News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

Rediff.com  » Business » How to sustain a high GDP growth

How to sustain a high GDP growth

By BS Bureau
September 02, 2010 17:22 IST
Get Rediff News in your Inbox:

The 8.8 per cent growth in gross domestic product (GDP) in the first quarter of 2010-11 (that comes on the heels of 8.6 per cent in the last quarter of 2009-10) should put to rest any doubts about the durability of the economic recovery.

It could also mean that the economy is getting back on the 9 per cent growth trajectory of the pre-crisis years.

Besides, the fact that GDP growth is being driven by industry, that grew 10.3 per cent in the quarter, should augur well for revenue mobilisation and the fiscal health of the government.

The sustainability of this revival would depend on the extent to which investment activity is revived and employment generated. That said, there is usually no dearth of caveats when it comes to interpreting economic data and this week's data is no exception.

There are two specific sets of concerns. For one, the first quarter of this fiscal year was really the last of the post-crisis period to gain from a "low base" effect that would have pushed the current year's growth rate up (Q1 2009-10 posted growth of 6 per cent; in Q2 it picked up to 8.6 per cent).

As this statistical effect wanes in the coming quarters, there would be a natural tendency towards deceleration. If that is accompanied by more "genuine" moderation, month-on-month, in some components of GDP, then the deceleration could be more acute.

The index of industrial production (IIP) certainly points to the possibility of moderation for the "industry" component of GDP. The extent of deceleration in aggregate GDP would, of course, be determined by how components like agriculture fare but the consensus among economists appears to be that growth for the rest of the year would be tamer.

Besides, analysis of the expenditure side of the GDP balance (that involves measuring GDP as the sum of consumption, investment etc.) produces some bizarre results.

Aggregate GDP growth measured this way turns out to be a paltry 3.7 per cent. While the discrepancy is likely to be partly due to data error, there could be more fundamental problems underpinning this.

The expenditure side breakdown points to softness in both private final consumption expenditure (that grew by 0.3 per cent year-on-year) and gross capital formation (that grew by 3.7 per cent year-on-year). Though the government says this data needs a second look.

The softness in private consumption continues an existing trend and perhaps points to the fact that high inflation has eroded disposable incomes of a large swathe of the population.

The weak capital formation data is more alarming since it follows a healthy pick-up in the previous quarter. In the previous quarter, it had grown by a healthy 17.4 per cent.

If this is indeed an indication that investment spending is tapering off after a spurt, the sustainability of the growth momentum comes under a cloud. Given the risk of moderation going forward, policy-makers need to be careful in withdrawing stimulus.

If it does take the expenditure side symptoms seriously, RBI might want to go a little easy in setting monetary policy.

The global economy seems to be losing steam and recent data prints from the US on housing and consumer spending have been nothing short of alarming.

This seems to be impinging both on India's export performance and inward capital flows. In a scenario where India cannot depend much on help from its friends in stoking its growth engines, any sign of weakness in domestic demand has to be viewed with caution.

Get Rediff News in your Inbox:
BS Bureau
Source: source
Related News: GDP, India, IIP, RBI, US
 

Moneywiz Live!