Recent data on the Indian economy released recently by the Central Statistical Organisation (CSO) should remove any remaining vestige of scepticism on the growth story.
The data in question refers to just one quarter, the second quarter (July-September 2010), but its full import has larger messages.
A better than expected 8.9 per cent growth during the quarter on top of a similar growth in the first quarter (April-June) suggests that the economy is well positioned to move into a higher growth trajectory. For 2009-10, the revised growth estimate has been 7.4 per cent. Hence, if the economy maintains its tempo — at least maintain its 8.9 per cent of growth in the first six months of the year — it can realistically aim at double-digit growth in the coming years. The sharp increase in the estimates suggests that India has climbed out of the recession at a much faster pace, which was thought possible. That corroborates what the IMF and other global institutions have been saying: that the developing countries led by China and India are in the forefront of the global recovery. The world's advanced economies are witnessing feeble growth.
The official projections (of the Reserve Bank of India and the government) at 8.5 per cent with an upward bias will most certainly be marked up. Impressive as the recent acceleration is, two points are relevant. One, before the global economic crisis began to take hold in mid-2007, the Indian economy was already recording growth rates of above 9 per cent on the back of strong domestic consumption, investment and export demand. In fact the Planning Commission had visualised a double-digit growth at the end of the XI Plan.
Second, it is necessary to take note of the macro-economic conditions during the pre-crisis years and now to draw meaningful inferences on the sustainability of the current GDP growth. There are some similarities but also major differences in the factors underpinning the growth process then (pre-crisis period) and now.
Good news continues
Barely a week after the CSO's data for the second quarter was released, the mid-year analysis was placed before Parliament. The former had confirmed the continuance of the growth momentum: the second quarter growth was of the order of 8.9 per cent, the same as for the first quarter. The mid-year analysis is of the view that the 9 per cent pre-crisis growth rate can be achieved this year itself. But there are well known risk factors.
Faster growth is expected to continue in the third and fourth quarters. The optimism is based on the fact that agriculture has recovered smartly from last year's drought and rain. Inflation is also expected to fall although there is plenty of uncertainty in the outlook for inflation.
Quite obviously there are major risks ahead which cannot be ignored or downplayed. The mid-year review and the RBI have drawn attention to them. High-up on the list of risks is the widening current account deficit, which is expected to exceed 3 per cent of the GDP. A widening trade deficit — the primary cause for the current account imbalance — is a related concern. The assumption that the current account deficit will absorb the burgeoning capital inflows — mostly to the stock markets — hides the fact that the size of the current account deficit and the copious flows pose independent policy challenges. Overdependence on short-term flows is unhealthy and can pose major liquidity and stability risks.
The inflation rate continues to be high although it has climbed down from double digits. The RBI's year-end target of about 6 per cent seems difficult to achieve at this stage. Persistently high inflation may force the RBI to hike rates or at least keep them at the present high levels, which in turn will impact negatively on growth.
Global scenario
The rather bleak international economic scenario is another cause for concern. Although India is sufficiently insulated and its exports form only a small part of the GDP, a prolonged slowdown in the advanced countries will have an impact on manufacturing and services sectors.
On many economic parameters, India is worse off today than during the pre-crisis period. The combined liabilities of the government have increased since 2008-09. The combined fiscal deficit has been between 8.3 per cent and 10 per cent in the last three years. Central government finances have no doubt received a boost this year from the 3G auctions and a reasonably successful public sector disinvestment programme. Still indications are that government finances will not be in a much better shape than in the previous years.
Correction
The graph accompanying the Business Page report, “Flattering growth but risks ahead” (December 13, 2010), wrongly gave the source as Central Statistics office. It should have been the Central Statistical Organisation.
