The Hindu Business Line : Discordant notes to the song

The Indian economy's streak of good fortune shows no signs of petering out if the latest data released by the Central Statistical Organisation (CSO) are any indication. Gross Domestic Product (GDP) growth for 2006-07 has been revised upwards to 9.4 per cent from the `advance estimates' of 9.2 per cent released in February. Quarter-wise data reveal less heartening variations because real GDP growth for the three months, January-March 2007, was 9.1 per cent compared to the 10 per cent in the corresponding previous period. Such variations, in fact, presage some shifts in the economy's growth pattern that policymakers would do well to keep in mind while celebrating the run of the highest growth in almost two decades.

Sector-wise estimates have been revised upward with industry clocking 10.9 per cent and services 11 per cent. Clearly, during this period the effects of the dear money policy were not to be seen. Significantly, the CSO data show a sector shift in savings and investment that, in theory at least, should strengthen the growth process in the long term. For the last quarter of 2006-07, the ratio of private final consumption expenditure (PFCE) to GDP dropped to 54 per cent from 56-60 per cent in the previous quarters. The ratio of Gross Fixed Capital Formation (GFCF) at current prices, however, rose to 30 per cent from an average of 27 per cent in the previous seven quarters. This is about the healthiest sign of the growth process where investments outpace consumption not the least because this is the best antidote to rising inflation. Yet, despite official claims to falling inflation — the latest being 5.5 per cent — prices are still spiralling. The fact that manufacturing price indices are rising shows that sector shifts in capital formation are not helping fill supply gaps.

The CSO paints a gloomy picture for agriculture with a 2.7 growth, a result the government estimated correctly. Investments have not flowed to this sector in quite the same way they have to others. The Prime Minister wants 4 per cent growth but that involves hectic investment activity. Every year New Delhi promises a huge package for the hinterland but its record so far indicates funds either not used or misspent. With rising private funds, policymakers have a unique opportunity to help create fresh capacities in the undeveloped areas of the economy and thereby fight inflation. But with the current investment climate either muddied by politics, as in post-elections Uttar Pradesh, or in land acquisition, the advantages of robust savings may be lost to the economy as Indian firms seek profitable avenues in more amicable emerging economies.