Friday, Jan 02, 2004
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THE ECONOMIC RECOVERY of 2003-04 has well and truly taken root. The Central Statistical Organisation's estimates of the gross domestic product (GDP) in the second quarter (July-September) of the fiscal year 2003-04 establish this fact beyond any doubt. According to the CSO, the Indian economy grew by an astonishing 8.4 per cent in the second quarter. The last time GDP grew so rapidly was more than four years ago, in the fourth quarter (January-March) of 1998-99. The CSO's estimates reveal that the ongoing recovery is not confined to agriculture; it has spread to manufacturing and has been especially strong in the service sector. It is only the mining and electricity, gas and water supply sub-sectors that have had to suffer a modest pace of expansion of under 3 per cent. Coming on top of the 5.7 per cent rate of growth during the first quarter (April-June) of the current fiscal year, the frenetic pace of expansion of overall GDP takes growth during the first half of 2003-04 to a commendable 7 per cent.
Since the economy usually expands at a more rapid pace during the second half of the year, economic growth is more than likely to cross 7 per cent in all of 2003-04. If that happens, the projections of the Finance Ministry and the Reserve Bank of India of a 6.5 to 7 per cent rate of growth will turn out to have been conservative. The Government will no doubt be pleased with and take credit for this economic performance. However, a certain caution is called for before hyperbole takes over from reality in proclaiming that the economy will now grow by over 7 per cent over the next few years. Impressive and broad-based as the GDP growth was in July-September, the recovery of 2003-04 is for now still an economic rebound fuelled by the good monsoon of 2003. The higher incomes earned from the substantial increase in kharif (monsoon) crop production have boosted the demand for manufactured products and services; hence the acceleration in the GDP growth rate. There is still considerable uncertainty about whether this acceleration will last after the effects of the 2003 monsoon have exhausted themselves. Industrial growth remains erratic and concentrated in a few industries such as automobiles; this is a trend demonstrated in official statistics for October, which has not been taken into account in the CSO estimates for July-September. The merchandise export sector has not been doing as well as it did in 2002-03. And the performance of the infrastructure industries such as power remains unsatisfactory.
The second reason for caution in interpreting the GDP estimates has to do with the quality of data on the service sector. According to the CSO, the individual sectors of India's service economy expanded by well over 7 per cent in the second quarter. The output of the trade, hotel, transport and communications sub-sector increased by as much as 11.9 per cent. When the commodity producing sectors of agriculture and industry do well, as in last July-September, so do many services such as trade and transport. However, services have grown much faster than the commodity sectors. Economists have pointed out that in recent years the CSO's estimates of services' growth have shown little connection with the performance of agriculture and industry, and this must raise questions about the reliability of the official data on services. The CSO's quarterly estimates of output in India's service economy unlike the final statistics for the year are based on the trends in indicators such as railway freight and passenger movement, bank deposits and government revenue expenditure. A rigorous analysis may be necessary to establish the suitability of these indicators for making estimates of growth in the larger service sector.
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