A year of mixed performance

Yearend 2009: Indian economy is in a much better shape now than last year

Even as the Indian economy appears to be cruising into 2010 with a robust outlook for higher growth, its overall performance in the first half of 2009 gave anxious moments to policy makers with major economic indicators showing dismal performance.

Though, the second half of 2009 witnessed visible signs of much-needed recovery in the economy, all throughout the year the phenomenon of spiralling prices in essential commodities, especially key food items like cereals and pulses and vegetables, made life miserable for the common man. 

The major challenge facing the economy in 2009 was whether the economy could overcome the blues of global meltdown that impacted the growth momentum of countries around the world, developed to developing. An overview of the performance of the Indian economy in 2009, however, gives a feeling that the year 2009 represents a crossroad for the country’s future.

Against the backdrop of global slowdown exerting ripple effect at the beginning of 2009, the Indian economy faced the gigantic task of sustaining even low profile growth rate of 5 to 6 per cent with most of its key economic indicators like Index of Industrial Production (IIP) and agricultural production showing low growth rate and exports posting an alarmingly declining trend. But as we are approaching a new year, an air of optimism to post 8 per cent growth in GDP is adding to the feel-good factor.

On the other hand, as the year 2009 draws to a close the spiralling rise in food prices, which touched an alarming level of 19.95 in the first week of December, 2009-the highest in the last one decade-gives rise to apprehension that overall inflation will shoot up in coming months thus threatening to disturb the fiscal equilibrium of the economy.  

Contradictory signals

 Against this conflicting backdrop one has to analyse the performance of the Indian economy in 2009, second half of which appears to have triggered the much-awaited process of recovery thus laying the foundation for the economy to move into higher trajectory of growth rate of 8 to 9 per cent in coming years, with inflation raising its ugly head. 

As the economy rolled into 2009 with a hang over of low profile growth rate in second and third quarters of 2008-09 (stretching from July to December, 2008) the government in a bid to counter the recession, responded by providing focused fiscal stimulus packages in the form of tax relief to boost demand and increased expenditure on public projects to create employment and public assets.

Easing liquidity

The Reserve Bank took a number of monetary easing and liquidity enhancing measures to facilitate flow of funds from the financial system to meet the needs of productive sectors.

The fiscal accommodation led to an increase in fiscal deficit-the net difference between the government’s net income and expenditure-from 2.7 per cent of the Gross Domestic Product (GDP) in 2007-08 to 6.2 per cent of GDP in 2008-09. This fiscal stimulus at 3.5 per cent of GDP at current market prices amounts to staggering Rs 1,86,000 crore. These measures were effective in arresting the fall in growth rate of GDP in 2008-09 ending March 31, 2009 to 6.7 per cent compared to average 9 per cent posted in previous three fiscals.

But in the first three months of 2009 — January to March, 2009-which otherwise is considered as the last quarter of 2008-09-the overall performance of economy witnessed a declining trend with the GDP growth rate falling to low 5.8 per cent primarily due to dismal performance of the manufacturing sector.

The manufacturing growth turned negative at 1.4 per cent in the January-March, 2009 quarter, pulling down GDP growth in the same period to 5.8 per cent from 8.6 per cent a year ago.

The industrial sector in the first three, four months of 2009 witnessed a sharp slowdown as a consequence of successive shocks, the most important being the knock-on effects of the global financial crisis. But as the benign effects of stimulus packages started working, the second half of 2009 witnessed revival of growth in IIP thus raising hope of revival of the overall economy.

As the official data show overcoming blues of the global slowdown country’s economy posted a robust growth rate of 7.9 per cent in the July-September quarter of 2009 as against 6.1 per cent in the first quarter, thereby reflecting distinct signs of recovery.
Analysis of the latest quarterly GDP data shows that the key manufacturing sector grew by an impressive 9.2 per cent in the July-September 2009 period compared to 5.1 per cent in the corresponding period of last fiscal. Similarly, mining and quarrying grew by robust 9.5 per cent as against a poor 3.7 per cent in the second quarter of 2008-09.  The latest data show that country’s six core industries, which contribute 26.7 per cent to the overall IIP, showed improved performance in the second half of 2009. During April-November 2009 the six core industries posed a growth of 4.6 per cent against 3.5 per cent in the corresponding period of 2008.

But performance of agriculture, which plays a crucial role in boosting the overall growth of the economy, in 2009 was not up to mark. As the data show during January to March 2009 agriculture grew by just 2.7 per cent.

Then it declined to 2.4 per cent during April to June 2009 and slumped to abysmally low level of 0.9 per cent during July to September, 2009. Analysts caution that the ongoing deceleration in agriculture as noticed in most part of 2009 is likely to persist in view of deficient monsoon rainfall and the prevalence of drought and floods in various parts of the country.

Similarly, on the export front the most part of 2009 witnessed extremely poor performance, which is causing anxiety to policy makers. Country’s export witnessed unprecedented decline in most part of 2009 owing to a sharp contraction in demand from consumers in major like U S, European Union and Japan, whose house-hold budget cuts to survive global recession wiped out millions of jobs and eroded growth in emerging economies. Exporters bled all through the year with their woes peaking in May when export dropped by 39.2 per cent-the highest ever fall in the last one and half decades.  But a ray hope for revival of growth has arisen by way of 18.2 per cent growth in November 2009.  

Threat of inflation

Another area of concern, which the economy witnessed all throughout 2009, relates to phenomenon of spiralling rise in prices of essential commodities, which is fast emerging as a hot political issue. Interestingly, though up to August to September 2009 inflation sharply declined some time going below zero per cent, there was no across the board decline in actual prices of most of the commodities consumed by common man especially food items like cereal, pulses and vegetables.

This was primarily due to the Wholesale Price Index (WPI) index based inflation giving more weight to manufacturing goods as against food and primary products.

With effect from middle of November government introduced a new system of measuring inflation that gives due weight to food and primary articles. The latest 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. There is now growing apprehension that ongoing soaring food inflation will push up the overall inflation much above five per cent by end of this fiscal. This is likely to threaten the very fiscal equilibrium of the economy.  This steep rise in food inflation is likely to put pressure on the over all inflation thus raising apprehension that the Reserve Bank will adopt tight monetary policy thereby pushing up the interest rate on all sorts of borrowings like car and housing loans and commercial lending.

Analysts apprehend that with the hardening of interest rate regime the industry will find it expensive to go for further expansion and investment. This in turn will affect the much-needed growth momentum of the economy.

On the corporate front the year 2009 witnessed the government taking series of steps to help the crisis ridden Satyam Computers back to its foot. The Hyderabad-based IT major sank into manifold problems with its disgraced founder Ramalinga Raju confessing having fudged firm’s account deliberately to create fictitious assets and non-existent profit margins.

The government’s twin-pronged strategy to salvage Satyam focused getting into the root of the fraud-considered to be largest ever fraud in country’s corporate history-and restoring overseas investors’ confidence in India’s growing IT sector.

DH News Service