Satisfactory growth defying odds financial scene

February 14, 2010 11:33 pm | Updated February 15, 2010 12:10 pm IST

Mechanization in transplanting under way in a paddy field in Kerala. Farmers in several parts of the country have adapted modern techniques to increase productivity. Photo: K.K. Mustafah

Mechanization in transplanting under way in a paddy field in Kerala. Farmers in several parts of the country have adapted modern techniques to increase productivity. Photo: K.K. Mustafah

The strong economic growth may prompt the centre and the RBI to plan for a calibrated exit from the stimulus packages. The advance estimate of a 7.2 per cent GDP growth has given rise to optimism. While it has fallen short of some official estimates, an above 7 per cent rate is impressive enough in the current context of a sluggish recovery in the global economy.

The Central Statistical Organisation has forecast a GDP growth of 7.2 per cent in the current year (2009-10). The ‘advance estimate’ was released on February 8 and is the first stage in a long drawn out four stage process of officially estimating GDP and other national income data in the country.

Four sets of GDP figures are issued: advance estimate, updated advance estimate, quick estimate and revised estimate.

In the past, there have been many occasions when the initial estimates were revised upwards. This time too, there is an expectation that the final growth rate for 2009-10 will be higher than the advance estimate. Finance Minister Pranab Mukherjee has claimed as much.

How much higher, of course, is a matter of conjecture but it is important to place the projected growth rate for the year (7.2 per cent) in its proper perspective.

It is higher than the 6.7 per cent for last year but below a few other official estimates for the current year.

Strong fourth quarter?

The Reserve Bank of India in its recent third quarter review of the credit policy had estimated a growth rate of 7.5 per cent, sharply higher than its own earlier forecast of 6 per cent with an upward bias. Earlier, the Mid-Year Economic Survey — a document of the Finance Ministry — had forecast a 7.75 per cent growth. The economy grew by 7 per cent during the first six months of the year mainly due to a spectacular 7.9 per cent increase in the second quarter. The third quarter data, not yet released, will reflect the impact of the agricultural slowdown.

So the betting is on a strong showing in the fourth quarter. In estimating a growth rate of 7.2 per cent for the year, the authorities are banking on a bountiful rabi harvest to substantially offset the fall in kharif production. A growth rate of 7.2 per cent, though above last year’s rate, will be below the 9 per cent plus growth recorded in each of the three years beginning 2005-06 and ending 2007-08. The economy grew by 9.5, 9.7 and 9.2 per cent, respectively, or at an average of nearly 9.5 per cent.

The sharp drop in 2008-09 to 6.7 per cent has to be understood in the context of the global economic crisis.

All countries witnessed sharply lower growths: many, including all the developed ones, even posted negative rates. India along with China is among the few which posted positive growth rates and, as subsequent years showed, maintained the positive trend.

The achievement of a 7.2 per cent growth rate would be particularly commendable at a time the global economy is climbing out of a deep recession. Among the domestic factors, the economy has weathered one of the worst droughts in recent times.

Besides, delayed monsoons and floods in different parts of the country have left their mark on the farm sector.

In the event, the projected agricultural growth at a minus 0.2 per cent, though well below last year’s 1.6 per cent, is better than feared. The implication is agricultural performance will not drag down the overall growth rates.

The marginal contraction in agriculture is estimated to come on top of a fall in the production of foodgrains and oilseeds by 8 per cent and 5 per cent, respectively, as compared to last year. That, of course, is one of the main factors behind the current spike in food inflation.

Manufacturing on top

Economic growth during the year will be led by the strong performance of manufacturing which is expected to grow by 8.9 per cent, sharply higher than the 3.2 per cent in 2008-09. Evidently, the negative factors — steep fall in domestic and global demand, high cost of raw materials — have not dragged down manufacturing and the other two sub-sectors under the broad classification of industry. Mining and quarrying is expected to post 8.7 per cent growth (1.6 per cent last year) while electricity, gas and water supply is likely to grow by 8.2 per cent as compared to 3.9 per cent a year ago.

The services sector is expected to grow at a slower pace than the 9.8 per cent it clocked last year. Compared to last year, when it grew by nearly 14 per cent, the segment, “community, social and personal services” is estimated to grow at a slower but still impressive 8.2 per cent. Clearly the implementation of the Pay Commission award and other stimulus measures that had buoyed this segment earlier will have less impact this time. The strong economic growth may prompt the government and the RBI to plan for a calibrated and coordinated exit from the stimulus packages.

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