Economic Survey

India Economic Survey 2005-06

India's Growth Story

GDP Growth (Actual)

9.5%

Forecast: 7.0-7.5%

Inflation (CPI)

4.4%

Consumer Price Index

Wholesale Inflation (WPI)

4.4%

Wholesale Price Index

Fiscal Deficit

3.9% GDP

Union Budget (Actuals)

Key Theme

India's Growth Story

Key Highlights

GDP growth surged to 9.5%, massively exceeding the 7.0-7.5% forecast and the fastest expansion in eighteen years
Manufacturing sector grew at 9.1%, driven by robust domestic demand and improving export competitiveness
Services sector expanded by 10.9%, powered by IT, financial services, and telecommunications
The investment rate climbed to 33.8% of GDP, the highest in Indian economic history to that point
WPI and CPI inflation converged at 4.4%, a moderate level despite high global commodity prices
Credit growth exceeded 30%, the most aggressive bank lending expansion in decades
Forex reserves crossed $150 billion as capital inflows remained strong
NREGA was launched on February 2, 2006 in 200 districts, marking a new era in social protection
The Sensex crossed 10,000 for the first time, reflecting exuberant investor confidence
Special Economic Zones Act was notified, sparking intense debate about land acquisition and tax concessions
India emerged as the world's fastest-growing telecom market with subscriber additions exceeding 5 million per month

Policy Recommendations

1 Manage the credit boom prudently to avoid asset price bubbles and systemic risk
2 Invest in infrastructure at 8-10% of GDP through expanded PPP frameworks
3 Reform agricultural marketing and implement the model APMC Act across states
4 Modernize labor laws to balance worker protection with employer flexibility
5 Strengthen higher education by allowing greater private and foreign participation
6 Develop the domestic bond market to reduce dependence on bank-intermediated finance
7 Pursue energy security through diversification of sources and promotion of renewables
8 Accelerate the SEZ programme while addressing concerns about agricultural land conversion
9 Improve urban governance capacity to manage rapid urbanization
10 Maintain fiscal discipline despite buoyant revenue to build buffers against future downturns

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	9.5	+2.0 to +2.5% — spectacular outperformance driven by investment and credit expansion
Fiscal Deficit (% of GDP)	4.1	4.0	-0.1% — broadly on track, benefiting from strong tax buoyancy
Investment Rate (% of GDP)	28-30	33.8	+3.8 to +5.8% — investment boom exceeded all projections
Credit Growth (%)	15-20	30+	+10 to +15% — aggressive bank lending raised financial stability concerns
Services Growth (%)	8.5-9.0	10.9	+1.9 to +2.4% — financial services and telecom far exceeded expectations

