Economic Survey

India Economic Survey 2004-05

Sustaining Inclusive Growth

GDP Growth (Actual)

7.5%

Forecast: 7.0-7.5%

Inflation (CPI)

4.2%

Consumer Price Index

Wholesale Inflation (WPI)

6.5%

Wholesale Price Index

Fiscal Deficit

3.9% GDP

Union Budget (Actuals)

Key Theme

Sustaining Inclusive Growth

Key Highlights

GDP growth held strong at 7.5%, at the upper end of the forecast range, confirming the growth acceleration was structural
The new UPA government introduced the National Rural Employment Guarantee Act (NREGA) framework
WPI inflation rose to 6.5% driven by a spike in global crude oil prices from $30 to $55 per barrel
Manufacturing continued expanding at 8.7%, the strongest industrial performance in several years
Software exports surpassed $17 billion, firmly establishing India as the global back office
The current account recorded a small deficit of 0.4% of GDP after a surplus the previous year
Sensex rallied past 6,600 despite the initial "May 2004 crash" triggered by the unexpected election result
Tax revenue buoyancy improved significantly with the tax-to-GDP ratio rising by 0.5 percentage points
The implementation of VAT at the state level began, replacing the cascading sales tax regime in several states
FDI policy was liberalized further with higher sectoral caps in telecom and construction

Policy Recommendations

1 Address rising oil prices through a transition from administered pricing to market-linked mechanisms
2 Scale up the rural employment guarantee programme with strong implementation safeguards
3 Accelerate second-generation reforms in agriculture: marketing, credit, insurance, and irrigation
4 Maintain the FRBM fiscal consolidation path despite pressures for increased social spending
5 Push for comprehensive goods and services tax to rationalize the indirect tax structure
6 Develop the corporate bond market as an alternative to bank-dominated financing
7 Invest in urban infrastructure to manage rapid urbanization pressures
8 Strengthen financial regulation in response to the growing complexity of capital markets
9 Expand health and education spending as a share of GDP toward benchmark levels
10 Pursue regional trade agreements while advocating for multilateral trade liberalization under the WTO

Survey Predictions vs Budget Outcomes

Comparison between Economic Survey predictions and actual Union Budget allocations

Metric	Survey Prediction	Actual Budget	Deviation
GDP Growth (%)	7.0-7.5	7.5	At upper end of forecast — sustained momentum from investment and consumption cycles
Fiscal Deficit (% of GDP)	4.4	4.0	-0.4% — better than expected due to strong tax revenue performance
WPI Inflation (%)	4.5-5.0	6.5	+1.5 to +2.0% — global oil price surge was the primary driver
Oil Import Bill ($ Bn)	25-28	34	+$6-9 Bn — crude prices nearly doubled during the year
FDI Inflows ($ Bn)	5-6	5.5	Within range — policy liberalization kept inflows stable

