On the face of it, the Central Statistical Organisation's (CSO) advance estimates of gross domestic product (GDP) growth for the current year (2011-12), released last Tuesday, give little room for optimism. For the first time after the global crisis, economic growth is forecast to go below 7 per cent. That would be sharply lower than the 8.4 per cent of last year (2010-11).
During the first-half of this fiscal (April-October 2011), the economy grew by 7.3 per cent. So, if the official estimates come good, the second-half will see growth decelerating to around 6.5 per cent.
Agriculture will grow by just 2.5 per cent (down from 7 per cent last year), industry by 3.9 per cent (7.2 per cent) and services by 9.4 per cent (same as last year). So, the decline in the GDP growth rate is due to a decline in industry and agriculture with services continuing to be resilient.
The lower growth in agriculture is partly attributable to the high base of last year. However, as government spokespersons were quick to point out, production of fine cereals, rice and wheat have been at record levels although production of coarse cereals has lagged behind. The implication is that not all the good news has been captured by the official statistics.
Looking to the future, agriculture is likely to post a higher rate of growth, assuming, of course, a bountiful monsoon once again.
The industry segment comprises manufacturing, construction and mining. The trend in manufacturing growth, as measured by the monthly index of industrial production (IIP) figures, has been unmistakably downwards. High interest rates are behind the slow pace of manufacturing growth. Hence, its growth this year at 3.9 per cent will be well below 7.2 per cent of last year. Mining has been hit by the vagaries of government policies, especially relating to environmental clearances, and is forecast to contract by over 2 per cent during this financial year as compared to a 5 per cent growth in 2010-11.
But electricity has fared surprisingly well — it has obvious strong linkages with mining — posting a growth of 8.3 per cent as compared to just 3 per cent last year. Given that the power sector is also facing deep seated financial problems, it is doubtful whether it can sustain its growth momentum into next year.
Services sector is once again leading the GDP growth. Within that broad segment, trade, hotels, transport and communication will repeat its good performance posting 11.2 per cent growth during this year. But the other major sub-segment — financing, insurance, real estate and business services — has not done badly either. Even community, social and personal services, a proxy for government spending, has fared relatively well (5.9 per cent this fiscal against 4.5 per cent in 2010-11).
On the demand side, there has been a sharp fall in private consumption which is highly susceptible to interest rate changes. Even more worrying is the fall in investment growth by a few percentage points. That is a development that does not portend well for the next year.
The other side of the story
Altogether by no means upbeat, the advance estimates do have a few positive messages that are relevant for the ongoing budget preparation.
For one, a projected 6.9 per cent GDP growth rate, though low by recent standards, compares favourably with what obtains in most other countries.
Second, to the extent India's fortunes are closely linked to the global economy, especially the eurozone and the U.S., even a modest revival in those countries will mean a lot. India's exports might once again start expanding on the back of recovery in Europe and the U.S. Just as importantly, sentiment in the global financial markets will improve and that will be good news for India. Large institutional investors' risk appetite will return and that, as we have already seen at the beginning of 2012, will result in more cross-border flows into Indian stock exchanges.
However, one hastens to add that economic recovery — if one can call that — is still far away in the West. The U.S. seems better placed than Europe, but even there growth can only be described as feeble. In Europe, the agreement reached over Greece is seen to be a big positive.
However, Greece has been forced to accept large spending cuts in return for the bail out. That will be hugely unpopular and is bound to cause social unrest.
Third, is it possible that the Indian economy growth has “bottomed out” and that from now on it could get only better? Admittedly there are no strong indications either to confirm or repudiate that hypothesis. On the one hand, inflation, which had remained stubbornly highly during last year, has come down and the Reserve Bank of India (RBI) has leeway to soften its policy to accommodate growth concerns. There has been so much criticism over “policy paralysis” and indecision in public policy that the government will be forced to act.
On the other hand, the task of fiscal consolidation remains more daunting than ever before. A slowing economy has aggravated the problems.
Much needed reforms, even the less controversial ones such as the Direct Taxes Code (DTC) and the Goods and Services Tax (GST), seem difficult to implement.