Readying for the tightrope walking

Though Mukherjee appears to be optimistic of the country achieving a near 8 per cent GDP growth in the current fiscal, a lurking fear of inflation destabilising the fiscal equilibrium of the economy seems to be haunting him. The other major economic challenge facing the FM is how to cut down growing the fiscal deficit, while sustaining the ongoing recovery.

Global meltdown
The economy, which was comfortably cruising along the trajectory of high GDP growth rate of 9 per cent from 2005-06 to 2007-08, had suddenly faced the challenge of sustaining such a high growth profile with the setting in of global slowdown in September-October 2008.

Under the effects of the global slowdown, the country’s economic growth rate slumped to 6.7 per cent in 2008-09, thus, setting off an apprehension that Indian economy would find it difficult to post even near 6 per cent growth in the fiscal 2009-10.
However, the unveiling of a series of stimulus packages to revive the cycle of demand in the economy played as a catalyst in accelerating the economic growth, which started reflecting in key economic indicators like Index of Industrial Production and the crucial infrastructure comprising vital segments like steel, coal, cement and  electricity generation. The data on performance of the economy during the first and second quarter of the current fiscal reflect that from a struggling economy in 2008 Indian economy is returning to the recovery path.  As the latest available GDP data shows, India’s economy has posted a robust growth rate of 7.9 per cent in the second quarter of the current fiscal (July-September, 2009) as against 6.1 per cent in the first quarter thereby reflecting distinct sign of recovery.
This impressive performance of the GDP in the second quarter, which has surpassed expectation of trade and industry, is primarily due to improved performance of industry and service sectors.

Cumulatively, the economy posted a growth rate of 7 per cent in the first half of the current fiscal (April-September, 2009) thus giving rise to hope that the annual economic growth rate during 2009-10 could be higher than 7 per cent.
The key infrastructure sector has also shown steady growth with 3.5 per cent growth in the second quarter and the half yearly growth is put at 4.7 per cent as against 3.3 per cent last year. This sector which accounts for one-fourth of the economy is vital for the economic growth to sustain.  Enthused by signs of recovery Pranab Mukherjee has projected that country’s overall economic growth rate could touch 7.75 to 8 per cent in the current fiscal 2009-10 on the back of economic recovery. An optimist Mukherjee even says “Indian economy will return to 9 per cent growth rate in 2-3 years as there are firm signals of a solid recovery.”

Even as economy is showing signs of recovery the scenario on the front of performance of the key agro sector is not encouraging. As the latest data show there is a deceleration in the growth of agriculture and allied activities to just 0.9 per cent in the second quarter of current fiscal (July to September, 2009) from a level of 2.7 per cent in the corresponding period of previous fiscal.  The Mid-Year Review of the economy made by the finance ministry has already cautioned that the deceleration in agriculture and allied activities likely to persist for a while since it does not reckon fully the deficient Monsoon rainfall and the prevalence of drought like conditions in 300 districts of the country.
As economists say to get back to high growth path, it is crucial that agriculture return to 4 per cent growth on a sustained basis. The other area of concern is the the dismal performance of the export sector. Most part of 2009 witnessed export posting negative growth.

Consolidation path
The decline in India’s merchandise export is primarily due to contraction in demand in major importing countries like US, European Union countries and Japan.

Only in November and December, 2009 after posting negative growth rate for 13 consecutive months, export has started showing trend of positive growth rate. The commerce ministry is hopeful about an upward turnaround in export early next year with some of the major global economies witnessing marginal but slow revival. But Planning Commission Deputy Chairman Montek Singh Ahluwalia cautions that the exporting community is the worst hit and will further face difficulties.  Even as towards the end of 2009 the economy witnessed signs of recovery, inflation has raised its ugly head with the spiraling rise in essential commodities including food items consumed by common man reaching alarming level.

Data show annual rate of food inflation skyrocketed to an alarming 19.95 per cent for the week ended December 5 –— the highest in more than a decade. Further intensifying political heat over ongoing rise in prices of essential commodities the Wholesale Price Index (WPI)- based inflation ballooned to 7.31 per cent in December, 2009 fuelled primarily by rise in prices of food items.  The other major economic challenge facing the country is: how to put make the country keep its expenses within the income. Last year, the government stepped up public expenditure to revive cycle of demand in the economy, which was badly impacted by the global slowdown. This has led to swelling of fiscal deficit which is estimated to touch an alarming level of 6.8 per cent of the GDP. If the deficit of states are added the figure may cross 12 per cent. It is in the interest of the economy that the focus has to be given on fiscal consolidation by bringing down the fiscal deficit. Mukherjee himself admits that such high level of fiscal deficit will not be sustainable on a long-term basis. Once the economy is put back on path of normal growth rate of 7 to 8 per cent focus will be on fiscal consolidation. 

Thus, the challenge is how to balance fiscal consolidation, keeping inflation within manageable limit and sustaining economic growth.
DH News Service