It’s official now. Data for the quarter in which the global credit crisis hit home shows the economy is cooling faster than our policymakers thought. At 5.3 per cent, GDP growth is a percentage point below what would be needed to achieve a targeted growth rate of 7.1 per cent for 2008-09. On current indications, the fourth quarter is unlikely to be very different from the previous one and the economy could be settling within the 6-7 per cent growth band independent economists have been forecasting for the year. There were no surprises that manufacturing has given up all of the 8.6 growth it clocked in the year-ago period. And some services — like the finance, insurance and real estate businesses, which grew by 9.5 per cent — have shown remarkable resilience in a rapidly deteriorating global situation. The joker in the pack has been agriculture, where output contracted by 2.2 per cent. This, too, comes against a phenomenal 6.9 per cent growth in the previous winter’s harvest.
If the economy were to indeed shave nearly 3 points off the 9 per cent growth it posted in 2007-08, it will add Rs 150,000-odd crore less to the national income this year. This number is uncannily close to the amount the government plans to spend in excess of its original targets for the year. Add to this the Rs 70,000 crore it has forgone through tax giveaways and the fiscal response does seem to be fairly well calibrated. On paper at least. Around two-thirds of the increased spending is soaked up by revenue expenditure, which offers dubious credentials as an economic stimulant.
The UPA had made significant progress in taming the fisc — it halved the deficit from 5.9 per cent of GDP in 2002-03 to 2.7 per cent in 2007-08 — only to give up the gains in the last year, when the figure is slated to climb back to 6 per cent.
This on an assumption that the economy will grow by 7.1 per cent in 2008-09. Every percentage point fall in the GDP growth rate adds a full point to the fiscal deficit, raising, on the one hand, the policymaker’s desire to prime the pump more while, on the other, lowering his ability to do so.