Broad-based growth

Lower inflation and higher investment remain priorities

At a relatively impressive 7.4 per cent, India’s national income growth for 2009-10 indicates that the economy has bounced back from the post-Great Recession low of 6.7 per cent in 2008-09. This revival of fortunes was partly on account of manufacturing output growing at a spectacular 16.3 per cent in the last quarter, taking the sectoral growth rate for the year to a healthy 10.8 per cent. This was in contrast to the anaemic growth of 3.2 per cent in 2008-09. Thus, Indian industry seems to have quite decisively got out of the funk it had fallen into in the wake of the global financial meltdown. While industrial growth is reason enough to cheer, it is just as heartening to see agricultural growth come in at a low but positive 0.7 per cent in the last quarter of 2009-10. Thus, the worst impact of last year’s severe drought seems to have been confined to the third (October-December 2009) quarter of 2009-10 when output actually fell by almost 2 per cent on a year-on-year basis. If this recovery in agriculture sustains, God and the monsoon willing, it will not only shore up growth rates for the current fiscal year but also help mitigate food inflation.

 

There are, as usual, areas of concern. The services sector actually decelerated, growing by 8.5 per cent in 2009-10 compared to 9.8 per cent in 2008-09. This came largely on the back of a sharp fall in the growth rate of the “community, social and personal services” component that roughly corresponds to the economic activity of the government, including the various “stimulus” initiatives introduced in 2008 and early 2009 to counter the slowdown. Growth in this category dropped from 13.9 per cent in 2008-09 to a mere 5.6 per cent in 2009-10. This deceleration possibly captures the waning statistical effect of the salary revisions of government employees, implemented in October 2008, that worked de facto as a counter-cyclical stimulus. (One has to remember here that in national income accounting, value addition by government employees is equated directly to their salaries) Going forward, as the impact of the slow exit (initiated in the February 2010 Budget) from the government’s more explicit stimulus programmes creeps into growth data, this component of services will remain sluggish and remain a drag on headline growth. Besides, analyses of different expenditure components (consumption, investment et al) that constitute overall GDP also throw up some disturbing trends. The growth rate in private final consumption expenditure (that constitutes the bulk of GDP) has actually fallen from 6.8 per cent to 4.3 per cent. This perhaps reflects the impact of the high prices of essential commodities like foods that are known to erode discretionary spending by households. While a recovery in gross capital formation (physical investments like infrastructure spending and capex by companies) from 4 to 7.2 per cent has compensated, the growth rate, in absolute terms, of this critical expenditure component remains muted.

The key to a more robust growth rate in 2010-11 thus lies in the government’s ability to control food prices and in the recovery in investments converting into a full-blown upswing in the face of continuing global economic uncertainty. Let’s keep our fingers crossed.