Economic Performance

The overall growth of 5.4% in 2001-02 is supported by a growth rate of 5.7% in agriculture and allied sectors, 3.3% in industry and 6.5% in services. The acceleration of the overall GDP growth rate is basically due to a significant improvement in value added in the agriculture  and allied sectors from a negative growth rate of -0.2% in 2000-01 to 5.7% in 2001-02. There has been significant deceleration in the growth rate of industry. However, the performance of the services sector has improved moderately.

Principal Sectors of the Economy: India’s GDP comes from three principal sectors, Agriculture, Manufacturing and Services. Services - including real estate, transportation, financial services and other business and social services-account for 45% of GDP, while agriculture and allied activities account for close to 30%.

The current account deficit in 2000-01 narrowed to about 0.5% of GDP from 1.1% of GDP in 1999-00. The improvement in the current account was largely due to a more dynamic export performance, sustained buoyancy in the invisible receipts reflecting sharp increase in software service exports and private transfers and the subdued non-oil import demand..

India’s major import items are mineral fuels, precious stones and precious metals (rough diamonds, gold and silver) and capital goods. India’s largest merchandise exports are Gems and jewellery, agriculture products, ready made apparel, cotton yarn and fabrics, leather goods and handicrafts.

Under its liberalization programme, India has initiated major steps in restructuring capital flows, moving away from sovereign debt to equity inflows and currency deposits as the major form of capital inflows. India’s foreign exchange reserves consist of gold holdings, special drawing rights and foreign currency assets held by India’s apex financial institution, the Reserve Bank of India. Foreign currency holdings are the largest component of reserves and move on a day-to-day basis. Total reserves as on January 2001 stood at a record high of US$ 49.48 bn, representing eight months of import needs.

In end of 2000, external debt stood at US$ 100.38 bn, of which short-term debt (less than one-year maturity) accounted for $4.6bn. India ranks eighth among the world’s most indebted nations, and maintains a debt classification of  less indebted.

 Debt indicators are satisfactory, with external debt/ GDP ratio of 22.3% and short-term debt to reserves ratio of 8.2%, compared to the levels of 41% and 382 % in the crisis period of 1990-91.

Despite improved economic performance, a rising and unmanageable fiscal deficit has been a cause for concern and criticism for India. Fiscal deficit has been on the rise, touching 5.5% of GDP in 2000-01.

Infrastructure growth, while showing significant growth in nominal terms, has lagged behind. The acceleration in the economy in the 1990s and the pressure of high industrial growth is beginning to tell on the basic services like power, telecommunications, ports and roads which are considered to be one of the main bottlenecks to India’s achieving the set targets in the 9th five year plan (1997-2002).

India’s rationale for attracting foreign direct investment is based on tested economic principles. Economic data on India’s GDP-investment relationship indicates an incremental Capital Output Ratio (ICOR) of 4.3 i.e. sustaining a GDP growth of 7%, requires a matching investment growth of at least 30.1%. To the contrary, domestic savings growth has been falling, and currently stands at 23% of GDP, unable to sustain the growth target without external flows.

Mobilising FDI has been the main plank of economic reforms given the steady decline in availability of concessional debt flows globally, and the spin off benefits that long-term foreign equity may bring along to the Indian economy. The series of policy and facilitation measures initiated since 1991 have had a positive impact on the pattern of inflows and in 1997, FDI inflows overtook portfolio and institutional investments for the first time.

During 2000-01 FII net invest,ments were US$ 1.84 Bn. there are close to 450  registered FIIs in India,  Cumulative FII investments are of the order of US$ 10 bn.  The relaxation of investment regulations for FIIs permitting them to deal in all securities, the rejuvenation of IPOs led by technology stocks, and the emergence of new instruments such as book building placement market has revived FII interest in India.