The mid-year review presented recently to Parliament exudes confidence in the state of the Indian economy while simultaneously being circumspect on inflation. Economic growth is likely to be higher than what many official agencies had forecast earlier. The RBI has not revised the forecast of 6 per cent growth (with an upward bias) it made in its July credit policy review. The Prime Minister’s Economic Advisory Council had pegged its forecast at 6.5 per cent. The Economic Survey released ahead of the Union Budget had predicted a rate between 6.25 per cent and 7.75 per cent for 2009-10. According to the mid-year review, GDP growth will be nearer the upper band. Such robust optimism is based on two related factors. As the global economy shows signs of finally moving out of the prolonged recession, India, China, and a few other developing countries that are in the forefront of recovery have posted growth rates higher than projected earlier. More specifically, the Central Statistical Organisation’s estimate of a robust GDP growth of 7.9 per cent during the second quarter of the year (July- September 2009) exceeded all expectations and prompted many professional forecasters to mark up the growth projections. However, it is doubtful whether data from just one quarter can be the basis for predicting an increase in growth that is clearly above the more recent trends. The economy grew by 6.7 per cent in 2008-09 and by 6.1 per cent in the first quarter of 2009-10.
The second quarter growth has been driven by the strong performance of the manufacturing sector and some specific segments of the services sector that have clearly benefited from the stimulus packages and the implementation of the pay commission report. Although the government has said that the stimulus measures will not be withdrawn in a hurry, they cannot also be continued for very long. Also, while industrial growth led by the manufacturing and services segments is spurring the growth momentum, the performance of agriculture is causing serious concern. With a disappointing growth rate of 0.9 per cent in the second quarter, agriculture is expected to fare worse in the third quarter when the full impact of the shortfall in the output of major Kharif crops will be felt. The surge in inflation might dampen growth expectations. Even though the supply side factors have been underpinning inflation, monetary policy will also have to kick in to control the situation. Once again the RBI faces a stark choice of continuing its soft interest rate stance or tackling inflation through tighter money.
Keywords: economy, Parliament, RBI, economic growth, GDP growth, Central Statistical Organisation, Prime Minister’s Economic Advisory Council, Economic Survey
Inflation hurts ordinary people here and now while benefits of economic growth trickles down to them only at a very slow pace. Hence tackling inflation should get priority over pushing up economic growth in govrnment's agenda. Long years of neglect of the agricultural sector having come home to roost, the government finds itself on a sticky wicket. The economic skills of the UPA government on which depends the economic well-being of over a billion people are on test. To pass the test the government will have to think more and do more than what it is doing today. Time is not on its side.
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