.4 5.2 3.5

Current Economic scenario

Financial sector

Energy sector

• Foreign trade sector - Foreign currencies- Trade volumes- Trade policies- WTO - FTAs- Reforms in foreign trade sector

INDIAN ECONOMIC OUTLOOK

The fourth largest economy in the world in terms of PPP

Real GDP growth of India for the last five years averaged 8.8%

India recorded GDP growth of 9.6% in FY2007 which was highest in the last 18 years. The growth moderated to 9% in FY2008

However, the economic growth is expected to slowdown to around 7% in FY2009 on the back of economic slowdown

Services

• Services sector contributed 55.6% to the total GDP of India in FY2008 as compared to 52% in FY2004.

• Industry and agriculture sector contributed 26.6% and 17.8% respectively to the GDP in FY2008.

Agriculture

• Agriculture sector showed signs of revival as it grew by 4.6% in FY2008 vis-à-vis 3.8% in previous year. However, witnessed moderation to 3% in Q1FY2009 compared to growth of 4.4% in similar quarter of last year.

• Industrial and services sector witnessed moderation in growth to 5.2% and 10.2% respectively in Q 1_FY2009 as compared to 9.6% and 10.6% respectively in Q 1FY2008.

Industry

• Index of Industrial Production (IIP) witnessed some revival in September 2008 after recording lowest growth in last ten years in August 2008 as it witnessed growth of 4.8% compared to just _.3% in August 2008. However, IIP growth in September 2008 was lower than 7% in September 2007

• Higher interest rates, economic slow down and rising commodity prices are the main culprits for slowdown in IIP

• Increasing commodity prices especially oil and food articles fuelled inflation in India in recent time. However, inflation came down to single digit for the first time in last 22 weeks to 8.98% from the historical high level of 2.63% for the week ended August , 2008.

• Inflation is expected to cool down further buoyed by the decline in energy prices and other commodities

Population

• India’s population is one of the youngest in the world. The average age of the Indian population is 24.8 years.

• Larger working population means lower dependency ratio and higher disposable income.

Savings and per-capita income

• India’s per capita income growth averaged 6.2% during the Tenth Five-Year Plan period (2002-03 to 2006-07).

• India’s per capita income grew by 7.2% in FY2008 to Rs.29,786 as compared to Rs.27,784 in FY2007.

• Per capita income likely to witness some moderation on the back of economic slowdown.

• With rise in per capita income, savings and investments also witnessed sharp acceleration in the recent past.

• Gross domestic savings as a percentage of GDP improved to 34.8% in FY2007 from 23.4% in FY2000. Gross domestic investments also improved sharply from 24% in FY2001 to 35.9% of GDP in FY2007.

International trade

• Due to global financial turmoil, India’s EXIM trade witnessed moderation in recent time especially on export front.

• In September 2008, India’s export grew by just 0.4% (lowest in last three years). However, import remained buoyant as it grew by 43.3% in September 2008.

• Relatively higher import growth in the past few years widen the trade deficit to US$65.8bn in the first half of FY2009.

• Current account deficit widen to 1.5% of GDP in FY2008 vis-à-vis 1.1% in FY2007.

• Further rise in the trade deficit is expected given the Indian exports would affect in global turmoil and growth in import expected to remain buoyant on the back of robust domestic demands.

• India’s external debt to GDP ratio declined substantially from 38.8% in FY1992 to 18.8% in FY2008

• International trade now accounts for 41% of GDP compared to 14% in 1990

FDI

• India witnessed FDI inflow of US$93.9bn since August 1991 till August 2008 while in FY2008 FDI inflow was US$24.6bn.

• Despite global slowdown India continued to witness strong FDI inflows and received FDI worth US$14.6bn in the first five months of FY09.

FII

• Notwithstanding the current negative sentiment prevailing in the market, number of registered FIIs increased to 1541 as of October 2008 against 1124 in October 2007.

• Despite huge selling in parts of FY2008, FIIs remained net buyer in the market to the tune of US$16bn as compared to US$8.9bn in previous year. However, in the first eight months of FY2009 FIIs were net sellers to the extent of US$8.1bn.

Forex reserves

• India’s Forex reserves increased from a miniscule US$36bn in FY2000 to US$251.4bn in November 2008, which IMF thinks is above optimal level.

• However, due to heavy selling pressure from FIIs in the Indian market and weakening of Indian rupee against US$ forex reserves declined sharply from the high of US$309.2bn in March 2008.

Interest rate scenaio• In view of the liquidity crunch in the market, RBI recently

announced several cuts in key interest rates. In the past few months CRR witnessed sharp cut from its peak of 9% to current 5.5% which would infuse about Rs.1.6 tn in the system.

• Repo rate declined from 9% in August 2008 to the current level of 7.5% while SLR declined for the first time since 1997 from 25% to 24%.

• After the sustain rise, Interest rate is expected to soften as the government is looking forward to increase the liquidity in the system with a view to counter the economic slowdown.

Future outlook

• Infrastructure sector• Agriculture sector• Industry sector• Services• Reforms in the economy• Governance and the economic growth• Political stability• Political system