Union Budget 2005-06 Summary

Corresponding budget data to read alongside the Economic Survey Actuals

Total Receipts

5.06 lakh crore

Total Expenditure

5.06 lakh crore

Fiscal Deficit

1.46 lakh crore

Revenue Deficit

91,914 crore

View Union Budget 2005-06 in detail

Detailed Analysis

The Economic Survey for 2005-06, the first prepared under the new Chief Economic Adviser Arvind Virmani, documented an economy in overdrive. GDP growth had accelerated to an astonishing 9.5 per cent — the fastest expansion in eighteen years and a full two percentage points above the upper end of the official forecast. India was no longer merely an emerging market with promise; it was a growth engine that the world was taking very seriously. Goldman Sachs' "BRIC" thesis, which had seemed speculative when first published in 2003, was being validated quarter by quarter. The headline number concealed an even more remarkable story in the details. Manufacturing grew at 9.1 per cent, driven by domestic demand, improving capacity utilization, and a boom in corporate capital expenditure. Automobiles, cement, steel, consumer durables — every industrial segment was firing. The IIP regularly posted double-digit growth months. Services expanded by 10.9 per cent, with financial services growing at a staggering pace as banks aggressively expanded lending and the stock market surged. IT exports crossed $23 billion, and the BPO industry had evolved into a sophisticated ecosystem handling everything from financial back-office operations to pharmaceutical research. The investment boom was the signature feature of the year. Gross fixed capital formation surged to 33.8 per cent of GDP, the highest in Indian history. Corporate India was investing at a pace that reflected both genuine opportunity and, in some cases, the herd instinct that characterizes boom periods. Real estate projects, special economic zones, power plants, steel mills, highways — the scale of planned investment was enormous. The Survey estimated that projects worth over Rs 5 lakh crore were under implementation or at an advanced stage of planning, a number that would have been inconceivable five years earlier. Much of this investment was financed by credit. Bank credit grew by over 30 per cent during the year — the most aggressive lending expansion in decades. Housing loans, personal loans, and credit to the commercial sector all surged. The Survey, to its credit, was measured in its assessment: while acknowledging that credit expansion was a natural consequence of higher growth and improving financial intermediation, it warned that sustained growth above 25 per cent could generate asset price bubbles and create systemic vulnerabilities. This caution would prove well-founded, though the reckoning was still a few years away. The stock market was in euphoric territory. The Sensex crossed 10,000 for the first time in February 2006, driven by record FII inflows, strong corporate earnings, and a narrative of structural transformation. Initial public offerings were oversubscribed by extraordinary multiples, and retail investor participation was growing through mutual funds. The Survey discussed the wealth effect of rising asset prices — particularly real estate, where prices in major cities had appreciated by 30-50 per cent over two years — and its implications for consumption demand and savings patterns. The policy landscape was reshaped by two major initiatives. First, NREGA (the National Rural Employment Guarantee Act) was formally launched on February 2, 2006, in 200 districts. The Survey analyzed the programme's early implementation experience, noting the challenges of creating productive assets through employment generation, managing wage payments, and ensuring that the programme reached the poorest households. Second, the Special Economic Zones Act was notified, sparking an intense national debate about agricultural land conversion, tax revenue foregone, and the desirability of enclave-based industrialization. Inflation was remarkably well-behaved given the growth acceleration. WPI and CPI inflation both registered 4.4 per cent — a moderate level that defied the standard textbook prediction that rapid growth would generate demand-pull inflation. The Survey attributed this to several factors: productivity improvements in manufacturing, competitive pressures from imports (tariff rates had continued to fall), and the RBI's measured tightening of monetary policy. However, the Survey noted that food inflation was higher than the aggregate numbers suggested, particularly for pulses, vegetables, and edible oils — a warning sign of the supply-side constraints that would bedevil Indian inflation management in subsequent years. The external sector was strong but changing in character. The current account deficit widened to 1.2 per cent of GDP, driven by a surging oil import bill (crude prices averaged above $60 per barrel). Merchandise exports grew by over 20 per cent, and services exports maintained their trajectory. Capital flows were massive: FDI inflows improved to $7.7 billion (still low for an economy of India's size, but growing), while portfolio flows, external commercial borrowings, and NRI deposits all surged. The rupee was under appreciation pressure, and the RBI's intervention purchases added to already abundant domestic liquidity. On the fiscal front, the FRBM Act was delivering results. The Centre's fiscal deficit fell to 4.0 per cent of GDP, and the revenue deficit was declining faster than targeted, thanks to extraordinary tax buoyancy. The Survey noted that in boom years, it was tempting for governments to increase spending, and urged restraint. The concept of a "structural deficit" adjusted for the economic cycle was introduced, suggesting that India's true fiscal position was weaker than the headline numbers implied. This was a sophisticated and farsighted analysis that, unfortunately, did not translate into adequate policy action. The demographic dividend was becoming a central element of the India growth narrative. With over 550 million people under the age of 25, India's dependency ratio was falling and its working-age population growing faster than any other large economy. The Survey argued that this demographic advantage, if complemented by education, skills, and employment opportunities, could sustain high growth for decades. But it warned that a demographic dividend was not automatic — it required deliberate policy investment in human capital. The dismal state of India's public education and health systems made this a real concern. The real estate sector had become a significant economic force during this period, and the Survey tracked its rise with a mixture of appreciation and caution. Housing construction was booming in every major city, driven by easy credit (home loan rates had fallen to single digits), rising incomes, and a cultural aspiration for property ownership. Commercial real estate was equally buoyant as IT companies, BPOs, and multinational corporations competed for office space. The Survey estimated that real estate and construction together accounted for roughly 8 per cent of GDP and were the second-largest employer after agriculture. But it cautioned that the sector was opaque, poorly regulated, and vulnerable to speculative excess — a prescient warning given the real estate correction that would accompany the global financial crisis three years later. The NREGA launch in February 2006 represented a philosophical shift in India's approach to poverty alleviation. Moving from targeted subsidies and employment-as-charity to a rights-based framework of guaranteed employment was unprecedented in the developing world. The Survey assessed the early implementation in 200 districts with careful balance, acknowledging the programme's potential as both a safety net and a tool for rural asset creation while noting the formidable administrative challenges: maintaining muster rolls, ensuring timely wage payments through a banking system that barely existed in many rural areas, and preventing the corruption that had plagued previous employment schemes. The programme's annual cost was estimated at Rs 11,000-14,000 crore in its initial phase. Looking ahead, the Survey projected growth of 8-9 per cent for 2006-07, noting that all the engines — investment, consumption, exports, credit — were firing simultaneously. Yet it also noted, presciently, that the global liquidity conditions enabling much of this growth were abnormal, and that India needed to build macroeconomic buffers for the inevitable correction.

Source: Official Economic Survey Document

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Sustaining Inclusive Growth

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Inclusive Growth in a Globalizing World

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