On June 30, 2005 the Central Statistical Organisation (CSO) released estimates of real GDP growth for the fourth quarter (January-March or 2004-05 and reaffirmed its advance estimates of real GDP growth for the full year 2004-05 at 6.9 per cent. Noteworthy features of the pick-up in real activity in Q4 over Q3 (October-December, 2004) which are expected to have a bearing on Q1(April-June), 2005-06 were: (i) the turnaround in agriculture brought about by the year-on-year increase in rabi output; (ii) the sustained expansion of the service sector underpinned by the performance of trade, hotels, restaurants, transport and communication, and community, social and personal services (Table 1).

Quarterly estimates of real GDP growth for 2005-06 would be released ^Q1^, by the CSO at the end of September, 2005. The movements in key underlying factors such as the progress of the South-West monsoon, industrial production and associated indicators of business and investment expectations, and lead information on drivers of service sector activity provide a proximate view of real sector developments in the quarter.

According to the India Meteorological Department (IMD) forecast on July 6, 2005 the rainfall during the South-West monsoon season (June-September) 2005 for the country as a whole is likely to be 98 per cent of the Long Period Average (LPA) with a model error of +/- 4 per cent. The arrival of the monsoon was, however, delayed by almost a week. Moreover, the progress of the monsoon was weak till June 22, 2005 and the cumulative rainfall was 49 per cent below normal. The monsoon picked up in the last week of June, partly offsetting the earlier shortfall. The cumulative rainfall recorded during the South-West monsoon season 2005 so far (June 1 to July 13, 2005) was one per cent above normal as against 10 per cent below normal a year ago. Of the 36 meteorological sub-divisions, cumulative rainfall was deficient/scanty/ no rain in 8 sub-divisions (16 sub-divisions during last year) (Chart 1).

At the district level, 61 per cent of the total number of districts (525) reported excess/normal rainfall, while the rest received deficient/scanty/no rain. The total live water storage in the 76 major reservoirs ¹ as on July 15, 2005 was 28 per cent of the Full Reservoir Level (FRL) as compared with 20 per cent a year ago. The water storage position was 141 per cent of last year’s level.

The area coverage up to July 11, 2005 was lower in the case of all the kharif crops (Table 2).

production of cotton is expected to stage a recovery, while that of oilseeds, sugarcane and jute and mesta is likely to record a decline.

The total stocks of foodgrains with the Food Corporation of India (FCI) and State Government agencies stood at 28.5 million tonnes as on May 1, 2005, down by 12.0 per cent from a year ago. Total procurement of rice and wheat up to June 30, 2005 was about nine per cent lower while the total offtake of foodgrains (during April 1 to April 30, 2005) was around two per cent lower than in the previous year. Foodstocks continue to remain higher than the revised buffer stock norms (Table 4).

Industrial production was buoyant in April-May, 2005 with growth accelerating in the manufacturing sector. The electricity sector recorded a strong pick-up during May, 2005 and the cumulative growth during April-May, 2005 was marginally higher than a year ago. On the other hand, the mining sector remained subdued against a high base a year ago and a decline in production in mines (other than coal mining) (Chart 2).

According to the use-based classification, the capital goods sector maintained high growth, reflecting increase in investment and export demand. The consumer durables sector picked up strongly driven by demand for white goods and passenger cars and facilitated by ease in availability of financing. Consumer non-durables also recorded a substantial growth, reflecting low base and a turnaround in growth of food products. Basic goods accelerated during May, 2005 and the cumulative growth during April-May was higher than a year ago. Intermediate goods, however, recorded deceleration, inter alia, due to a decline in production of petroleum refinery products (Chart 3).

At the two-digit manufacturing group level, industrial performance in April-May, 2005 recorded an improvement over a year ago in terms of number of

industries recording accelerated growth. Only three industry groups recorded a decline as compared with six groups during the corresponding period of the previous year (Table 5).

