World over the search for “green shoots” of recovery is on as politicians, policy makers, economists and the public at large look to signs that suggest that the recession is behind us. India is no exception. Witness the celebration when the Central Statistical Organisation (CSO) released on September 1 its GDP estimates for the April-June 2009 quarter which point to a slightly higher quarter-on-quarter rate of growth. The message that the government and sections of the media have read into those estimates is that the Indian economy is on the path to recovering from the deceleration in growth it has been experiencing from the last quarter (January-March) of 2007-08, and returning to the 9 per cent rate recorded prior to that.
However, a closer look at the figures indicates that the recovery is by no means strong or even definitive. Thus, comparing growth in the first quarter of 2009-10 with that in the two immediately preceding quarters (refer press note issued by the CSO on May 29), we find that GDP growth has only marginally risen from the 5.8 per cent recorded in both those quarters to 6.1 per cent during April-June 2009. If past experience is any guide this one-third of a percentage point difference could even disappear when revisions of the provisional figures are made at later dates. Thus what can at best be inferred from those figures is that the downturn has bottomed out. But there is nothing as of now to prevent the system from bouncing along the bottom. Even Planning Commission Deputy Chairman, Montek Singh Ahluwalia’s statement that the “worst is over” may be optimistic, if all we have is a trend in which the rate of growth does not fall further.
There are three reasons why we need to be cautious. First, this stagnation at the bottom comes after many rounds of intervention in which credit supply has been eased, interest rates have been dropped, taxes have been reduced, and government expenditure has been significantly increased. Public expenditure increases have been large not just because of the stimulus measures aimed at addressing the recession, but also because of previously committed expenditures such as the payment of higher public sector salaries and arrears associated with the implementation of the Sixth Pay Commission recommendations. In the immediate future, spending is likely to grow at a slower pace, especially because of the concerns over the budgetary deficit being expressed by fiscal conservatives. Lower public spending inevitably leads to lower growth.
Second, the poor monsoon bordering on widespread drought is bound to adversely affect agricultural growth in the immediate future and over the financial year as a whole. The deficiency in rainfall has been high in those states which contribute a substantial share of total rice surpluses. Punjab, Andhra Pradesh, Uttar Pradesh and Chhattisgarh, which contributed close to three-fourths of all rice procured during 2007-08 marketing year, have experienced deficiencies in rainfall in the 30 to 60 per cent range. This would dampen, if not cap, any trend of recovery.
Finally, there seems to be little support as yet from the world economy with India’s exports in July falling for the tenth successive month by a large 28 per cent relative to July of the previous year. Over the first four months of the current fiscal year exports have fallen by 34.1 per cent, offering little hope of recovery in the export sectors of the economy.
Put these together and there is ample reason to be cautious when predicting that a sufficiently robust recovery is around the corner. But the need to talk up the economy is discouraging such caution. The Planning Commission for example expects growth in 2009-10 to touch or exceed 6.3 per cent (as compared with 6.7 per cent in 2008-09). This is reportedly based on the understanding that agricultural GDP will fall by just 2.5 per cent despite the severe drought. Once this year’s growth is seen to more or less hold near last year’s levels, optimistic predictions of a rise to 8 per cent in 2010-11 and 9 per cent in 2011-12 follow. Optimism of that kind is fine so long as it does not result in complacency. For complacency, in turn, could lead to a slackening of the effort not just to keep growth going but to deliver it in sectors and among sections that have been hard it during and before the current slowdown.