Revisiting the growth story

There is an air of celebration within the economic policy establishment in the country. India, it is argued, has weathered the global crisis well, experienced an early reversal of the downturn in GDP growth during 2008-09 and is all set to return to the pre-crisis trajectory of 9 per cent growth per annum. As evidence of these trends, the official Economic Survey 2009-10 refers to the “turnaround” in the second quarter of 2009-10, when GDP grew by 7.9 per cent, and to the CSO’s advance estimates of GDP for 2009-10, according to which the economy is predicted to grow at 7.2 per cent per year during the fiscal year as a whole.

The 7.2 per cent figure is now repeatedly quoted by official spokespersons, with the Finance Minister reportedly declaring in his reply to the general discussion on the budget in the Lok Sabha that it “was not a pipe dream but a reality”. There is indeed some cause for celebration. Though GDP growth is by no means the best indicator of a nation’s health, the 7.2 per cent figure is creditable given the global context in which it has been realised.

But is 7.2 per cent the true figure? What has been underplayed by the government and the media is that two days after the Economic Survey was released and a day after the budget was tabled in Parliament, the CSO put out its GDP figures for the third quarter of 2009-10. According to those figures, growth in the third quarter was down to 6 per cent from 7.9 per cent in the second and a marginally higher 6.1 per cent even in the first quarter. The “turnaround” does appear to have been short-lived. Moreover, “community, social and personal services”, which grew at 12.7 per cent in the second quarter as a result of the implementation of the Sixth Pay Commission’s recommendations, recorded a 2.2 per cent decline in its contribution to GDP. This combined with a 2.8 per cent decline in GDP from “agriculture, forestry and fishing”, brought the GDP growth rate down by close to 2 percentage points relative to the previous quarter.

This reversal of the turnaround raises a question. If the government is still sticking to its 7.2 per cent growth figure for 2009-10, what are the aggregate and sectoral GDP growth rates needed during the fourth quarter to ensure this outcome? Since the quarterly estimates of GDP at constant 2004-05 prices are available for the period starting with the first quarter of 2007-08, this is easy to compute. The figures indicate that GDP during the first three quarters of financial years 2007-08, 2008-09, and 2009-10, stood at Rs. 28,43,901 crore, Rs. 30,44,987 crore and Rs. 32,47,839 crore respectively. Given the actual, quick and advanced estimates of GDP for these financial years, the GDP during the fourth quarter stands at Rs. 10,49,556 crore and Rs. 11,09,986 crore during 2007-08 and 2008-09 and is predicted to be Rs. 12,05,225 crore in 2009-10.

The implication of this is that if the predicted 7.2 per cent rate of growth during fiscal 2009-10 is to be realised, growth during the fourth quarter will have to touch 8.6 per cent, compared with 5.8 per cent in the fourth quarter of 2008-09 and 6 per cent during the third quarter of 2009-10. Given quarterly trends thus far, this does appear a tough call.

Which are the sectors that are expected to contribute to this sharp recovery in quarterly GDP growth? Undertaking a similar exercise for the sectoral contributions to GDP, we find that the CSO expects growth in the fourth quarter of 2009-10 to remain negative (-0.1 per cent) in the case of agriculture, while rising sharply to 14.2 per cent in the case of “electricity, gas and water supply”(as compared with 7.8 per cent in the third quarter), 15.2 per cent in the case of “financing, insurance, real estate and business services (7.8 per cent) and 15.7 per cent in the case of “community, social and personal services” (-2.2 per cent). These are the sectors that are expected to lift growth substantially, despite the poor performance of agriculture. The predicted fourth-quarter performance of the last of these sectors is noteworthy because the Sixth Pay Commission effect that facilitated growth in earlier quarters is likely to be extremely weak, if present at all.

Thus the optimism with regard to GDP growth is based on implicit or informed edtimates of a sharp turnaround during the fourth quarter, when India is expected to overcome the effects of an unexpected slide in the third quarter. Noting this is not to attempt to play spoiler in the midst of celebration. It is to make clear the kind of buoyancy on which predictions of creditable growth are based.