C.R.L. Narasimhan

Exciting growth story but lurking dangers

AUGURS WELL: Welding in progress at a factory in Dholka on the outskirts of Ahmedabad. A rebound in manufacturing and recovery in farm output drove India's quarterly economic growth to 8.6 per cent, the best in two years, as Asia's third-largest economy returns to pre-crisis levels of expansion. Photo: AP   | Photo Credit: Ajit Solanki

National income statistics released by the Central Statistical Organisation (CSO) on May 31 show the economy in a positive light. According to the revised estimates, the gross domestic product (GDP) growth during 2009-10 fiscal has been 7.4 per cent, marginally higher than the 7.2 per cent forecast in February's advance estimates.

The CSO publishes income statistics in several stages — advance estimates, revised estimates, quick estimates and so on. There is a long interval between the stages. It is not uncommon for the CSO to revise its estimates.

India's economic performance has to be evaluated both in relation to its own track record and potential as well as those of others, both developing and developed.

A 7.4 per cent growth has been possible because of the strong economic performance during the last quarter of 2009-10 fiscal (the first three months of the calendar year 2010). A better than expected 8.6 per cent increase on a year-on-year basis lifted the overall performance.

Industrial revival

The CSO had also adjusted upwards the growth estimates for the second and third quarters but marked down the first quarter's performance. The revised rates for the four quarters of 2009-10 are respectively 6 per cent, 8.6 per cent, 6.5 per cent and 8.6 per cent respectively.

The acceleration seen in the last quarter of 2009-10 augurs well for growth during the current year as the momentum will continue. Several segments fared better than expected. Manufacturing registered a growth rate of 10.9 per cent during the year, with its performance being particularly impressive during the last quarter. Mining and quarrying too posted double digit growth. Manufacturing has been helped to an extent by the low “base” over the corresponding period of 2008-09. Mining and quarrying received a boost, thanks to the crude output from the KG basin and the wells at Barmer, Rajasthan. However, neither the base effect nor the bonanza in the hydrocarbon sector diminish the performance of the industry segment, which has become the main growth driver. There has been a revival of business and consumer confidence.

Slowdown in services

The services sector, on the other hand, witnessed a deceleration, growing by 8.5 per cent in 2009-10 compared to 9.8 per cent a year earlier. The sub-segment “community, social and personal services” witnessed a sharp fall, growing by just 0.8 per cent and 1.6 per cent during the third and fourth quarters of 2009-10 from 7.6 per cent and 14 per cent respectively. For the whole year, the rate of growth was 5.6 per cent compared to 13.9 per cent a year earlier.

Clearly, the effects of the Pay Commission's award that had boosted the performance of this sub-segment are petering out. On the other hand, the strong showing by “trade, hotels, transport and communications” and “financing, insurance, real estate and business services” is in line with the strong economic rebound.

Farm surprise

The biggest surprise has been in agriculture which posted a 0.7 per cent growth in the last quarter compared to minus 1.8 per cent in the third quarter. For the whole year, the growth rate in agriculture, forestry and fishing has been estimated at 0.2 per cent against minus 0.2 per cent in February's advance estimate. The upward revision in the estimates of production of principal crops is the main reason.

The turnaround in agriculture is significant. Last year (2009-10), insufficient monsoon, followed by drought and floods in different parts of the country dragged down agriculture output. Hopefully, the revival in agriculture will help in containing food inflation.

Another positive inference from the official statistics is that growth is broad based with many sectors posting growth rates of 5 per cent or over.

There is no doubt that the revised estimates of GDP growth vindicate the government's optimism. Leading government spokespersons have claimed that a growth rate of 8.5 per cent is possible for this year. However, inflation is a big threat and the Reserve Bank of India might have to hike interest rates. The hardening of commodity prices will raise the cost of manufactured goods.

Global scene

India's performance looks even better when compared with other countries. For quite some time now India has been the second largest growing economy after China. In fact, world output growth is now being spearheaded by these two economies along with a few others. The developed world has been slow to recover and even when the recovery phase started it has been fragile. Besides, economic growth in the U.S. and a few other countries has not made a dent on unemployment, which is a serious social issue.

The European debt crisis threatens to spread and even countries not directly affected by it face a problem of large public indebtedness.

Scaling back government expenditure is an urgent task in many developed countries but the process will be painful and besides, may impinge on the already slow pace of recovery.

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