The finance minister has taken a stance contrary to that of the International Monetary Fund, and some others, in calculating GDP projections for the current year. At the IMF forum in Washington recently, Mr Chidambaram questioned the world body’s assumptions. He is confident of 5-5.5 per cent, while others put their money on GDP ranging from 3.5-4.5 per cent. The 5 per cent mark is significant because psychologically anything less sounds defeatist. CARE Ratings figures project growth at 5.1 per cent, subject to assumptions being fulfilled.
There are two major reasons why growth should look up now on, while there are two other positive factors working in the background. The first is that the monsoon has been good. Going by the first advance estimates of agricultural production, farm output will be higher this year, which means there will be good spending power. In the past, there was a tendency for incomes to be diverted more to gold and jewellery. This impacted consumption and savings. While the rupee value of gold has increased in net terms, the physical restrictions placed are probably more important. This, combined with conventional spending during the festival season by even non-farm households, should provide a thrust to spending.
Recently the government also announced that it would capitalise banks (news reports suggested that government would pump in an additionl `5,000 crore into banks for this purpose) which sold more consumer loans. This has prompted some public sector banks to drop their lending rates. At the margin this should boost consumer spending. The importance of consumer spending on durable goods forges strong backward linkages with the basic, intermediate and capital goods sectors. While this virtuous circle is a strong possibility, it is built on the premise that rural households do not divert their income to gold.
The second reason for optimism is the government’s indication of clearing investment proposals amounting to `3.8-5 lakh crore. At a pragmatic level, one may not expect all these to fructify this year, given that Indian industry still has spare capacity. But even if 15-25 per cent of these proposals materialise, there will be a turnaround in investment, pushing up industrial growth.
While overall industrial growth would still be in the region of 1-2 per cent for the entire year, a foundation would have been created for future growth.
On the other side, somewhere along the way we are also witnessing the right signs in growth in exports. Though built on a low base, as growth was in the negative region last year, exports will still positively impact growth at the periphery. The rupee depreciation would have also helped in providing an advantage.
Further, the construction space is an area where some action can be expected. The core sector data shows that steel and cement have been relatively buoyant, indicating some movement in infrastructure activity. With support also coming from the services, especially finance, trade and transport, an overall growth rate of 5 per cent could be maintained this year. But, the big assumption is the strong link between farm incomes and spending on consumer durable goods.
There are two major reasons why growth should look up now on, while there are two other positive factors working in the background. The first is that the monsoon has been good. Going by the first advance estimates of agricultural production, farm output will be higher this year, which means there will be good spending power. In the past, there was a tendency for incomes to be diverted more to gold and jewellery. This impacted consumption and savings. While the rupee value of gold has increased in net terms, the physical restrictions placed are probably more important. This, combined with conventional spending during the festival season by even non-farm households, should provide a thrust to spending.
Recently the government also announced that it would capitalise banks (news reports suggested that government would pump in an additionl `5,000 crore into banks for this purpose) which sold more consumer loans. This has prompted some public sector banks to drop their lending rates. At the margin this should boost consumer spending. The importance of consumer spending on durable goods forges strong backward linkages with the basic, intermediate and capital goods sectors. While this virtuous circle is a strong possibility, it is built on the premise that rural households do not divert their income to gold.
The second reason for optimism is the government’s indication of clearing investment proposals amounting to `3.8-5 lakh crore. At a pragmatic level, one may not expect all these to fructify this year, given that Indian industry still has spare capacity. But even if 15-25 per cent of these proposals materialise, there will be a turnaround in investment, pushing up industrial growth.
While overall industrial growth would still be in the region of 1-2 per cent for the entire year, a foundation would have been created for future growth.
On the other side, somewhere along the way we are also witnessing the right signs in growth in exports. Though built on a low base, as growth was in the negative region last year, exports will still positively impact growth at the periphery. The rupee depreciation would have also helped in providing an advantage.
Further, the construction space is an area where some action can be expected. The core sector data shows that steel and cement have been relatively buoyant, indicating some movement in infrastructure activity. With support also coming from the services, especially finance, trade and transport, an overall growth rate of 5 per cent could be maintained this year. But, the big assumption is the strong link between farm incomes and spending on consumer durable goods.
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