The Hindu Business Line : Bracing for harder times

If the Q3 figures are any indication, it is now practically certain that the 7.1 per cent GDP growth projected for 2008-2009 as a whole will not be attained. The 5.3 per cent growth estimated in the October-December period means that the last quarter will have to grow by 7.7 per cent if the overall GDP annual target is to be hit, which is considered unlikely at this point of time. (The growth in the first two quarters of the year was at 7.9 and 7.6 per cent.)

While the outlook is decidedly bleak, an attempt has been made by the authorities concerned to soften the blow by stating that the 5.3 per cent October-December performance will probably improve a bit when the full picture during the three months emerge. In particular, the decline in the farm growth rate by as much as 2.2 per cent is based on “skimpy data” emerging from the second round of figures.

Two more rounds are expected, and it is being said, not without good reason, that the complete farm estimate for the quarter concerned will convey a figure better than the -2.2 per cent already publicised, which is expected to lead to an overall Q3 growth attainment higher than 5.3 per cent.

Farm sector growth

The point is that, irrespective of the improvement in the final farm output growth figure for the October-December quarter, there is no way in which the 2007-2008 corresponding quarter sectoral performance, of 6.9 per cent, can be attained.

Indeed, achieving even a “no-growth, no-decline” level may be beyond reach, the implication being that the contribution of the farm sector to the overall 2008-2009 growth estimate will be far less than that attained last year.

Even so, officials have been sounding a clear note of optimism when they say that the final annual growth figure will be “close to seven per cent”, basing their hope on a higher fourth quarter performance, which they say will be “robust”.

The expectation for the January-March quarter is based not so much on the performance of agriculture, although there may be some improvement in the sector compared to late last year, but on indications of healthy investment and capital-formation figures, not to speak of the impact of incentives for increased consumption-demand which the Government and the RBI have taken over the past couple of months.

According to available figures, gross fixed capital formation as a proportion of GDP stood at 31 per cent against 30.8 per cent in the same period last year which, though not a substantial improvement in real terms, is still an impressive performance given an overall grim economic environment.

Note of warning

However, a note of warning needs to be sounded here given the recent stricture by the CAG of huge Government sums allotted for rural capital-formation schemes not really percolating to the grassroots recipients.

The inference is that while the books may indicate substantial expenditure, actual capital-formation to the same extent has in fact not taken place, which may in turn affect the huge task of rejuvenating a “collapsing economy”.

There is, of course, little doubt that, whatever the quarterly growth figures may suggest, the economy is in a moribund state with both production and demand struggling to stay afloat. Thus, inventories are reported to have climbed to 4.3 per cent of GDP in Q3 against 3.4 per cent in the previous quarter, underscoring the fact that goods produced are not moving.

The expectation is that the measures at rejuvenation taken since October and November would have injected some “demand” into the market, which should lead to a higher growth rate in the last quarter of the year.

The question is: Are things moving in the right direction which, among other things, would lead to less disruption in current development plans and prevent too great a disturbance in the future plans of the production units, including sectors such as housing, etc? As of now, there are few signs that this is in fact what is happening. On the contrary, there are indications that there is still a pressing need for more official inducements to get the economy moving once again, which could explain the general clamour for another dose of interest rate cuts by the RBI.

Export woes

Given the worldwide slowdown, the export sector has been hit hard, which has led the UPA Government to take a number of general and sectoral steps to get things going once again. Among the sectors singled out for special assistance are leather, textiles, and gems and jewellery, which till now have borne the brunt of the world slowdown, which in turn has resulted in thousands of Indian jobs being lost.

Importers having export-obligations have also been assisted, while norms for claiming dues under the duty-reimbursement schemes have been liberalised.

The fact of the matter is that while the Government’s sincerity in trying to ease the problems being currently faced by exporters cannot be doubted, it is crystal clear that the measures taken will not be enough to help exporters beyond a point in view of the cut-throat competition raging in a falling market.

The writing on the wall is, therefore, clear, namely, that despite the succour provided to it momentarily by the depreciating rupee, the exporting community will have to brace itself for a specially difficult time ahead..

The one silver lining in the current scenario of economic woes is the inflation rate figure which, at 3.36 per cent for the week ended February 14, has touched the lowest level in more than a year.

Among other things, the low rate will provide the RBI with more leeway to drop interest rates to rev up the economy, both by lowering costs and stimulating demand.

Whether such a policy move will be adequately successful in meeting its objective is difficult to say at this point of time, but it is of interest to learn that the falling inflation rate is itself a result of the “cascading effect of the fuel price cut on the prices of manufactured products which have a 63.75 per cent weight in the wholesale price index”.

Since a reduction in fuel prices is directly related to the subsidy cost for the fuel sector, a link between the declining inflation rate and the burgeoning oil subsidy bill can, perhaps, be established, which is not something one can write home about.

( blfeedback@thehindu.co.in)