Positive signs

The 7.9 per cent growth in GDP for the second quarter of the year, as estimated by the Central Statistical Organisation, is a pleasant surprise, and has improved the sentiment which had been dampened by the Dubai blues. The performance of the economy is better than at any time in the last six quarters and has provided confidence about its resilience and momentum. The annual GDP projections are bound to be revised upwards and it is possible that the economy may register a 7 per cent growth for the whole year, above the best estimates given by anybody. Other indicators like the pick-up in exports, though they are yet to register growth, and the growth of industrial output at near 10 per cent, also support the cheer.

But the caveat is that the high figures owe much to one-time, non-recurring factors. The performance was mainly accounted for by the growth in community and social services, mining, manufacturing and services. The Sixth Pay Commission payout is still showing a positive impact on consumption and demand. The government’s stimulus packages, which increased public expenditure, have given strength to the manufacturing and services sectors. More importantly, the growth of agricultural sector at  0.9 per cent is deceptive. The adverse fallout of the poor monsoon and drought is yet to be reflected in the figures. This is bound to bring down the composite growth figures as it will affect the performance of various sectors.
The strong signals from the economy may tempt the government to withdraw the tax incentives and stimulus measures. The rise of inflation will also be another reason for that. The RBI has given indications of reviewing its fiscal and monetary policy in the emerging scenario. But the government and the RBI should go in for a gradual change of policies and take only incremental steps. The economy can be said to be growing independently only when fresh investments come into their own. There are signs of that, as projects worth Rs 4.8 lakh crore are to be commissioned this year, up from 2.8 lakh crore last year. But as RBI governor himself stated last week the recovery is still fragile and our dependence on world economy is more than expected. Therefore expectations have to go in tandem with caution.

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