Advantage agriculture

The revised estimates for GDP growth during 2005-06 were released yesterday. They indicate that GDP grew by 8.4 per cent during the year, slightly higher than the 8.1 per cent that had been suggested by the advance estimates in February. In a nutshell, the economy is growing faster than even the government thought it was. The 8.4 per cent rate continues a streak that started in 2003-04 with 8.5 per cent, dipping mildly to 7.5 per cent in 2004-05, only to surge again as the new figures show.

The main driver of this pattern is the agriculture sector, which is estimated to have grown by 3.9 per cent during 2005-06, buoyed by a sharp spike of 5.5 per cent in the January-March quarter. This is substantially higher than the 2.3 per cent growth in this sector indicated by the advance estimates. Virtually the entire difference in the overall GDP growth rate is due to this upward revision; agriculture accounts for about 19 per cent of GDP now, so a difference in the growth rate of 1.6 percentage points in this sector will add about 0.3 per cent to aggregate GDP. In other words, the industry and services components of GDP were captured with relative accuracy by the advance estimates. In other words, whatever conclusions anyone may have drawn about the sustainability, or otherwise, of 8 per cent growth on the basis of the February data release, remain valid.

The critical issue, then, is not whether the economy grew at 8.1 per cent or 8.4 per cent during 2004-05. It is whether the drivers that have contributed significantly to the three-year streak remain robust or show signs of running out of steam. From this perspective, there are both positive and negative signals emanating from yesterday's numbers. On the credit side, most of the sectors that contributed significantly to growth during 2004-05 continued in that vein last year. Manufacturing, for example, accelerated slightly from 8.1 per cent to 9 per cent, while construction sustained growth at a little over 12 per cent. The big services category""trade, hotels, transport and communication""accounting for over 26 per cent of GDP, powered along at 11.5 per cent during 2005-06, appreciably faster than the still impressive 10.6 per cent it clocked in the previous year. The only sector that showed a significant slowdown was mining, but it accounts for just about 2 per cent of GDP. In any event, minerals can always be imported and slumping domestic production should not act as a constraint on overall growth.

On the debit side, each of the main drivers could face challenges in the months ahead. Rising oil prices will impact manufacturing, particularly the demand for new transport equipment of all kinds, as well as the cost of transportation services. Rising interest rates will affect construction activity as well as the consumption growth that has been fuelled by retail finance. This could be reinforced by falling stock prices through the "wealth effect", working negatively. Of course, these are all threats, not certainties. Some or all of them could either vanish or be offset by other, more favourable, developments. Meanwhile, it would be prudent to not read too much into the 0.3 percentage point surprise, while, of course, taking some comfort from the persistently good performance of the main drivers of growth over the past couple of years.