Economic Survey

India Economic Survey 2003-04

Accelerating Growth

GDP Growth (Actual)

8.0%

Forecast: 6.0-7.0%

Inflation (CPI)

3.8%

Consumer Price Index

Wholesale Inflation (WPI)

5.5%

Wholesale Price Index

Fiscal Deficit

4.5% GDP

Union Budget (Actuals)

Key Theme

Accelerating Growth

Key Highlights

GDP growth surged to 8.0%, the highest in over a decade, far exceeding the 6.0-7.0% forecast
Agricultural output rebounded by over 9% as a strong monsoon reversed the previous year's drought losses
Manufacturing sector expanded by 7.4% on improving corporate profitability and rising capacity utilization
Services sector grew at 8.5%, with financial services and IT leading the charge
Sensex crossed 6,000 for the first time, buoyed by strong corporate earnings and FII inflows
Foreign exchange reserves breached $100 billion, placing India among the top reserve holders globally
FRBM targets galvanized fiscal consolidation efforts with the revenue deficit narrowing
FDI inflows improved to $4.7 billion though still lagged behind China and ASEAN peers
The telecom revolution continued with mobile subscriber base crossing 35 million
Corporate India emerged leaner and more competitive after the restructuring of the previous three years
The rural economy showed resilience with improving farm incomes and rising FMCG demand

Policy Recommendations

1 Seize the growth momentum to push through deeper structural reforms in factor markets
2 Accelerate infrastructure investment through PPP frameworks and viability gap funding
3 Reform agricultural markets comprehensively to link farmers to consumers and reduce intermediation
4 Pursue a phased reduction in customs tariffs toward ASEAN levels to boost manufacturing competitiveness
5 Strengthen the financial sector through banking consolidation and capital market development
6 Invest in skills and vocational training to capitalize on the demographic dividend
7 Implement Value Added Tax at the state level to replace the cascading sales tax regime
8 Reform the civil service to improve governance quality and reduce corruption
9 Expand health insurance coverage to reduce catastrophic out-of-pocket expenditure
10 Develop special economic zones as engines of export-oriented manufacturing

Survey Predictions vs Budget Outcomes

Comparison between Economic Survey predictions and actual Union Budget allocations

Metric	Survey Prediction	Actual Budget	Deviation
GDP Growth (%)	6.0-7.0	8.0	+1.0 to +2.0% — strong agricultural recovery and industrial buoyancy drove upside surprise
Fiscal Deficit (% of GDP)	5.6	4.5	-1.1% — sharp improvement from buoyant tax revenues and expenditure control
Agricultural Growth (%)	3.0-4.0	9.0+	+5.0 to +6.0% — exceptional monsoon-driven rebound from drought base
Forex Reserves ($ Bn)	85-90	113	+$23-28 Bn — massive capital inflows exceeded all projections
FII Inflows ($ Bn)	2-3	10.9	+$7.9-8.9 Bn — global liquidity surge and India growth story attracted record flows

