New Delhi: Finally, the country has managed to record a 6.7 percent growth in financial year 2008-09, despite the global economy still in the throes of a deep recession. This has been vindicated by the official figures released recently. This growth rate, though, much lower than the 9 percent rate that we have been clocking for the previous four years, is nonetheless, well above the 6 percent growth that was being projected by some analysts. Some prophets had even predicted only a 5% growth in the last financial year. The Central Statistical Organization had pegged the GDP growth rate at 7.1 percent.
The actual growth rate is certainly in the range that the RBI had projected: 6 to 5.7 %. Our Prime Minister Dr. Manmohan Singh too had been emphasizing that the growth rate would be in the range of 6.5 to 7. That is precisely what has happened.
In a way, this growth has been somewhat unexpected. It has largely been possible by the strong 5.8 % growth in the last quarter of the financial year. The reasons for this have been the effects of huge Government spending on social programmes and construction, pumping liquidity into the market through special packages and by lowering of interest rates. Government consumption too increased by 22 percent.
The most encouraging news is the performance of the core sector which has sent clear signals of an economic recovery. In April 2009 growth rate in the core sector of infrastructure doubled to 4.3 percent, against 2.3% in the same month last year when the economy was booming. The output of cement in April went up by 11.7% compared to 6.9% in the same month last year. Steel grew by 1.6 percent against a decline of 0.6 % in April last year. Coal production grew at an impressive 13.2 percent compared to 10.4 % in the corresponding period last year. So was the case with electricity generation which jumped up by 6% in April against 1.4 % in the same month, last year.
Not less important is the increase in the collection of direct taxes by 16.88 % in May this year. In fact the collections have shown a positive growth since February this year. This will help the Government to keep the fiscal deficit under control, which could well cross 5% of the GDP against the limit of 2.5 % fixed earlier. The deficit could well be about 10 % if the state budgets are also taken into account. The actual position in this regard will, however, be known when the Finance Minister presents the budget next month. May month’s collection figures are particularly encouraging as there had been a shortfall just a month earlier.
As a result of this economic scenario, coupled with the installation of a stable Government at the centre, the financial market is also jubilant. The stocks are rising and the sensex is hovering in the 15,000 area, double than what it was less than 6 months ago. Mutual Funds too are, as a consequence, looking up.
The picture certainly would have been much better, had we not slowed down in two important sectors: manufacturing and agriculture. A sluggish manufacturing sector, which grew at just 2.4 percent during 2008-09 against 8.2% in the previous financial year, was a dampener. Similarly, agriculture, which accounts for 20 % of the country’s GDP, recorded just 1.6 % growth in the last financial year against 4.9 % in the previous financial year.
What came as a booster was the growth in the service sector: 13 % growth in the community services, 9% in transport and communications sector and a 7.8% growth in financial and other service sector. All this happened at a time when the US economy contracted by an annualized rate of 6.2 % and the Japanese economy by 12.7 %. This only proves the resilience of Indian economy. To some extent it is also due to the fact that Indian economy is more inward looking as it opened up only after 1991. It thus depends more on the domestic demand. In sectors where it looks more on the foreign markets like the textiles, the effect of global meltdown has been more pronounced. The country recorded a 33% fall in exports in March this year, leading to fall in incomes and unemployment in this sector.
President Pratiba Devi Singh Patil’s recent address to the joint sitting of the two houses of Parliament has now laid the future roadmap for the Government. It aims at pushing ahead with the economic reforms, pursuing the disinvestment and promoting Foreign Direct Investment which will also take care of the financial constraints of the Government. It also envisages increased public spending. But while doing so, care will be taken of fiscal prudence so that the widening gap in fiscal deficit is kept in check. Liquidity in the banking sector will also be improved to make way for better access to funds by the stake holders. The Reserve Bank of India has already asked the Government for a comprehensive review of the interest rate regime to nudge the banks into reducing their lending rates which they are reluctant to do. The Finance Minister Mr. Pranab Mukherjee too has clearly pointed out to the banks that they have not so far adequately reflected in their lending rates, the reduction in key rates by the RBI. But they have now agreed to take a fresh look at the issue.
Fortunately, inflation too is under control which provides additional leg space to the Government to take fiscal and monetary measures to push up growth. The current financial year will not be without challenges and the growth rate may continue to be around the existing level. The Prime Minister told the Parliament the other day that he was confident that the country would record at least 7% growth in the current fiscal as well. But if all work together, it is possible to raise it to 8-9 % “even when the world grows at a lower rate” the Prime Minister said. These are words of satisfaction indeed. A high rate of 35% of our GDP being the savings determines the money that can be deployed for development works, though heavy public spending does carry a cost in terms of increasing fiscal deficit which has already crossed 6.2 %.
The larger picture that emerges thus is of hope, confidence and optimism on the economic front.
By: Ashok Handoo