Business Standard / New Delhi Dec 01, 2008, 00:07 IST
Over the past few weeks, most forecasters have lowered their expectations for India’s GDP growth. Their concerns stem from the combined impact of slowing domestic drivers and the worsening global environment. But forecasts are only forecasts, and conclusions about the economy can only be drawn from the facts about its performance. From that perspective, the advance estimates for GDP during the July-September quarter indicate that GDP grew by 7.6 per cent, only marginally slower than the previous quarter’s 7.9 per cent, and beating all the forecasts. Of course, there are two quarters left in the year, and things may get far worse—which is why the forecasters are not inclined to revise their numbers upward. If it is true, as many have argued, that the real downturn hit only in mid-September, the second quarter numbers are not reliable pointers to the future.
This becomes clearer from a study of the sectoral patterns. The manufacturing sector has seen the sharpest deceleration over the past few months, touching a low of close to 1 per cent during August before recovering somewhat in September, as revealed by the Index of Industrial Production. This has translated into 5 per cent growth during the quarter. Both slowing exports and tight interest rates have contributed to the deceleration from the 10 per cent region a year earlier. With agricultural growth also having slowed (though still at a respectable 2.7 per cent), it is the services sector that has provided buoyancy to the system.
Somewhat surprisingly, for instance, the construction sector has displayed robust growth of 9.7 per cent during the quarter. Given the travails of real estate developers in recent weeks, this momentum is curious. If it reflects the ongoing activity in infrastructure and other projects that firmed up their financial arrangements in recent months, then it is a stabilising force. But the story may differ sharply in the third quarter, as funding constraints and the lack of demand hit home. Similarly, ‘trade, transport, hotels and communications’, have grown by 10.8 per cent, close to the 11.2 per cent during the previous quarter; but anecdotal evidence now suggests that both trade and transport have slowed down, while communications powers ahead. The upside could come from the public services component, which grew by 7.6 per cent during the second quarter, and which will accelerate on account of the implementation of the Sixth Pay Commission recommendations. Meanwhile, it is significant that the investment-GDP ratio has exceeded 35 per cent, higher than the 32 per cent achieved during the previous quarter. This reinforces the interpretation of the construction numbers.
From the perspective of the domestic business cycle, the softening of inflation may have removed the dilemma about which economic problem (inflation or slowdown) to focus on, while the monetary policy decisions taken over the past couple of months have eased the liquidity crisis. However, the domestic mood remains deeply bearish, with surveys reporting a sharp downturn in business optimism. It is also too early to see any signs of a global turnaround. From the government’s perspective, therefore, the risk to guard against is what the forecasters have been seeing: a significant slowdown in the second half of the year. It is possible that the full year will end with growth of 7 per cent, which would take second-half growth to the region of 6.5 per cent. But the government should act on the basis of the possibility that the numbers could end up lower still.
All past pay commission recommendations were beneficial to the economy. With the implementation of 6th pay commission, a larger part of the government employees will have to pay income tax. Also to reduce their tax burden under 80C, many will be investing, upto one lakh rupees, in ELSS, PPF, Life insurance etc.
Think of some 3 million people making such investments and what it will do to the economy.
Regards
VeeGee
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