With the latest GDP data on Q2 of 2009-10 being higher at 7.9 per cent, the growth outlook for the next two quarters and for the whole year is likely to be in the upper bound range of 7.0 (±0.75) per cent and may even exceed it. A disaggregated analysis of the trends in the major components of real GDP in the last few quarters indicates that while some of the components had exhibited a recovery earlier sequentially, on a seasonally adjusted basis the recovery is appreciable in private final consumption demand in Q2.
There is enough evidence to suggest that the fiscal policy measures undertaken by the government have worked. However, indicators such as capital flows, movements in the Index of Industrial Production, growth in infrastructure, and developments in the agriculture and service sectors need to be monitored closely to ensure the calibration of withdrawal of expansionary policies and guard against slipping back to lower growth.
Whereas agricultural output is likely to decline on account of deficient and erratic southwest monsoon in the current fiscal, its overall negative impact may be tempered by the robust growth of other sectors. With the return of the services sector to its trend growth path, it is the growth in industry that will be critical in sustaining the growth momentum this year as well as in the medium term. Here, the path ahead presents important challenges and issues that need to be addressed in the short and medium terms.
Inflation: The country has been facing the problem of rising prices of primary articles recently, whose dominant cause is the supply-side, one of reduced food production or, more accurately, the expectations of a reduction in food production over the next months. Though such supply shortages due to constrained production could partially be met by imports, this option is not available for some commodities, such as pulses. In view of this, it is essential that the nation also tries to shore up systems for encouraging greater food production and the domestic availability of essential commodities.
Challenging trinity: Prior to September 2008 and deepening of the global financial crisis, monetary policy stance was tightened to combat the sharp rise in WPI-based inflation. With the return of capital inflows, the questions that have once again come to the fore are: whether the inflows at this stage are in excess of domestic absorptive capacity and whether these could result in the overheating of the economy with the attendant risk potential for creating asset price bubbles? Is the economy headed towards the point where it would again have to contend with the challenge of the mutually contentious trinity-of maintaining a balance between price stability, exchange rate stability and capital mobility? At the current juncture, the problem is somewhat muted; however, the matter will need some deep strategic thinking in the long run.
Low credit growth: Though signs of revival of the economy are clearly evident, growth in bank credit demand still remains lukewarm. During the current financial year, growth in bank credit has remained low with year-on-year growth at the end of H1 working out to 12.6 per cent against 25.2 per cent a year ago. The factors that have contributed to the slowdown in non-food bank credit are economic conditions as well as cost of funds.
Banks also reined in credit to the retail sector due to the perceptions of increased risk on account of the general slowdown and to guard against bad loans. The notable issue is that while the overall credit demand of the manufacturing sector from the banking sector has slowed down, corporates have been able to access non-bank domestic sources of funds and external financing (which had almost dried up earlier during the crisis) at lower costs.
Fiscal consolidation: Fiscal policy, worldwide, has played the main role of boosting demand. Thus, unusual developments during 2008-09 necessitated deviation from the FRBMA. The budget for 2009-10 has carried forward this policy through a fiscal expansion of 4.1 per cent of GDP (over 2007-08 levels). These levels of fiscal expansion are short-term responses, but are not sustainable on a long-term basis. Hence, it calls for fiscal consolidation in the medium term.
The Medium Term Fiscal Policy Statement 2009-10 has provided the roadmap with fiscal deficit declining to 5.5 per cent of GDP in 2010-11 and further to 4.0 per cent of GDP in 2011-12. The timing of the exit and the pace at which it should be carried out will depend on the strength of the recovery and its sustainability without fiscal stimulus. There is again the issue of the nature of the fiscal consolidation process going forward-whether it should rely on revenue growth which is in turn linked to the growth recovery or on greater expenditure restraint.
G-20 and global coordination: The Group of Twenty (G-20) has taken up the cause of global stability, policy coordination and cooperation at the global level. India was among the only four nations that had positive growth among the 20 nations during the height of the global recession in 2008 and can afford to play a proactive role in this group. |