Union Budget 2004-05 Summary

Corresponding budget data to read alongside the Economic Survey Actuals

Total Receipts

5.05 lakh crore

Total Expenditure

4.98 lakh crore

Fiscal Deficit

1.26 lakh crore

Revenue Deficit

75,971 crore

View Union Budget 2004-05 in detail

Detailed Analysis

The Economic Survey for 2004-05 was written during a period of political transition and policy recalibration. The surprise victory of the Congress-led United Progressive Alliance (UPA) in the May 2004 general elections — which triggered a historic 800-point crash in the Sensex on the day results were announced — had raised questions about the continuity of economic reforms. Finance Minister P. Chidambaram and the new team at the Finance Ministry, with Ashok Lahiri continuing as Chief Economic Adviser, had the task of reassuring markets while also delivering on the UPA's mandate for more inclusive growth. GDP growth came in at 7.5 per cent, at the upper end of the forecast range and confirming that the previous year's 8 per cent performance was not a one-off. The composition of growth was shifting: while agriculture contributed modestly (growing at 0.7 per cent after the bumper harvest of 2003-04), manufacturing was the star performer at 8.7 per cent — the strongest industrial growth in several years. Services continued their steady march at 8.7 per cent as well, with financial services, trade, and communications leading the sectoral tally. The year's most consequential policy development was the conceptualization and introduction of the National Rural Employment Guarantee Act (NREGA), which promised 100 days of guaranteed wage employment per year to every rural household. The Survey engaged with the programme analytically, discussing both its potential as a safety net and the risks of implementation failure, leakage, and fiscal cost. The estimated annual cost was Rs 20,000-40,000 crore depending on uptake and wage levels, a sum that worried fiscal conservatives but that the Survey argued was manageable if the programme was well-designed and gradually scaled up. Inflation was the year's most visible economic challenge. WPI inflation surged to 6.5 per cent, driven principally by the spike in global crude oil prices, which rose from around $30 per barrel at the start of the year to $55 by year-end. India's oil import bill jumped to $34 billion, roughly $6-9 billion more than anticipated, and the petroleum subsidy burden grew correspondingly. The government partially passed through oil prices to consumers, but the political sensitivity of fuel prices — especially diesel, which affected transport costs and therefore food prices — constrained the extent of the adjustment. The Survey advocated a full deregulation of petroleum pricing, a recommendation that would take another six years to be partially implemented. On the fiscal front, the picture was more encouraging than the headline deficit numbers suggested. The Centre's fiscal deficit narrowed to 4.0 per cent of GDP from 4.5 per cent the previous year, beating the FRBM target for the year. This was achieved primarily through revenue buoyancy: tax collections grew sharply, reflecting both the economic expansion and improvements in tax administration. The tax-to-GDP ratio rose by half a percentage point, a meaningful improvement. The introduction of VAT at the state level — replacing the cascading sales tax in several states — was expected to further improve revenue efficiency, though implementation was uneven. The external sector was adapting to new realities. After recording a current account surplus in 2003-04, the account swung back to a modest deficit of 0.4 per cent of GDP, primarily because the oil import bill surged. Non-oil merchandise exports grew robustly at over 20 per cent, and software exports surpassed $17 billion. Foreign exchange reserves, now comfortably above $130 billion, continued to grow, though the rate of accumulation slowed. The Survey discussed the "impossible trinity" of monetary policy — the challenge of simultaneously maintaining an open capital account, stable exchange rate, and independent monetary policy — with refreshing candour, acknowledging that the RBI's intervention-heavy approach had trade-offs. The financial markets told a story of resilience and recovery. After the dramatic May 2004 crash, the Sensex recovered swiftly, rallying past 6,600 by year-end as investors realized that the new government was committed to fiscal responsibility and reform continuity. FII inflows remained strong, and the domestic mutual fund industry was growing rapidly, bringing retail savings into the equity market. Corporate bond issuance also picked up, though the market remained shallow compared to bank-intermediated finance. Investment was gathering momentum across the economy. Gross fixed capital formation rose to 26.3 per cent of GDP, up from 24.1 per cent two years earlier, signaling that the corporate sector was moving from balance-sheet repair to capacity expansion. The Survey identified this upturn in the investment cycle as the single most important driver of medium-term growth and urged policy measures — streamlined approvals, infrastructure investment, and financial sector development — to sustain it. Employment patterns were evolving. The 61st Round of the National Sample Survey, whose preliminary results were available, suggested that formal sector employment was growing slowly while self-employment and casual labour remained dominant. The unemployment rate among educated youth was a particular concern. The Survey's discussion of the "jobless growth" critique was nuanced: it argued that GDP growth was creating employment, but not of the quality and quantity that the labour force needed, and that addressing this required both labour market reforms and massive investment in education and skills. The Survey's chapter on the social sector highlighted India's paradoxes: a country that could produce world-class software engineers but where 35 per cent of the adult population was illiterate; a country whose pharmaceutical industry supplied affordable medicines globally but whose child malnutrition rates rivalled sub-Saharan Africa. The incoming government's emphasis on inclusive growth — reflected in the NREGA, increased allocation for Sarva Shiksha Abhiyan, and plans for an expanded public health programme — was welcomed by the Survey, with the important caveat that expenditure quality mattered as much as quantity. The pharmaceutical and biotechnology sectors were quietly building the foundations for India's emergence as the "pharmacy of the world." Generic drug manufacturers were expanding their global presence, winning FDA approvals and supplying affordable medicines to developing countries, while a nascent biotech industry was taking root in Hyderabad and Bangalore. The tsunami of December 2004, which devastated coastal communities in Tamil Nadu, Andhra Pradesh, and the Andaman and Nicobar Islands, received attention in the Survey's assessment of disaster preparedness. While the economic impact on GDP was limited — the affected areas contributed a small share of national output — the human cost was enormous, with over 10,000 lives lost and hundreds of thousands displaced. The Survey recommended establishing a comprehensive disaster management framework, including early warning systems, coastal zone regulations, and dedicated response mechanisms. The Disaster Management Act of 2005, enacted in the wake of the tsunami, was cited as a positive development. The automobile sector emerged as a bellwether of India's consumption story during this period. Car sales grew by over 15 per cent, two-wheeler sales by 20 per cent, and the commercial vehicle segment — sensitive to industrial and infrastructure activity — posted even stronger numbers. The entry of Korean, Japanese, and European manufacturers had transformed the market from the Ambassador-Maruti duopoly of the 1990s into a vibrant, competitive industry. The Survey noted that the automotive sector's supply chain was becoming a significant employer, with ancillary units in towns like Gurgaon, Pune, and Chennai creating tens of thousands of manufacturing jobs. Looking forward, the Survey projected growth of 7-8 per cent for 2005-06, contingent on a normal monsoon, manageable oil prices, and continued reform momentum. In the event, this proved conservative: the economy was heading toward double-digit growth rates, propelled by a global liquidity surge, a domestic investment boom, and a financial sector that was only beginning to discover the possibilities of credit expansion.

Source: Official Economic Survey Document

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Accelerating Growth

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India's Growth Story

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