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On a higher trajectory

Prime Minister Manmohan Singh's belief, expressed at his press conference on Wednesday, that the economy is moving towards a sustainable growth rate of 8 to 10 per cent draws support from the data and the recent economic forecasts provided by leading institutions. In fact, for quite sometime now, the view has been gaining ground that the economy is headed towards a higher growth trajectory where annual real GDP growth rates of 8 per cent and above are both possible and sustainable. In its recent quarterly review of the monetary policy, the Reserve Bank of India has not only been more optimistic than ever before — it has forecast a GDP growth rate of 7.5 to 8 per cent for the year — but expects the momentum to be maintained well into the next year (2006-07). Interestingly, when the original Tenth Five Year Plan document assumed an average annual GDP growth rate of 8 per cent for the whole plan period, it appeared to be in the realm of wishful thinking, a view seemingly corroborated by the figures for the first two years. While the Prime Minister has singled out sound economic management, it was really a combination of factors that led to the acceleration of GDP growth. These include a turnround in agriculture and the continuing growth in the manufacturing and the services sectors. Evidence of economic buoyancy is visible all round. Credit disbursements by banks have continued to grow at a furious pace. Although oil imports continue to be the single biggest item — and understandably so — a large part of the imports is made up of capital goods. This is another sign of recovery. The current account of the balance of payments turned negative from the beginning of this year after having been in the black during the two preceding years. The favourable inference here is that the country is in a position to invest all its savings instead of exporting them.

Recent national income statistics of the Central Statistical Organisation (CSO) give room for further optimism. The data, computed after changing the base year from 1993-94 to 1999-2000, indicate that the CSO's advance estimate of last year's GDP rate at 6.9 per cent might be an underestimation by 0.6 percentage point. While this by itself is a positive sign, a higher base implies additional challenges this year to achieve the growth acceleration. The CSO data throw up a number of other positive factors: the savings rate has climbed up to 29.1 per cent during 2004-05 from 28.9 per cent the previous year, almost entirely due to reduction in government deficit. The investment ratio has climbed to 31.1 per cent, up by almost three percentage points. All these augur well for the macroeconomy and should have a positive impact on mass poverty and deprivation. However, as always, the growth prospects might be constrained by any number of factors. Infrastructure constraints, persistently high global oil prices, and the threat of higher inflation in the coming months are some of the major worries.

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