Growth is back...

Driven by domestic demand

Growth is back, unhindered, almost unaffected by the international slowdown, and well on its way to meeting the 8 per cent target that many believe has become India’s long-term growth trend. In its latest estimates of economic performance, the CSO expects growth to be at 7.2 per cent for the year 2009-10, up from 6.7 per cent for 2008-09. In other words, India’s GDP grew at close to 7 per cent annually through the worst economic crisis the world has ever seen. What is more, this growth was amidst the severest drought that Indian agriculture has experienced in recent decades, leading to a reduction in agriculture GDP by 0.2 per cent during 2008-09.

Going by the CSO estimates for 2009-10, this has been an unusually good year for the economy — barring agriculture, no other sector has grown below 6.5 per cent and all, apart from construction, have grown more than 8 per cent in real terms. Manufacturing, mining, services and utilities were all hovering around or higher than their long-term trends. And unlike in 2008-09, government and community services were not leading the economic growth figures. The data from many different sources has been showing that the Indian economy has largely shaken off whatever little impact the international economic fluctuations had, and these CSO figures underscore the same at the aggregate level. Of course, there would be some correction of these figures as the latest information pours in, but the overall picture is quite unambiguous.

Of all the major sectors, the two sectors that have grown the most rapidly were manufacturing and finance and business services. The former was able to withstand a dramatic fall in international and domestic demand, wage inflation and energy and commodity price fluctuation, and grow at 8.9 per cent in 2009-10, up from 3.2 per cent in 2008-09. Financial and business services, it appears, were never impacted by the international financial and economic meltdown — the growth rates were 10.1 per cent and 9.9 per cent during this and the previous financial year, respectively. Moreover, all available evidence is that sectoral growth rates would be higher in 2010-11 than in 2009-10.

Perhaps the only significant problem in India’s macro-economy is that of inflation, and this is also reflected in the GDP figures. While agricultural GDP grew at above 10 per cent during 2009-10, it was negative in real terms. As economic growth further accelerates, as it is expected to in coming quarters (barring another global meltdown), the demand side factors would tend to put further pressure on inflationary forces. The Indian economic story is very robust, much more than many seem to believe. It is time, therefore, for the government to set in motion a process of staggered removal of the stimulus package.