Services to help economy grow 7.5-8%, says CEA

Services will prove to be a stabiliser for the Indian economy and enable it to grow by 7.5-8 per cent this fiscal, a key finance ministry official said, amid fears on the part of some that the sector will slow down in a major way in the remaining months of 2008-09.

“Services will generally have no (bigger) cyclical decline than overall GDP and certainly (decline) much less than manufacturing, which is cyclical in most countries. Services will act as a stabiliser for us,” Chief Economic Advisor Arvind Virmani told PTI here.

Virmani said the services sector, along with others, did slow down in the first half, moderating growth to 7.8 per cent in the first half of the current fiscal compared with 9.3 per cent a year ago.

 

However, he did not agree with the view of some that services would slow down in a major way in the second half.

“We know from cyclical events that historically services are less affected by the cyclical shocks. Whatever the source of these cyclical shocks, I don’t see any reason why that should be overturned,” Virmani said.

Even as services helped the Indian economy clock better than expected growth in the first half, many economists say that the sector would slow down much more in the second half and restrict growth to 7 per cent or less for the whole fiscal.

Virmani said: “Those who are saying growth would be 7 per cent have to tell you what slowdown they are expecting... I am saying the growth rate is 7.8 per cent (in the first half) and you will still get at least 7.5 per cent (for the entire fiscal).”

“So slowdown is implicit, but it will be consistent with the projection of 7.5-8 per cent overall growth,” he said.

In the case of industry, there is a question whether it would go down further, but the same is not true for services, he added.

“That is not how services generally operate... There is a whole range of services there. The fact (is) that (when the) economy slows down, services also slow down, but they don’t slow down as much as manufacturing. You have a decline in manufacturing from 10.1 per cent to 5.3 per cent (in the first half). You won’t see that kind of decline in services,” Virmani said.

As far as overall economic growth is concerned, while the Reserve Bank of India (RBI) projects 7.5-8 per cent, many estimate 7 per cent or less.

Even after the recently announced stimulus package, Planning Commission Deputy Chairman Montek Singh Ahluwalia had said if the economy grew by 7 per cent it would be a good performance. “(A) 7 per cent growth rate is quite feasible ... A good performance,” he said.

Goldman Sachs said, “Although the moves (the RBI and government’s stimulus package) are positive, we do not think they materially alter the growth outlook for the Indian economy. We continue to expect GDP growth to slow to 6.7 per cent in 2008-09 and 5.8 per cent in 2009-10.”

In the first half of this fiscal, services managed a reasonable growth rate, despite moderation in some sectors from a year ago.

While construction grew by 10.5 per cent from 9.7 per cent, trade, hotels, transport and communication rose at the rate of 11 per cent from 12.1 per cent and financing, insurance, real estate and business services by 9.2 per cent from 12.5 per cent.