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Home / Delhi News / Encouraging but worrisome

Encouraging but worrisome

The better-than-expected 8.8 per cent GDP growth rate last quarter reflects India’s robust fundamentals, but it will be best not to ignore the potential party poopers. Abhijit Patnaik reports.

delhi Updated: Sep 03, 2010 03:00 IST
Abhijit Patnaik
Abhijit Patnaik
Hindustan Times

It's that time of year when the collective back of the nation is patted for a good show on the economic front. A clear trend

India posted a gross domestic product (GDP) growth rate of 8.8 per cent in the last quarter. If this growth rate sustains, the country's economy may double in size in less than 10 years.

GDP is a measure of a country's overall economic output. It is the market value of all goods and services officially produced in a year within the borders of a country.

"Strong GDP growth seen in the first quarter of 2010-11 is very encouraging and maintains India's position as the second fastest growing (large) economy in the world after China," said Chandrajit Banerjee, director general of the Confederation of Indian Industry, in a statement released on Tuesday.

Although the services sector – that accounts for 50 per cent of India's GDP – shows a healthy growth of 9.4 per cent year-on-year (y-o-y), the icing on the cake has been manufacturing with a 12.4 per cent y-o-y growth rate compared to 3.8 per cent in the previous year.

Even agriculture, long the poor cousin of manufacturing and services, is looking up. It showed a growth rate of 2.8 per cent y-o-y against 1.9 per cent last year.

There's more to cheer for. While the ground beneath the Delhiite has been crumbling due to excessive rains, the farmer flashes a wide grin. The good monsoon will only push the agricultural growth rate up and help cool down inflation by the year-end.

Thin ice
But economists warn that though the economy may be running fast, the ground underneath is treacherous. Both consumption and investment – factors that push the GDP growth rate – are showing poor growth rates.

What's more, while the agriculture and manufacturing sector growth rates were strong, mining and construction have recorded modest growth rates. And the services sector growth could have been stronger but for the

moderation in financing, real estate and business services, according to Banerjee.

The big reason for India's growth is the domestic market. Unlike China, with its export-led model, the slowdown in the global economy hardly put the brakes on India's engine of growth. The key factor underlying India's economic performance is the rising sales of goods made by companies at home to consumers at home.

But the high inflation rate going on for a year now will make a dent into this. "This has really led to a compression of the domestic demand," said Matthew Joseph, senior consultant at the Indian Council for Research in International Economic Relations.

He said, "Look at the numbers. These are the lowest in recent memory for private consumption growth in India. Even during the 2008 crisis, the numbers were 3-5 per cent. Now it's 0.3 per cent y-o-y – a record low."

The government consumption rate also declined by 0.6 per cent for the first time in 11 quarters. Investment growth rate reduced to 3.7 per cent from 17.7 per cent in January-March 2010. Even in that quarter, private consumption grew quite slowly – 2.6 per cent y-o-y. Lower expenditure growth will definitely affect future GDP figures.

No island, this
Although India's dependence on foreign trade is limited, the economy is in no way unconnected to the world. If the fears of a double-dip recession in the US materialise and Europe continues to falter in its recovery, it could shave close to 0.5 per cent off our GDP estimates.

India's merchandise exports increased to 13.2 per cent in July – the slowest pace in six months. This is a sign that the world economy is slowing. "Export and import growth contracted in this quarter, with a larger contraction in exports. This has had a net negative effect on GDP," Joseph argued.

What's in a number?
Some experts question the numbers themselves.

While GDP at factor cost grew 24.8 per cent in nominal terms, it grew only by 3.7 per cent in real terms. The difference is the inflation rate – 21.1 per cent. But the average inflation growth rate was 11 per cent in the April-June quarter.

Inflation plays a spoil sport here, as GDP is only the market value of goods and services. Real GDP, however, does not include inflation and is considered a better indicator of an economy's health since it reflects growth in actual physical output.

For example, even if real GDP does not rise at all, but inflation rises by 5 per cent, nominal GDP will show a rise by 5 per cent, which can be misleading, since output has not grown, only the prices have gone up.

The mistake in calculating the inflation factor – also called the price deflator – which is used for converting nominal GDP into real GDP will need to be corrected by the Ministry of Statistics and Programme Implementation soon.

Joseph said, "Industrial production, which helped boost the figures this quarters, will be in the 7-8 per cent range next quarter. The high base will also bring down the numbers for growth in industrial production. I expect the GDP figure to grow by less than eight per cent."

However, if the numbers stay rosy, this GDP growth rate will mean that it is only a matter of time that India breaks into the Top 10 economies of the world, unseating Canada.

ht epaper

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