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| Saved by Pay Commission | | The GDP numbers suggest that the bottom has been reached, and the likelihood of conditions deteriorating further has receded |
| Business Standard / New Delhi Jun 01, 2009, 01:44 IST |
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GDP numbers have benefited from a one-time boost
The year 2008-09 has ended with better numbers than expected. GDP growth, while somewhat below the Advance Estimates published last February, have been greeted with an enormous sense of relief. The February estimates had indicated a growth rate of 7.1 per cent during 2008-09, whereas Friday’s numbers put it at a more conservative 6.7 per cent. However, it is the quarterly numbers that carried the positive surprise and, consequently, drove equity markets up quite sharply. The growth rate during the fourth quarter has been estimated to be 5.8 per cent, while the estimate for the third quarter, which had earlier come in at 5.3 per cent, has been revised upwards to 5.8 per cent. In other words, while the second half of the year was significantly weaker than the first half, the numbers suggest that the bottom has been reached, and the likelihood of conditions deteriorating further has receded. These numbers validate the growing perception that the economic situation had indeed begun to turn around after a particularly bad third quarter, during which extremely tight liquidity conditions hurt both the real and financial sectors quite badly. The view that the worst is now behind us, which has gradually emerged as the dominant one, will now become firmly entrenched.
Of course, every silver lining has a cloud behind it and there are some in these numbers as well. Agriculture did relatively badly, dropping from a growth rate of 4.9 per cent in 2007-08 to 1.6 per cent last year. The high base was certainly a factor contributing to the slower growth, but the sharp reversal of trend raises questions about the contribution of higher procurement prices and other measures taken by the government to incentivise higher production. The manufacturing sector saw its growth rate decline dramatically from 8.2 per cent in 2007-08 to 2.4 per cent during 2008-09; in the fourth quarter, it saw an absolute fall of 1.4 per cent. This pattern is entirely consistent with the rather hostile macro-economic environment, both global and local, that the sector had to cope with. However, one might have expected this sharp decline to have an adverse impact on many services as well, but that does not appear to have been the case. The largest services segment, Trade, Transport, Hotels and Communications, grew by an impressive 9 per cent. This was, of course, much lower than the 12.4 per cent achieved in 2007-08, but certainly did not match the decline in agriculture and manufacturing, both of which extensively use these services. The one segment which saw acceleration was Community, Social and Personal Services, which includes the public sector and reflects the implementation of salary increases in this sector following the acceptance of the Pay Commission award. The boost to the year’s GDP on this account could well be 0.5 per cent of GDP or more; the impact on quarterly GDP numbers would be even greater. What this means is that the pace of activity at the start of the new financial year is lower than the headline number of 5.8 per cent suggests, and that quite a lot of work needs to be done in order to take GDP growth in the new year to the region of 7 per cent.
A striking feature of last year’s performance, when viewed from the demand perspective was that gross fixed capital formation, which is typically quite volatile and sensitive to business cycles, maintained a relatively steady pace. It has been estimated to be 32.2 per cent, slightly higher than the previous year’s 31.6 per cent, suggesting that the investment momentum has been maintained somehow or the other. Overall, these numbers should give the new government a lot of breathing space. It can now afford to shift focus from crisis management to the many structural problems that plague the economy, for it is these that act as a brake on faster medium-term growth.
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