Economy expands, but little room to grow

Further government action needed to sustain growth

The numbers for the gross domestic product (GDP) of the Indian economy during the first quarter of 2014-15 were declared last Friday. The first quarter pertained to a politically significant period - starting from April 1, six weeks before the election results were declared, to June 30, a little over a month after the new government took office. In line with many predictions, they showed that year-on-year growth was 5.7 per cent, a relatively good number compared to the past few quarters. One year ago, growth had come in at 4.7 per cent and the mood was one of utter despondency. Last week, the number was better - but not by as much as sentiment, which tended to see in that unmistakable signs of a strong recovery.

There are indeed some signs in the numbers that a robust recovery may indeed be under way. Four sectors explain much of the improvement over last year. Manufacturing grew by 3.5 per cent during the quarter, a sharp improvement over the 1.2 per cent decline in the corresponding quarter of 2013-14. Electricity grew by over 10 per cent, in contrast to the less than four per cent growth a year ago. And the omnibus service-sector category of trade, transport, hotels and communication, which itself accounts for about 22 per cent of GDP, accelerated from a sluggish growth rate of 1.6 per cent to a much better 2.8 per cent. Construction also accelerated from a 1.1 per cent growth rate last year to almost five per cent this year. All these are indications of a relatively broad-based pick-up in economic activity. In contrast, the negative forces appeared to be relatively small. The other two service sectors - financial, real estate and business services, and community, social and personal services - saw somewhat mild deceleration in growth compared with last year. It is worth noting, however, that the second quarter of last financial year saw a slight pick-up in growth, so observers should be wary of a base effect. Two quarters of data at least are needed to argue a sustainable recovery.

Still, after having found a firm bottom in the 4.5-5 per cent range, the economy is demonstrating some capacity to rise up from there. But two important questions arise in this regard. First, having risen from the floor, how far away is the ceiling? Second, what factors are at work in determining that ceiling? On the first, a realistic assessment would be that there isn't a lot of headroom for further acceleration. There are just too many constraints and bottlenecks - persistently high food inflation and the significant slowdown in infrastructure investment, to name but two - to allow the economy to return to the glory days of 2003-08. So as much cheer as the first-quarter numbers may have evoked, in the business-as-usual scenario, it must be acknowledged that there is now a relatively narrow range between the floor and the ceiling.

This brings up the second question. As reassuring as the prospects of a recovery may be, the government must realise that the limited headroom for acceleration is something only it can deal with. There are certainly some positive signs with respect to efforts to get to grips with these two and other factors that have played a role in shrinking the potential upside. But it's still very early days for the government, and it will discover that there's many a slip between the cup and the lip. In such situations, there is no substitute for effective strategising and diligent implementation. The ceiling on growth will only rise when the right combination of policies is put in place. These numbers should not be seen by the government as a reward, or as the consequence of its actions. Concerted reformist endeavours are necessary to sustain growth. The greatest risk posed by Friday's numbers is complacency.