Union Budget 2003-04 Summary

Corresponding budget data to read alongside the Economic Survey Actuals

Total Receipts

4.6 lakh crore

Total Expenditure

4.71 lakh crore

Fiscal Deficit

1.32 lakh crore

Revenue Deficit

98,196 crore

View Union Budget 2003-04 in detail

Detailed Analysis

The Economic Survey for 2003-04, the last prepared by Ashok Lahiri as Chief Economic Adviser, had the happy task of documenting one of the most impressive growth accelerations in India's economic history. GDP growth surged to 8.0 per cent — a number that exceeded even the most optimistic forecasts and represented the strongest performance since the reform era began. India was no longer merely a "potential" growth story; it was delivering results that commanded global attention. The recovery was broad-based, but agriculture was its most dramatic component. After the devastating drought of 2002-03, when farm output had contracted by 7 per cent, the monsoon of 2003 was bountiful. Rainfall was well distributed across the country, and agriculture bounced back with growth exceeding 9 per cent. This was largely a base effect — production was recovering to trend rather than surging above it — but the contrast with the previous year's distress was striking. Foodgrain production climbed back above 210 million tonnes, and the improvement in rural purchasing power cascaded through the economy, boosting demand for everything from two-wheelers to consumer durables. Manufacturing emerged as the breakout sector. After years of stagnation and corporate restructuring, Indian industry was entering a new cycle. Capacity utilization rates rose above 80 per cent in several industries, corporate balance sheets were the healthiest in a decade — thanks to three years of debt reduction and cost-cutting — and interest rates were at their lowest in years. The Survey noted a striking improvement in corporate profitability: the operating margin of listed companies rose from 15 per cent to over 18 per cent, and return on equity improved correspondingly. This set the stage for the investment boom that would characterize the next several years. The services sector continued its steady expansion at 8.5 per cent, with financial services and IT being the primary growth engines. India's software exports crossed $12 billion, and the BPO industry was gaining scale rapidly. International attention was focused on the "outsourcing" phenomenon — a U.S. presidential election year meant that Indian IT became a political issue in America — but the Survey argued, correctly, that outsourcing was a natural consequence of globalization and that attempts to restrict it would prove futile in the long run. Perhaps the most remarkable development of the year was the surge in foreign exchange reserves, which breached $100 billion — a level that would have seemed fantastical just five years earlier, when reserves had been below $30 billion. The accumulation was driven by massive capital inflows: FII investments surged to $10.9 billion (against a forecast of $2-3 billion), while IT exports and remittances continued to provide strong current account support. The RBI's intervention to prevent excessive rupee appreciation generated a sterilization challenge, and the Survey discussed the costs and benefits of reserve accumulation with unusual analytical depth. The fiscal picture was improving, though not as fast as reformers wanted. The Centre's fiscal deficit narrowed to 4.5 per cent of GDP from 5.9 per cent the previous year — a sharp improvement that reflected buoyant tax revenues (particularly excise and customs, which benefited from higher economic activity) and the demonstration effect of the newly enacted FRBM legislation. Revenue deficit also narrowed, and the Survey expressed cautious optimism that the FRBM targets could be met if growth was sustained and expenditure discipline maintained. The equity market reflected the improved economic fundamentals. The Sensex crossed 6,000 for the first time, driven by record FII inflows and a re-rating of Indian corporate earnings. The IPO market revived after years of dormancy, and corporate bond issuance picked up. The Survey noted that this financial market exuberance, while welcome, carried risks: asset price inflation could create wealth effects that boosted consumption but also sowed the seeds of future instability. This warning, though somewhat premature for India, proved globally prescient given the financial excesses that were building elsewhere. Infrastructure remained the economy's Achilles heel. The power deficit was estimated at 12-15 per cent during peak hours, roads were inadequate for the growing vehicle fleet, and port turnaround times were among the worst in Asia. The Survey estimated that India needed infrastructure investment of 7-8 per cent of GDP (against the existing 3-4 per cent) to sustain high growth. It recommended an expanded role for public-private partnerships, viability gap funding for commercially unviable but socially necessary projects, and an overhaul of the regulatory framework. The state-level economic picture was becoming more differentiated. Gujarat, Maharashtra, and the southern states were growing faster than the national average, attracting disproportionate shares of private investment. The northern and eastern states — Bihar, UP, Orissa, Jharkhand — were falling further behind. The Survey flagged this divergence as a potential source of social tension and recommended addressing it through improved governance, infrastructure investment, and fiscal transfers. The gold and foreign exchange market dynamics were remarkable. India's reserves had surged from $55 billion at the start of the fiscal year to over $113 billion by March 2004, an accumulation pace that exceeded even China's during the same period. The RBI was purchasing dollars aggressively to prevent rupee appreciation, and the resulting liquidity injection into the domestic economy was keeping interest rates low and credit conditions easy. The Market Stabilization Scheme, under which the RBI issued bonds specifically to sterilize the liquidity impact of its forex intervention, was introduced during this period — an institutional innovation born of the unusual macroeconomic circumstances. The monetary policy environment was uniquely accommodative during this period. With WPI inflation at a moderate 5.5 per cent and the economy recovering from the drought-induced slowdown, the RBI under Governor Y.V. Reddy maintained a stance of measured easing. Interest rates were at multi-year lows, and the banking system was flush with liquidity from the surge in capital inflows. The reverse repo rate — the policy rate at the time — was at 4.5 per cent, and government bond yields had fallen to levels that made corporate borrowing historically cheap. This monetary environment was a crucial enabler of the investment cycle that was beginning: companies could finance expansion plans at real interest rates that were barely positive. The telecom sector epitomized the new dynamism. The mobile subscriber base crossed 35 million, and the monthly additions were accelerating. The competition unleashed by the New Telecom Policy of 1999 was driving prices down and coverage up at a pace that few had predicted. The Survey highlighted telecom as a case study in how competition and private investment could transform a sector that had been synonymous with scarcity and corruption under the government monopoly. It estimated that the telecom revolution was adding 1-2 per cent to GDP growth through productivity improvements across the economy. The Survey's engagement with the "India Shining" campaign — the BJP-led NDA government's pre-election messaging that India's growth story was a success — was understandably cautious, given that the Survey was an official document. But it did note, in its characteristically measured prose, that while the aggregate growth numbers were indeed impressive, the distribution of gains was uneven. Rural India, which accounted for 70 per cent of the population, had experienced two difficult years, and the agricultural sector's structural weaknesses remained unaddressed. The disconnect between headline GDP growth and rural distress would prove to be the central issue in the upcoming general election. Looking ahead, the Survey projected growth of 7-8 per cent for 2004-05, noting that the investment cycle was turning, global conditions were supportive, and the reform agenda — despite political uncertainties with the approaching general election — had a momentum of its own. This forecast proved accurate, though the political landscape would shift dramatically: the NDA government, riding the "India Shining" campaign, would lose the May 2004 general election, ushering in the UPA era.

Source: Official Economic Survey Document

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Economic Survey 2002-03

Reform and Recovery

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Economic Survey 2004-05

Sustaining Inclusive Growth

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