The driver for the 8.9% economic growth in the three months till September has been a good monsoon after a year when the rain fell short. Farm output in this monsoon season grew 4.4%, four times faster than last year and well above the agricultural trend line. Although farming’s share of India’s economic activity is steadily declining, a crop failure has wider knock-on effects of higher prices, much of which is behind us. Food inflation should ease up as the autumn harvest — which produced 5.9% more rice,
19.4% more coarse cereals, 39.3% more pulses and 10.3% more oilseeds — arrives on shop shelves. A good summer crop usually signals a bountiful winter one because the monsoon charges the groundwater as well. Food prices could, in a few months, stop being the citizen’s, and the government’s, biggest worry.
The performance on the factory floor, while not as statistically impressive in a traditionally dull quarter as
on the farm, has been fairly robust. Manufacturing, which has the lion’s share of industrial output, accelerated from the year-ago period, but energy production and mining slowed down. Likewise services yielded a mixed bag with retailing and transport growing 50% faster than last year, construction keeping up a steady pace, and financial services and government spending slowing down sharply from the second quarter of 2009-10. Even then, the economy has accelerated to its fastest pace in three years. This will be the third successive quarter of growth above 8% and India is on the verge of recording its first yearly expansion in excess of 8.5% since the global downturn. In share of the gross domestic product, the components of demand — consumption, investment and government expenditure — have barely moved from last year, the notable deviation being the shrinkage in imports.
The government can look back on its handling of the economy over the last two years with some degree of satisfaction. That national income grew 7.4% last year and is likely to grow 8.5% this year is testimony to how tax cuts and income giveaways helped India ride out of its deepest economic crisis in living memory. The government reckons it spent 3.5% of the GDP in 2008-09 as fiscal stimulus.
The tricky bit now is to keep this growth momentum alive while winding down the huge debt the government has piled up in the immediate crisis period. The government has a fiscal roadmap laid out by the 13th Finance Commission, it needs the political will to adhere to these deficit reduction targets.