Economic Survey

India Economic Survey 2006-07

Inclusive Growth in a Globalizing World

GDP Growth (Actual)

9.6%

Forecast: 8.0-8.5%

Inflation (CPI)

6.7%

Consumer Price Index

Wholesale Inflation (WPI)

5.4%

Wholesale Price Index

Fiscal Deficit

3.3% GDP

Union Budget (Actuals)

Key Theme

Inclusive Growth in a Globalizing World

Key Highlights

GDP growth reached 9.6%, the highest in India's post-independence history at that time
Manufacturing sector posted 12.3% growth, its strongest performance in over two decades
Gross fixed capital formation reached 35.9% of GDP, an unprecedented investment rate
CPI inflation rose to 6.7%, well above comfort levels, driven by food and fuel prices
Foreign exchange reserves crossed $190 billion, approaching the $200 billion mark
FDI inflows doubled to $19.5 billion as India became a preferred investment destination
The Sensex crossed 14,000, making the BSE among the best-performing exchanges globally
Agricultural growth remained subdued at 3.8%, highlighting structural weaknesses in the farm sector
NREGA expanded to 330 districts with over 2 crore households participating
India signed a civil nuclear agreement with the United States, opening new energy possibilities
SEZ approvals surged to over 300, attracting criticism about land acquisition and tax concessions

Policy Recommendations

1 Address the emerging inflationary pressures through coordinated fiscal and monetary tightening
2 Accelerate agricultural reforms to close the growing gap between farm and non-farm sector growth
3 Manage capital inflows proactively to prevent excessive credit growth and asset price inflation
4 Invest urgently in power generation and transmission to remove the binding constraint on manufacturing
5 Strengthen financial regulation to keep pace with the growing complexity of the financial system
6 Reform land acquisition processes through a fair and transparent framework
7 Improve the targeting efficiency of subsidies — food, fertilizer, and petroleum — through technology
8 Scale up NREGA implementation while improving the quality of assets created
9 Develop a comprehensive urbanization policy addressing housing, transport, water, and sanitation
10 Pursue a graduated approach to capital account convertibility as recommended by the Tarapore Committee

Survey Predictions vs Budget Outcomes

Comparison between Economic Survey predictions and actual Union Budget allocations

Metric	Survey Prediction	Actual Budget	Deviation
GDP Growth (%)	8.0-8.5	9.6	+1.1 to +1.6% — industrial investment boom drove the upside
CPI Inflation (%)	4.5-5.0	6.7	+1.7 to +2.2% — food and fuel inflation exceeded forecasts significantly
FDI Inflows ($ Bn)	10-12	19.5	+$7.5-9.5 Bn — India's growth story attracted unprecedented foreign investment
Fiscal Deficit (% of GDP)	3.8	3.5	-0.3% — strong revenue buoyancy improved fiscal position
Investment Rate (% of GDP)	32-33	35.9	+2.9 to +3.9% — private corporate investment surged beyond expectations

