Sub Seven: Financial Express: 16th March 2009

It is often said that despite the financial crisis and the global recession in the rest of the world, India will remain one of the fastest growing economies, touching the 7% mark (7.1% is the government’s estimate) and trailing only China. The CSO had two releases on growth in the month of February 2009. The first one had a forecast for 2008-09 while the second one had an update on the progress made in the third quarter of the year, as well as that for the first three quarters. We also have numbers coming in from the CSO on industrial performance for this period, while the Ministry of Agriculture has not presented a very pleasant picture in its second advanced estimates for agricultural production.
Based on the agricultural estimates put forth, around 80% of the rabi crop comprising cereals, which will be harvested in the fourth quarter would actually decline by 1%, while the balance in the form of pulses and oilseeds would increase by 2.4% and 6.6% respectively. Quite clearly, growth of 8.2% may not be attainable under these conditions unless prospects for cereals, especially wheat changes dramatically. Industry has already shown low growth rates of -1.11%, 1.76% and -2.51% in October, November and December respectively. With growth averaging 3.4% so far, it would be a bit difficult to suddenly surge to 6.2% to justify 4.1% growth for the full year. The same holds for electricity which has had three declining growth rates. Therefore, in the real sector it would be difficult to achieve the desired growth rates. This picture has held based on the impressionistic views presented by various sectors of industry in the first 2 months of this calendar year.
The other sector which has to accelerate is trade, hotels etc. which has been one of the more buoyant sectors registering growth of 9.4% this year . However, around half of this sector is explained by transport and communications, where growth is inexorably linked with that in the real sector. Also with foreign and domestic trade slowing down in the last 4-5 months on account of the recession and the fall in tourism following the terrorist attacks in Mumbai, growth could at best be sustained at the existing levels. The finance, insurance, etc. sector is already in the slowdown mode, with the banking and insurance sector, which accounts for 40% of this sector’s output, facing stagnant business lines. The two sectors that have excess growth capacity are construction and community and social services, which together account for 20% of GDP. These sectors have accelerated growth and will have to make up for the loss of growth in the other sectors. The construction sector is up mainly due to the efforts of the government in the form of infrastructure projects as the housing industry is still to pick up under the generally adverse economic conditions. The category of community and social services also includes general administration which at times may convey the impression of growth due to the higher level of expenditure of the government. Around 40% of this component is accounted for by public administration and defence. There is scope for an increase in this component, which can affect around 5.2% of GDP.
Therefore, with virtual zero growth in agriculture expected this year and possible negative growth in industry or at best marginal growth in the next three months, there has to be overwhelming growth in the construction and government sectors to boost growth. Growth of 7.7% in GDP in the last quarter of the year is hence not attainable and a number in the range of 5% looks more reasonable. With growth of 5% in the last quarter, overall growth would be around 6.4%. In a better case scenario of 6% growth in the last quarter, annual growth would get enhanced to 6.6%. The 7.1% number certainly does not look plausible in the context of the horizon that exists today.