Room for manoeuvre: Editorial in Financial express, 8th February 2011

Given the revisions made by the CSO in the GDP numbers for FY10, which made things look better, one would tend to look at the quick estimates of FY11 with a bit of scepticism. However, since it is the official stance, one must accept the numbers and see what they tell us. Growth of 8.6% for this year is not really off the mark, notwithstanding the hardships that we have been through in the form of high inflation and interest rates. Two of these numbers stand out. The first is the growth in the manufacturing sector, which is 8.8%. This is significant because while growth up to November has been buoyant, the base year effect was to come in from December onwards and drag down the number as IIP growth had averaged 20% in each of the last four months of FY10. The fact that we still are clocking high growth means that industry is doing well. The second is the lower growth of the community and social services at 5.7% as against 11.8% last year. This officially confirms that the fiscal stimulus has slowed down, though admittedly this is what the estimates for FY10 had also said, which were reversed a few days back to indicate that the stimulus continued in FY10. The other numbers are more on expected lines, which is definitely comforting.

Against this background, two issues are provoked—the response of fiscal and monetary policy. With the Budget coming up, this number will provide solace to the government insofar as it does not have to work on the basis of a low growth. Therefore, the stimulus factor will not be high on the agenda, and it can carry on with business as usual while focusing on other aspects such as inflation. As far as RBI is concerned, it is slightly trickier. Its stance that the series of interest rate hikes would not really impact growth stands vindicated this time with this high growth rate number. It could therefore go ahead and increase rates one more in March in case inflation does not slow down or come within its target rate of 7%. But a deeper thought has to be given to whether or not there is a point of inflection where industry will respond to these rate hikes. Already we have seen a slight dip in gross fixed capital formation from 32% to 31.6%, which may not be significant today but could turn ugly in future. Hence, while there is solace that growth has not been impacted perversely by the interest rate hikes, one has to be more watchful in FY12 where the overall global environment may not be congenial—with crude prices and metals showing upward tendencies. We should now begin to see the economy and the policy options in a different light and not have static expectations of economic responses, as it may just mean stretching our good luck too far.