The Hindu : Slow economic recovery forecast

Online edition of India's National Newspaper
Tuesday, Jul 16, 2002

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Business

Slow economic recovery forecast

By Our Special Correspondent

NEW DELHI JULY 15. The Institute of Economic Growth (IEG) has forecast that foreign institutional investment (FII) will be negative in the first quarter of the current fiscal while industrial recovery will continue to be slow. It has also projected, on the basis of data up to May, that the average export growth will be 0.53 per cent and import growth will be a negative 3.2 per cent for the next three months.

Even on industrial growth, the IEG's Development Planning Centre is not sanguine about industrial growth as it maintains that the much talked about recovery is not occurring in a strong way.

It says low investors' confidence due to war fears in the early part of the year and demand constraints had affected the industrial sector. Though the war fear has faded, the outlook is still not positive for investors. Given this situation, it maintains that recovery in the industrial sector may not be feasible over May-July period.

In its monthly report, the think tank suggests that for the industrial sector to grow, the government should try to reduce the existing gap between foreign investment approvals and actual inflows. However, it says expected increase in inflation and increase in non-food credit may to some extent improve industrial performance.

On FII, it recalls it rose by $276 million in March this year due to high domestic interest rate as compared to foreign interest rates, exchange rate depreciation and the government decision to allow FII in private sector banks. In subsequent months, it expects there would be FII outflow given the reduction in the interest rates, exchange rate appreciation and the tension in the Indo-Pak border.

On the trade front, it does not expect any buoyancy in exports during the period May-July. The decline in exports recorded during May is attributed to the slowdown in the world economy and decline in the pace of rupee depreciation.

The appreciation of the exchange rate in June and the marginal increase in the domestic inflation rate may lead to further decline in export growth in the coming months, it is pointed out.

As for the dip in imports, these are said to be largely due to rupee depreciation, domestic slowdown and fall in world oil prices since May. With no sign of recovery in the domestic economy, the think tank expects imports to decline further though exchange rate appreciation and a slight rise in inflation could be a moderating factor.

Foreign exchange reserves, however, are projected to rise to $59 billion by the end of September from $57 billion in June. The main factor for the buoyant reserves position is said to be continued buying of foreign exchange by banks on behalf of the Reserve Bank of India to keep the rupee value at low levels.

Contracting trade deficit and positive attitude towards FDI may further help increase reserves though fall in domestic interest rates may dampen foreign investment, it is stated.

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