Sunny side up

But growth in the rest of the year will be slower

A 7.9 per cent rate of growth in the gross domestic product (GDP) is respectable under any circumstances. If it comes at a time when large tracts of the developed world are barely out of a recession, and when the previous quarter had clocked just 6.1 per cent, it is nothing short of spectacular. However, caution needs to be exercised in interpreting India’s latest quarterly numbers. The government’s estimates show growth of 0.9 per cent in agriculture. This might seem counter-intuitive, given the below-par monsoon, but can be explained by a methodological quirk. The drought affected the output of foodgrains, coarse cereals, pulses and oilseeds. However, this decline will get recorded only in the period when this crop is harvested. Thus the impact of the drought will be visible in the current (October-December) quarter—which would mean that the 7.9 per cent figure may not be sustained.

Second, the growth rate in services has come in at a robust 9.3 per cent. This is odd, when important components, such as “trade and transport” and “financial services” have been somewhat sedate. In contrast, the “community, social and personal services” component (which represents, among other things, the services provided by government) grew by a robust 12.7 per cent, thereby shoring up the aggregate for the services sector as a whole, and reflects in part the large outlays on social sector programmes as well as the hike in salaries of central government employees and the payment of a tranche of salary arrears in September. In GDP calculations, the salaries of government employees are used as a proxy for value addition by the sector. Since salaries were hiked in October 2008, it created a positive “base effect” for growth calculations that would have persisted until September this year. The role of the government is captured dramatically in the breakdown of GDP by expenditure components. Government final consumption has grown by a whopping 27 per cent in this quarter. As for the short-term future, a fall in farm sector growth in the current quarter could drag down the headline GDP growth. And as the government unwinds some of the stimulus programmes and the base effect of the salary revisions disappears, service sector growth could moderate. Thus it might be misleading to extrapolate the latest numbers to arrive at the likely growth rate for the second half of the year. Still, it is unlikely that growth in the full year will be less than 7 per cent — higher than all the forecasts so far.

The most positive element of the numbers is the fact that manufacturing has clocked 9.2 per cent growth. “Mining and quarrying” has also done well. The traction in industry has important implications for policy. The combination of strong growth and high consumer price inflation will invite calls for monetary action. It also makes a case for the withdrawal of some of the fiscal stimuli (particularly indirect tax cuts) introduced in the wake of the global crisis. That said, the “exit” from an expansionary policy regime has to be gradual and handled with care. The global macro environment remains fragile and the prospect of a prolonged lull, if not another dip, in global growth remains. That could affect India’s growth rates going forward.