The economy has just had its best three-year period ever. The advance estimates for GDP during the full year 2005-06 were released on Tuesday by the Central Statistical Organisation. GDP is expected to grow by 8.1 per cent, faster than most people expected. This gives the Indian economy an unprecedented three-year run of 8 per cent average growth (8.5 per cent, 7.5 per cent and 8.1 per cent), surpassing the then euphoric three-year run of 7.3 per cent, 7.3 per cent, and 7.8 per cent during 1994-97. | |
| For the historically-minded, this parallel may be a matter of some concern, because from 1997 until 2003, the average growth rate slipped to a more modest 5.5 per cent. Could today's three-year boom be the precursor to a more subdued performance over the next few years? Such pessimism is unwarranted, for this time round, the underlying drivers of growth are more robust and capable of sustaining the momentum than they were a decade ago. The most important difference is that, during the previous spurt, inflation was already edging towards the danger level of 8 per cent and more. This induced an aggressive anti-inflationary stance by the RBI. This time round, despite a hostile oil price scenario, inflation is less of a concern. Although the Reserve Bank of India clearly views it as a threat and is responding accordingly, its foot on the brake is being applied far more gently. The growth rate may slow a bit, but, in the current scenario, a sudden decline is not on the cards. |
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| Going beyond the aggregate numbers, the relative performance of sectors provides reasons for both cheer and concern. Agriculture is estimated to grow at 2.3 per cent, a somewhat muted recovery on a relatively low base of 0.7 per cent growth last year. Mining, a component of the industrial sector, will manage only 1 per cent growth, significantly down from an unimpressive 5.8 per cent last year. And the electricity component (which includes gas and water supply) has accelerated slightly from 4.3 per cent last year to an anticipated 5.4 per cent this year. Sustaining fast growth will obviously become more difficult if the growth in power supply lags significantly. This pattern is all the more striking because manufacturing, which is a relatively large consumer of power, accelerated from 8.1 per cent to a very impressive 9.4 per cent this year. |
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| The star performers from last year have continued to contribute significantly during this year as well. Construction, which clocked 12.5 per cent last year, is expected to have sustained its pace at 12.1 per cent this year. The huge services category of trade, transport, hotels and communication, which itself accounts for over a quarter of GDP, has accelerated from 10.6 per cent to 11.1 per cent, while the financial, real estate and business services have accelerated from 9.2 per cent to 9.5 per cent growth this year. |
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| Three aspects to this pattern need to be emphasised. First, while services continue to contribute significantly, manufacturing is clearly enlarging its role as an engine of growth. Broad-basing is undoubtedly conducive to sustainability. Second, while inflation is a more muted threat than before, the infrastructure drag can spoil the party. Finally, the risk of falling into a complacency trap as a result of this dream run is high. Sustaining growth means sustaining reforms and not shelving them, however tempting that option is in the current political circumstances. |
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