The revised estimates for GDP in 2007-08 were released last Friday, showing that the Indian economy grew by 9 per cent during the year. This was somewhat higher than the 8.7 per cent suggested by the advance estimates, which were made a few months ago. It is tempting to infer from these presumably more refined numbers that the economy is in more robust shape than was earlier presumed. If this is indeed the case, the recent surge in the inflation rate, which is being attributed primarily to the rapidly rising prices of several commodities, may well contain an element of demand-pull pressures as well. As if to reinforce this thinking, the weekly inflation numbers released the same day crossed the 8 per cent threshold, suggesting that the various measures that the government has taken over the past several weeks are, at least so far, having very little effect. Since the simultaneous crossing of these two thresholds has significant implications for macroeconomic policy, a correct assessment of what is behind this is critical to shaping an appropriate response.
With respect to the higher than expected growth rate, it is entirely due to a sharp increase in the estimated growth rate of agriculture between the two rounds. The advance estimates had this sector growing at 2.6 per cent, while the revised estimates put it at 4.5 per cent. While there are minor variations in the growth rates of other sectors, they are hardly enough to change the view that there is some deceleration in the economy compared to the very impressive performance of 2006-07. This is reflected in the growth rates of the manufacturing sector, which clocked 8.8 per cent during 2007-08, significantly less than the 12 per cent achieved during the previous year. However, there is a distinct difference between the sector's performance during the first and second halves of the year, with growth during the fourth quarter having registered a rather meagre 5.8 per cent. This was earlier indicated by the 3 per cent growth in the Index of Industrial Production during the month of March. Collectively, these patterns do not provide any reason to believe that there has been a reversal in the recent deceleration and the 9 per cent - 8 per cent combination is not a return to the overheating scenario, which induced the combination of interest rate and cash reserve ratio hikes, which in turn, have contributed to what is essentially a soft landing.
Under normal circumstances, a soft landing would have led to a lower inflation rate as well as slower growth, but clearly, these are not normal circumstances. A combination of global factors has led to persistent increases in commodity prices across the board. While the pressure has eased, at least temporarily, on the food front, minerals and oil continue to pose problems for countries around the world. The fact that the inflation rate is unacceptably high despite the government not having accommodated the international crude oil price by raising domestic retail prices of key products reinforces the policy problem. If a price hike can no longer be avoided, as the second editorial argues, measured inflation will appear significantly worse, putting the government under even more pressure. At the very least, the complexity of the situation emphasises the need for a broad political consensus on a multi-pronged policy response. We simply cannot afford to lose more time in adversarial debate. |
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