Apr 13, 2008

Indian Economy - A Note on The Economy

A Note on The Economy

Inflation :

The rate of Inflation fell below six per cent after more than two months and stood at 5.74 per cent during the last week of 2006-07 against 6.39 per cent a week ago despite rise in prices of major food products as well as some fuel and manufactured items. This resulted in average inflation standing at 5.18 per cent for 2006-07, within RBI's projection of 5-5.5 per cent. Inflation had averaged 4.46 per cent during 2005-06.

The fall in inflation during the week ended March 31 might ease pressure on RBI to tighten monetary policy. The decline in inflation would also give some respite to the government, which has been struggling hard to bring down inflation within RBI's projection of 5-5.5 per cent. Worried over the political fallout of the continuing high prices of essential commodities, the Government decided to import additional 15 lakh tonnes of pulses over the next 6-8 months to bring down prices.

The Government is concerned that despite the import of about 18 lakh tonnes of pulses in 2006-07, the prices have not come down to the desired level. The customs duty on import of pulses has already been reduced to zero level till August 1. India is facing an estimated shortfall of 3.2 million tonnes of pulses.

Monetary situation :

Strong credit and economic growth could still see the central bank follow up a series of recent tightening with a rate rise at its April 24 policy review. The Reserve Bank of India (RBI) has raised the reserve requirement for banks three times since December to rein in cash in circulation and has increased its main lending rate by 50 basis points this calendar year. The short-term lending rate now stands at 7.75 percent, its highest in nearly 4-½ years.

Finance Minister P Chidambaram said the government and central bank wanted to moderate bank lending, which is growing at annual rates of about 30 percent, without hurting growth.

Interest rates :

Rates on the inter-bank call money market have crashed to a nineteen-month low of 1.75-2.25%. The spending activities of the government, which till end- March had parked a large sum of unspent funds with the central bank, could be responsible for the sudden spurt in liquidity. The overnight interest rates fell to their lowest in more than 19 months on Thursday as cash supplies were boosted by higher government spending and bond redemptions.

The yield on the benchmark 8.07% 2017 paper ended Apr 12 at 8.07%, up from the previous close of 8.05%.

Industrial Production :

Industrial production slowed to 11% year on year in February from a revised 11.4% in January, mainly because output of consumer goods declined 90 basis points to 7.6%. It could be a sign that consumers are beginning to indulge less as interest rates rise, because consumer durables output - which are largely based on orders from wholesale and retail dealers — fell a startling 370 basis points to 1.6%. Fifteen out of the seventeen manufacturing sectors have posted a positive growth in February.

Tax Collections :

The government is hopeful of achieving the revised direct tax collection target of Rs 2,29,272 crore for 2006-07.According to latest figures, the government has collected Rs 2,23,797.1 crore, comprising Rs 1,41,915.4 crore of corporate tax, Rs 71,011.4 crore of personal income tax, Rs 5,331.7 crore of fringe benefit tax, Rs 4,729.5 crore of securities transaction tax and Rs 505.4 crore of banking cash transaction tax. The complete data should be available by mid-April.

The government has set a higher target of Rs 2,67,000 crore for direct tax for this fiscal

The country`s customs duty revenues continue to be buoyant with collections for the Apr.-Feb. 2007 period recording a 35.27% increase to Rs 776.93 billion against Rs 574.34 billion in the same period previous year. The government has now achieved the budget estimate of Rs 770.66 billion for the customs duty collections in 2006-07. It had recently revised the customs duty collections target for 2006-07 to Rs 818 billion, which was expected to be achieved comfortably going by the current trend in collections.

However, excise duty collections continue to be a `laggard` and a `worrisome tax` for the government. In Apr.-Feb. this fiscal, excise duty collections grew 5.8% to Rs 1,015.71 billion against Rs 960.29 billion in the same period previous year. Going by the current trend in excise duty collections, it may be difficult for the government to achieve the revised estimate of Rs 1,172.66 billion for 2006-07. The finance minister, P Chidambaram, had in the recent budget lowered the excise duty collection target from Rs 1,190 billion to Rs 1,172.66 billion. He has also said that the government would pay more attention to excise duty in 2007-08.

Official data released by the government showed service tax collections of the centre going up 64.42 % to Rs 288.77 billion during Apr.-Jan. 2007 against Rs 175.63 billion in the same period previous year.

Source - HDFC