The subdued performance of the infrastructure sector since December 2004 persisted during April-May, 2005 (Chart 4). The core infrastructure industries, which have a weight of 26.7 per cent in the Index of Industrial Production (IIP), were adversely affected by a reduced availability of gas for gas-based thermal plants; fall in crude petroleum production; sharp increase in international crude oil prices; below capacity operation of some big refineries; downturn in global finished steel prices; and rising input costs of power and freight for the cement sector. On the other hand, coal production rose sharply on the back of strong Chinese demand as also from domestic user industries such as power, steel and cement.

Various business confidence surveys suggest that the industrial activity will remain buoyant and the outlook will be positive (Table 6). The National Council of Applied Economic Research (NCAER) business confidence index (BCI) rose during April-June, 2005 - the third quarter in succession. Over one-half of respondents expect new investment plans for the year 2005-06 with 42.7 per cent planning new investments for capacity expansion. About 40 per cent envisage quality/efficiency improvement and the remaining 17.2 per cent propose investment in new lines of business. The Confederation of Indian Industries’ (CII) BCI also shows an improvement for April-September 2005 over the preceding half-yearly index. About 58 per cent of the respondent firms expected capacity utilisation between 75-100 per cent while another 22 per cent expected capacity utilisation to exceed 100 per cent. More than one-third surveyed companies expected an increase in employment. Around four-fifth of the respondents expected increases in new orders from the domestic market and also planned to make fresh investments during 2005-06. Nearly three-fourth of exporters expected export growth to remain robust.

The quarterly Business Confidence Survey conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI) during March-April 2005 indicates that the industrial sector is optimistic about export prospects, investments and making additions to the workforce. The BCI remains close to the July-September 2004 level and in the ‘significantly optimistic’ zone. 69 per cent of the respondents expected overall economic conditions to be ‘moderately to substantially better’ in the April-September 2005 period. For the majority (91 per cent) of the participating companies, availability of credit is not a constraining factor, while 83 per cent of respondents were ‘comfortable’ as far as the cost of credit is concerned.

According to the Reserve Bank’s latest Industrial Outlook Survey, the Business Confidence Index for July-September 2005 quarter stood at 119.6, lower by only 1.1 percentage point from the previous quarter’s level (Chart 5). The assessment about the overall business situation for April-June 2005 showed a decline in the level of confidence over the previous quarter although it remained unchanged from the level during the corresponding quarter a year ago.

Responses to the survey suggest an improvement in the overall business situation, production, order books, employment, exports, imports, selling prices and profit margins during the quarter July-September, 2005 vis-à-vis April-June,

2005. On the other hand, capacity utilisation is expected to be lower in July-September 2005 (Table 7). While the overall financial situation is seen as remaining unchanged during July-September 2005, working capital finance requirement is expected to increase, though availability of finance is expected to be broadly unchanged. More manufacturing corporates are expecting a rise in the cost of

raw materials while a bulk of the respondents – almost 85 per cent – felt that the inventory of raw materials as well as finished goods and selling prices (74 per cent) will not change during July-September 2005.

About two-thirds of the companies surveyed are planning investment in fixed capital during 2005-06 somewhat higher than during 2004-05 (61.6 per cent). Industry-wise, fertilisers, pharmaceuticals and medicines, transport equipment and electrical machinery evinced higher interest in investment. Companies identified existing demand, availability of internal finance and net return on investment as factors that encourage higher investment while availability of man power was reported as a discouraging factor.

Lead indicators of services sector performance for Q1,2005-06 suggest a continuing buoyancy (Table 8). Transport sector performance was led by increase in revenue earning freight of the railways. Substantial growth continued to be witnessed in cargo handled at major ports. Services sector growth has also been propelled by the Information Technology (IT) sector and IT Enabled Services (ITES)/Business Process Outsourcing (BPO).

The generally positive developments in agriculture, industry and services coupled with upbeat business confidence and expectations in the first quarter have imparted a degree of optimism regarding growth prospects for 2005-06. Forecasts place overall growth during 2005-06 in the range of 6.0 to 7.2 per cent (Table 9).