A) REVIEW OF THE GENERAL ECONOMIC ENVIRONMENT AND THE INVESTMENT CLIMATE

General Economic Environment and the Investment Climate

The overall economic activity as reflected in the real GDP growth rate, showed a distinct deceleration from 7.5 per cent in 1996-97 to 5.0 per cent in 1997-98. This fall was caused by the decline in the growth of industrial and agricultural sectors. While the industrial sector registered a decline in its growth from 7.1 per cent in 1996-97 to 4.2 per cent in 1997-98, the agricultural sector suffered a decline in the level of production by 3.7 per cent in 1997-98.

The growth of industrial production in 1997-98 was contributed by an increase of 4.9 per cent in the output of mining, 3.6 per cent in manufacturing and 6.8 per cent in electricity. According to use-based classification, while intermediate goods and basic goods grew by 6.9 per cent and 7.0 per cent respectively, consumer goods recorded a growth of 4.6 per cent. The performance of capital goods detoriated substantially as it registered a decline of 4.0 per cent. Thus, the decline in investment appears to be one of the important factors in the continuing deceleration of industrial growth in 1997-98.

Total gross domestic savings, increased to 26.1 per cent of GDP at current market prices in 1996-97 which was primarily on account of rise in private savings. The private savings as a percentage of GDP increased from 23 per cent in 1995-96 to 24.2 per cent in 1996-97. Some of the factors which contributed to improvement in saving rate included, high growth in GDP, low rate of inflation and the array of economic and financial measures undertaken over the past few years. There was a structural change in the composition of household sector savings. The financial savings of households sector as a percentage of GDP increased by 2.1 percentage points to 10.7 per cent in 1996-97 from 8.6 per cent in 1995-96, whereas household savings in physical asset as a proportion of GDP declined from 10.3 per cent in 1995-96 to 9.6 per cent in 1996-97.

The primary market showed a downward trend during the year with the capital raised declining to Rs 4,569.95 crore in 1997-98 from Rs 14,275.98 crore in the previous year. The share prices registered significant increases in the first half of 1997-98 but declining trend set in thereafter. The BSE sensex which rose from 3755 in May 1997 to a high of 4306 in July 1997 and declined to 3224 in January 1998 before climbing to 3893 in March 1998. The financial crisis in the Asian markets had a limited impact on the prices on the Indian stock exchanges and on the foreign portfolio flows during the year. The Indian securities markets functioned uninterrupted without trading halts or broker defaults.

A noticeable development in the capital market was the emerging trend toward integration of stock market with other financial markets. The behaviour of stock prices was also being influenced by exchange rate movements primarily on account of foreign portfolio flows into the market. Similarly the credit policy announcements by the Reserve Bank of India which signalled changes in Bank Rate too influenced stock prices. The integration of the various financial markets would have important policy implications for the SEBI, the RBI and the Government, warranting greater degree of co-ordination.

Table I.1: Key Indicators of the Indian Economy

Gross domestic product figures are at factor cost. 2- Index of industrial production 1980-81 = 100.

A - Advance estimates; P - Provisional; Q - Quick estimates.

Source: Economic Survey 1996-97 and 1997-98.