The Hindu Business Line : A reality check on economy

Till early this calendar year, policymakers seemed to be fixed on the idea of a 9 per cent growth — the average for the last two years — continuing over the next two summers. Slowly but surely a sense of realism is dawning among policymakers about how the growth story of the national economy is going to pan out in the coming months. Not too long ago, theReserve Bank of India Deputy Governor, Dr Rakesh Mohan, spoke of a "sustainable" 8-8.5 per cent GDP growth for fiscal 2007-08 adding the caveat of a low inflation rate. That caution came on the heels of the RBI's own forecast of a similar rate announced soon after it had increased the repo rate and the Cash Reserve Ratio last month. The RBI's lower forecast now finds echoes in the Asian Development Bank and Moody's forecasts of a similar level of economic activity this fiscal. Even more cautiously, and without putting a number to his views on the future of the economy, Dr C. Rangarajan, chairman of the Prime Minster's Economic Advisory Council, warned at a seminar in Mumbai that a cyclical overheating could lead to structural overheating

For policymakers in New Delhi betting on a 9 per cent growth hat-trick, it might pay to look at the impact the RBI's money-tightening measures is beginning to have on certain sectors. With banks aiming to raise deposit and lending rates after every move by the central bank to make money dearer for them, a credit squeeze at least in the retail segment may become evident sooner than later; analysts predict a 50 per cent fall in the growth of car purchases this year with interest rates breaching 15 per cent for vehicle loans. With housing loan interest rates also headed north, the growth of housing sales in metros may already be declining if the undue rise in rentals (a proxy measure for slow down in the rate of accretion to the housing stock) in Mumbai, for instance, is any indication. At another remove, exports this February slipped a notch or two and may fall further if the rupee remains at current high levels. Left unchecked inflation could further erode export competitiveness especially as China has not only kept its currency from becoming overvalued but also tackled inflation effectively.

But more than anything else, it is the `structural overheating' - growth driven by higher prices rather than from larger volume of goods and services output that Dr Rangarajan has warned — can lower growth prospects even more than the RBI's prognosis. The burden of the former RBI Governor's song was that, among other things, the infrastructure "deficit" needed to be tackled through appropriate legal, regulatory and administrative frameworks. Clean, effective and accessible governance would also help; resources would flow once these are in place. Basically sustained growth is not just about money.