Who takes the credit?

September 14, 2014 11:36 pm | Updated 11:36 pm IST

Macro-economic data that have been trickling in since the formation of the new NDA government suggest a tentative economic recovery. Though needing further corroboration, the early signs are most welcome. The Central Statistics Office, which announced the national income statistics towards the end of August, estimated economic growth during the first quarter of 2014-15 at a higher-than-expected 5.7 per cent over last year.

The NDA government took office only on May 26.

Quick off the mark, UPA’s Finance Minister P. Chidambaram claimed credit for the big rise in gross domestic product (GDP) figures during the April-June quarter. After all, he claimed, his government was in office during a large part of the first quarter. In further support of his statement, he cited some growth-inducing measures announced by the UPA government in its last days.

However, the counter-argument is that the Election Commission had already fixed the dates for the elections and with the coming into force of the pre-election model code in April, the UPA government was in no position to launch growth-inducing programmes on any major scale. The implication is that whatever policy measures that the UPA government undertook in April-May passed muster with the Election Commission’s diktat and therefore could not have been substantial.

On its part, the new government claimed credit for the vastly improved sentiment which, according to it, was a direct consequence of how positively economic agents started viewing Prime Minister Narendra Modi’s rule. Favourable first quarter GDP growth data will further reinforce the positive sentiment.

The whole debate of who should take credit for the apparent recovery leads nowhere.

Far more important is to analyse the latest growth data to see whether it can be sustained and improved further. One also needs to have a proper perspective on the growth figures. Has the economy ‘bottomed out’ suggesting an imminent recovery?

There are no easy answers. The first quarter performance, a 5.7 per cent increase, gets an added sheen only when compared with the lacklustre performance of the economy in the recent past. The economy was stuck in a sub-5 per cent growth over the past two years. That makes it the longest spell of a below 5 per cent growth in 25 years. During 2014-15, the growth rate was at a measly 4.7 per cent. So persistent has been the below par growth that breaking-out into the 5 per cent plus league seemed as elusive as it was desired by political leaders.

It is yet too early to suggest that a sustained revival is under way, taking the annual growth rates to above 6 per cent and rising. Available forecast rates for the current fiscal are hardly ambitious. The RBI’s estimate is 5.5 per cent. Most professional forecasters are not betting on substantially more even after the release of the first quarter data.

The major reason is inflation. High inflation levels have squeezed consumers, an important point considering that private spending accounts for roughly 60 per cent of the economy. High inflation levels have ruled out a rate cut by the RBI. Persistently high food prices tend to harden inflation expectations. The RBI expects Consumer Price Index-based (CPI) inflation to come down to within its target range of 8 per cent by March 2015 but moving to the next target, 6 per cent by March 2016, might prove to be more difficult.

Besides, it is not as though all economic news is favourable. For instance, industrial recovery is by no means sustained going by latest (July) figures. However, CPI inflation for August shows moderation. Taking credit or apportioning blame is a puerile exercise.

A break-up of the economic activities in the CSO’s quarterly data gives a mixed picture. The turnaround in mining and quarrying (2.1 per cent over last year) and manufacturing (3.5 per cent) augur well for future growth. Last year, they were in the negative territory. Another sub-sector, electricity, gas and water supply, was up by an impressive 10.2 per cent and as with mining seem to have benefited from speedier policy and environmental clearances for agriculture, whose importance extends far above its share in the GDP, the lacklustre performance of the monsoons will prove a dampener.

As it is the first quarter, the rate of growth of the farm sector has come down marginally to 3.8 per cent from 4 per cent in the previous year.

So while nothing conclusive can be inferred from an analysis of activities in the CSO’s first quarter data, there are clearly signs of renewed optimism. There are very large expectations from the NDA government to improve governance and carry out structural reforms to push the economy to a higher plane.

crl.thehindu@gmail.com

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