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Economic growth more than just numbers

Services and industry growing strongly to offset low agriculture growth.

IN RAPID succession the Central Statistical Organisation has been releasing statistics that are flattering to the economy. Each data release seems to be an improvement over the previous one. On Wednesday (February 7), the CSO released the advance estimates of the gross domestic product (GDP) for this year (2006-07) that peg overall growth at 9.2 per cent on top of a 9 per cent growth for last year.

Industry is expected to grow this year by 9.95 per cent, slightly higher than the 9.58 per cent recorded last year. The star performer here has been manufacturing that is expected to grow by 11.29 per cent as against 9.09 per cent.

CSO estimates

The CSO has estimated the services sector to grow by a robust 11.29 per cent (9.83 per cent). In this sector, the omnibus category trade, hotels, transport and communications accounting for a quarter of the GDP is estimated to grow by over 13 per cent this year compared to 10.42 per cent last year.

For quite some time now these two sectors — industry and services — have dominated economic growth with agriculture pulling down the overall rate. For 2006-07, agriculture is forecast to grow at just 2.73 per cent compared to a little over 6 per cent last year.

Macro economic data including estimates of GDP growth described above are on a year-on-year basis. Hence the base factor — the rate of growth during the previous period — becomes critical in evaluating more recent performance of the economy. A high growth rate for the current year has come on a base of 9 per cent for last year. This may give credence to the view that growth rates of 9 per cent and above could well become the norm.

Base rate too up

The Eleventh Plan is targeting an average annual growth rate of 9 per cent and that would seem achievable now. Even the Prime Minister's vision of a double-digit growth by 2011-12 appears to be within reach.

The importance of the base as the point of reference is amply demonstrated this time. Barely days before releasing the advance estimates for this year, the CSO had revised its estimates for 2005-06.

Upward revision

The most significant change was the upward revision of the GDP growth rate to 9 per cent from the earlier 8.4 per cent. That was possible because agriculture growth originally estimated at 3.9 per cent was sharply revised upwards to over 6 per cent.

Since the advance estimates for this year are based on the revised estimates for last year, a number of inferences — some positive, others negative — are possible.

In the former category, of course, is the inference — as mentioned above — that the economy seems set on moving onto a higher growth trajectory, perhaps earlier than what even the most diehard optimists had expected.

The GDP growth in 2004-05 was 7.5 per cent. Hence the average of the past three years taking into account the revision is at a comfortable level of above 8.5 per cent. For the whole Tenth Plan period, which had fixed an ambitious target of 8 per cent, the average GDP growth was at a commendable 7.7 per cent. The other positive inference is the rebound in agriculture last year to a respectable 6 per cent.

But this became the base for the advance estimates for the current year. Agriculture continues to be a laggard. In fact there have been big question marks over the revised growth rate in agriculture. With a 6 per cent growth agriculture would appear to have caught up at least partly with the other high growth sectors.

But there has been no corroborative evidence. In fact one of the principal causes for the looming inflation — now above 6 per cent on the basis of the wholesale price index — has been the high prices of agricultural commodities. That in turn is attributed to inadequate farm production. In any case, the advance estimates for this year clearly point to the poor performance of agriculture.

Viewed in another way, the advance estimates show that industry and services are growing so strongly that despite a lower growth in agriculture, the overall GDP growth is expected to be higher than last year.

However, despite their limitations, official statistics have been consistently pointing to a strong growth trend. Estimates of growth such as 9 per cent, 9.2 per cent and so on, are obviously important indicators of underlying economic activity. One key question now is whether such growth rates can be sustained. High growth rates might mean lower fiscal deficits (partly through higher tax collection).

Revenue buoyancy will give more elbow room for the Finance Minister to introduce reform measures. Reducing tax exemptions over a number of categories has been talked about for long and might well start this year.

Inflation

At 6.58 per cent for the reporting week ended January 25, wholesale price inflation threatens to dampen any euphoria over the 9 per cent plus GDP growth rates. That is because the price rise impacts more on the poor and the vulnerable. The diagnosis of economic growth in India not benefiting all sections is once again confirmed.

C. R. L. NARASIMHAN

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