Union Budget 2006-07 Summary

Corresponding budget data to read alongside the Economic Survey Actuals

Total Receipts

5.9 lakh crore

Total Expenditure

5.83 lakh crore

Fiscal Deficit

1.43 lakh crore

Revenue Deficit

80,734 crore

View Union Budget 2006-07 in detail

Detailed Analysis

The Economic Survey for 2006-07 had the distinction of documenting what was, at that point, the finest hour of India's post-independence economic performance. GDP grew at 9.6 per cent — eclipsing the previous year's already spectacular 9.5 per cent — and for the first time, serious people began asking whether India could sustain double-digit growth. The Survey, prepared by Chief Economic Adviser Arvind Virmani, balanced justified optimism about the economy's capabilities with increasingly urgent warnings about overheating risks and structural bottlenecks. The growth performance was led by manufacturing, which posted a remarkable 12.3 per cent expansion — its strongest showing in over two decades. Construction grew at a similar pace, driven by the real estate boom and infrastructure spending. Services continued their relentless advance at 11.0 per cent. Only agriculture remained the laggard, growing at a relatively modest 3.8 per cent, which was actually a decent outcome by historical standards but disappointing in the context of the overall economic boom. The Survey devoted considerable analytical energy to understanding why the agricultural sector was not participating in the growth acceleration, pointing to inadequate irrigation coverage, fragmented landholdings, distorted input subsidies, and archaic marketing regulations as the principal culprits. The investment cycle was in full swing. Gross fixed capital formation reached 35.9 per cent of GDP — an unprecedented level that placed India among the highest-investing economies in the world, comparable to China and East Asian nations during their high-growth phases. Corporate India was embarking on massive expansion plans across sectors: steel companies were planning capacity additions of over 50 million tonnes; power companies had projects totalling 60,000 MW in the pipeline; real estate developers were launching projects of a scale previously unseen in India. The Survey noted that the savings rate had also climbed, reaching 34.8 per cent of GDP, which meant that a significant share of the investment was being domestically financed — unlike many developing countries that had relied excessively on foreign capital during boom periods. The FDI story was particularly striking. Inflows doubled to $19.5 billion, making India one of the most attractive investment destinations in the world. Sectors that had been opened to FDI — telecom, construction, retail, financial services — saw significant foreign investor interest. Merger and acquisition activity involving Indian companies reached record levels, with marquee deals like Tata Steel's acquisition of Corus and Hindalco's purchase of Novelis demonstrating that Indian corporates were becoming global players, not just recipients of foreign investment. However, the Survey's inflation analysis carried a tone of concern that was absent in previous editions. CPI inflation had climbed to 6.7 per cent, well above the comfort zone. Food prices were the primary driver: pulses and vegetables had seen particularly sharp increases, reflecting supply constraints that years of neglect of agricultural investment had created. WPI inflation was more moderate at 5.4 per cent — partly because of different commodity weightings — but the divergence between WPI and CPI was itself a concern, since CPI better captured the consumption basket of the poor. The RBI had begun tightening monetary policy, raising the repo rate multiple times, but the transmission to lending rates was slow. The credit market was showing signs of exuberance that the Survey treated with appropriate wariness. Bank credit continued to grow at over 25 per cent, with real estate and housing loans expanding even faster. Non-banking financial companies were growing aggressively, and the Survey noted that some were funding risky real estate projects with short-term borrowings — a classic maturity mismatch that could create problems if market conditions turned. The quality of underwriting in retail credit, where personal loans were being given with minimal documentation, was also flagged as a potential vulnerability. The external sector was strong but generating policy dilemmas. The current account deficit was modest at 1.1 per cent of GDP, financed many times over by capital inflows. Foreign exchange reserves approached $200 billion, and the RBI was facing mounting sterilization costs as it intervened to prevent excessive rupee appreciation. The Survey discussed the Tarapore Committee's recommendations on fuller capital account convertibility, noting both the potential benefits (deeper financial markets, more efficient capital allocation) and the risks (increased volatility, exposure to global financial shocks). It recommended a cautious, graduated approach — advice that would prove prescient when the global financial crisis struck barely two years later. Fiscal performance continued to improve, with the Centre's fiscal deficit declining to 3.5 per cent of GDP — within striking distance of the FRBM target of 3 per cent. Revenue buoyancy was the primary driver: taxes were growing at twice the rate of nominal GDP, reflecting the economic boom, improved compliance, and the base-broadening effects of VAT implementation in most states. The Survey warned against complacency, however, arguing that much of the improvement was cyclical rather than structural, and that the government should use the windfall to build fiscal buffers rather than increase spending commitments that would be difficult to reverse. The social sector received mixed marks. NREGA had expanded to 330 districts, and over 2 crore households had participated in the programme during the year. The Survey's assessment was balanced: it acknowledged that the programme was providing a meaningful safety net in many areas but flagged implementation weaknesses including delayed wage payments, poor quality of assets created, and significant variation in performance across states. Education spending was increasing, but learning outcomes remained poor — the ASER surveys were documenting the distressing reality that many children in Class 5 could not read a Class 2 text or do basic arithmetic. The Indo-US nuclear deal, which was negotiated during the year, received attention for its potential to transform India's energy landscape. The Survey discussed the deal in the context of India's growing energy needs and the structural dependence on coal and imported oil. If nuclear energy could be scaled up from its existing 3-4 per cent share of electricity generation, it could significantly reduce carbon emissions and improve energy security. The Indian pharmaceutical industry was emerging as a global force, and the Survey noted its growing significance for both exports and public health. Indian generic manufacturers had become the primary suppliers of antiretroviral drugs to AIDS programmes across Africa and Asia, and the industry's ability to produce high-quality medicines at a fraction of Western prices was being recognized internationally. However, the implementation of the product patent regime under WTO obligations from January 2005 raised questions about the future trajectory of generics, and the Survey discussed the balance between intellectual property protection and access to affordable medicines. The SEZ programme was a subject of heated debate, and the Survey navigated the controversy carefully. Over 300 SEZ proposals had received in-principle approval, generating concern about agricultural land being converted to industrial use, the revenue foregone from tax concessions (estimated at over Rs 50,000 crore annually when all zones were fully operational), and the adequacy of rehabilitation provisions for displaced communities. The Survey argued that SEZs could be effective instruments for manufacturing promotion and export growth — as demonstrated by China's experience — but acknowledged that the implementation framework needed safeguards against speculative land acquisition and that the tax concession regime needed to be more carefully calibrated to ensure that social returns justified the revenue sacrifice. Looking ahead, the Survey projected growth of 9.0 per cent for 2007-08, while cautioning that the global economic environment was becoming more uncertain. Housing markets in the United States were showing signs of stress, and there were questions about whether the long period of global liquidity abundance was approaching its end. Few could have anticipated the scale of the disruption that was coming, but the Survey's warnings about overheating, credit excess, and the need for macroeconomic prudence were analytically sound.

Source: Official Economic Survey Document

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India's Growth Story

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Managing Growth and Change

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