As good as it gets

The first quarter (April-June) numbers on GDP growth are flattering and show that the momentum that has been visible for the last several months continues unabated. In fact, there are signs of further acceleration.

Aggregate GDP grew by 8.1 per cent, powered by manufacturing, which clocked 11.3 per cent, and by the omnibus trade, transport, hotels and communication segment of the services sector, which accounts for about as much as manufacturing in GDP and grew by a massive 12.4 per cent.

The performance of the manufacturing sector was anticipated because of the momentum visible in the monthly Index of Industrial Production numbers and in the handsome corporate profits that were reported in July.

While this is the first official indication of what is happening in the services sector, it stands to reason that services like trade and transport will show buoyancy along with manufacturing. With the first quarter having shown such good performance, growth for the fiscal year 2005-06 is almost certain to comfortably exceed the 7 per cent mark.

A couple of danger signals should be noted. One relates to the global economic environment, which has turned appreciably more hostile over the last year. Oil prices have risen to their highest ever in real terms and look likely to stay at that level, if not increase further. Although this has not yet begun to impact global growth, it is telling on the balance of payments of countries like India. The days of dollar inflows hugely exceeding outflows are therefore coming to an end. Even though there is no imminent danger of the balance being disrupted, a current account deficit more than 3 per cent of GDP is not something to be ignored because there is the implicit risk of international confidence in the rupee's stability being shaken. That can affect both trade receipts and capital flows.

When the overall economic scenario is as good as it has ever been, it is tempting to brush aside the hand wringing about reforms that has been going on for several months. Yet it's hard to ignore the fact that virtually every government initiative with a faintly reformist orientation has been shot down by one group or other.

Though the finance minister may be personally sympathetic to these concerns, he has had to defend his government's inability to progress down the reforms path by arguing that the growth momentum has not been slowed.

While he is entitled to take credit for the first quarter performance, there has to be recognition within government about the critical link between reforms over the last four or five years, such as the interest rate deregulation and trade liberalisation, and the performance of the economy.

With trade growing rapidly, the ports now get clogged every now and then. The road programme has gained momentum, fortunately, but the airport modernisation programme is still on paper and the railway upgrade is as yet only talk.

Most significant is the government's utter lack of progress and its apparent surrender on power sector reforms. There is simply no way that today's manufacturing performance can be sustained for very long without these and other infrastructure constraints being removed.