In a turnaround year economy has emerged stronger

At the end of 2010, the braving-global recession Indian economy heralds the new year 2011 with a robust optimism to achieve nearly 9 per cent growth rate in the current fiscal 2010-11 even as the ongoing phenomenon of high inflation continues to cause worry to policy makers.

The year 2010 will, no doubt, be viewed by many as very significant for Indian economy while looking at it from global angle. At a time of a steep global recession, the Indian economy has not only managed to keep its head above the water but has also shown strong growth, making it standout from the rest of the world. After China, India’s GDP (Gross Domestic Product) growth is expected to be the highest among the rest.

As one takes a panoramic view of the performance of the overall economy in 2010, the remarkable recovery in the growth momentum instantaneously draws the attention. All throughout the year, the Indian economy swam against the ripple effect of global slowdown, which was triggered by U S financial meltdown in late 2008, and its growth climbed back to near pre-crisis levels. Riding on the crest of growth momentum, the country’s GDP grew by 8.9 per cent during the first half of the current fiscal — primarily driven by robust farm output and services sector growth in the second quarter (July to September, 2010).

Sectoral performance

An in-depth analysis of performance of key segments, such as agriculture and industry, shows that improved performance of these sectors, mainly, boosted the growth momentum of the economy.

As the GDP data during the second quarter of the current fiscal (July to September, 2010) shows that the stimulus to growth momentum has come from industry and service sectors which expanded by 9 and 9.6 per cent respectively.

The big surprise has come from the crucial agricultural sector, which posted an impressive 4.4 per cent jump in the second quarter. The good monsoon during the year has immensely boosted the Kharif crop. (See Chart) The scenario was quite different a year ago when successive droughts and floods adversely affected the growth of the farm sector.

Performance of agro sector virtually holds the key to overall growth of the economy as it employs maximum number of people. Revival in farm sector will automatically boost rural demand, which in turn will rekindle the overall demand cycle in various segments of the economy, thus, triggering growth momentum. Another big boost to the economy during 2010 came from the crucial industry sector — especially from the manufacturing segment even as there had been some  hiccups in between.

Cumulatively, the Index of Industrial Production (IIP) that measures industrial growth rate grew by 10.3 per cent in the first seven months of the current fiscal (April to October, 2010) as against 6.9 per cent during the corresponding period of the previous fiscal. After posting an impressive 15.08 per cent growth rate in July the industrial growth rate witnessed decline in August and September, thus, causing apprehension that the growth momentum of the economy might receive a setback if the southward movement of industrial production continues. 

In September, it dipped by more than half to 4.4 per cent giving rise to apprehension that if declining trend would continue it could hamper economy posting projected growth rate of 8.5 to 9 per cent in the current fiscal. But industrial production bounced back to double digit growth rate by jumping 10.8 per cent in October this year. With the additional impetus, to revival of demand cycle due to expansion in agro growth, the industrial production is expected to sustain the double digit growth in coming months, thus, boosting hope for the economy maintaining its ongoing growth momentum.

Crucial concerns

The fact that the overall economy in 2010 has staged a remarkable recovery in growth is corroborated by the fact that the indirect tax collection rose by 42 per cent to Rs 2.07 lakh crore during April-November this year as compared to corresponding period last year, indicating up-tick in economic activities. While on one hand, most part of 2010 witnessed building up of growth momentum the economy witnessed high level of inflation causing concern to the government. Though inflation appears to be declining towards the later half of 2010 the general price level — especially food inflation — overwhelmingly remained high, threatening to destabilise the fiscal fabric of the economy.  

As Finance Minister Pranab Mukherjee said, “Inflation remained high in the current fiscal but is now coming down. From double digit it has declined to single digit. We hope that it will be somewhere around 6 per cent by end of this fiscal.”

The head-line inflation as measured by the Wholesale Price Index (WPI) shot up in November 2009 and continued at elevated levels in the first half of 2010. After reaching a peak level of 11 per cent in April 2010, it started to decelerate and is now placed at 8.6 per cent in October this year. Higher food prices caused in part by domestic drought conditions last year and higher global food prices have been driving inflation. The sharper rise in headline WPI inflation during 2010 is due to the rise in food items together with a rise in the fuel power, light and lubricants group and low base effect of last year. Inflation virtually remained negative or very moderate in the first half of 2009. Because of prevalence of high level of inflation, the Reserve Bank of India (RBI), all through 2010, adopted tight monetary policy to douse inflationary expectations and pressures.

Adoption of tight monetary policy hardened the overall interest regime, thereby making all sorts of borrowing ranging from commercial loans to car, home and personal loans costlier.

This led the Indian trade and industry to make vociferous demand for bringing down the interest rate. Their argument is high cost of capital would have an adverse effect on growth momentum. With the mellowing down of inflation, the RBI seems to be inclined to softening the monetary policy.

Uncertain future

Even as the economy is heralding 2011 with robust optimism, it faces multiple risks factors that could adversely affect the ongoing growth momentum. Experts have specifically mentioned trade imbalance, volatility of funds flow through the route of Foreign Institutional Investment (FII), current account deficit, reduction in foreign direct investments to almost half in last six months and above all, crisis in Euro zone affecting trade balance. FIIs have pumped in a record $39 billion in the Indian capital markets in this calendar year so far. It is expected to cross the level of $50 billion soon. On the other hand the more desirable FDI inflows have declined by 28 per cent in the first half of this fiscal to $11 billion. FII money is considered hot and volatile in nature compared to FDI.

There are concerns in our external trade (see accompanying story). Now the country’s trade deficit stood at $81.7 billion during the first eight months of this fiscal, more than half of its exports. High commodity prices may further increase the deficit, the analysts said. The current account deficit, representing net flow of income out of the country barring capital movements, surged three-fold to 13.7 billion in the April-June quarter over the same period last year. This trend is continuing. The deficit is widening due to higher imports because of economic recovery and larger payments overseas for certain services.
Crisis in Euro zone may affect India’s trade balance. After sovereign debt crisis in Greece, Spain and Portugal, banking crisis has erupted in Ireland. As a ripple effect of this the growth momentum of export may come under strain. Thus in view of these risk factors one should not be euphoric over growing optimism about probable high profile economic growth rate in the current fiscal.