Barreling on

The economy continues to outpace forecasters, none of whom predicted either the 8.1 per cent GDP growth achieved in the first quarter, nor the 8 per cent now reported by the Central Statistical Organisation for the second (July-September) quarter. It is now more or less certain that growth in the full financial year will exceed the Reserve Bank's upper limit forecast of 7.5 per cent. If achieved, that will take average growth in the 2003-06 period to 7.6 per cent, matching the record of 1994-97, but recorded this time with moderate inflation and without macro-economic imbalances other than the growing current account deficit (for which, blame oil). These "advance estimates" of quarterly GDP, released a month earlier than the usual schedule, must have been available to the Prime Minister ahead of public release, making him bold enough to hold out the prospect of 10 per cent growth at the World Economic Forum's annual event in Delhi a day earlier.

While the over-all growth numbers for the two quarters are almost identical, there are some important differences in the sectoral growth patterns. Manufacturing, which was a significant driver of first-quarter growth, slowed from its high of 11.3 per cent to a less exuberant but still flattering rate of 9.2 per cent in the second quarter. While this is largely a base effect, what is important is that the contribution of manufacturing to GDP growth is significantly less in the second quarter when compared with the first. The other components of the industrial sector""mining, electricity and construction""also slowed, most notably electricity from 7.9 per cent to 3.3 per cent. This has taken the over-all industrial sector from a healthy 9.7 per cent in the first quarter to a moderate 7.5 per cent in the second, slightly below the 7.7 per cent it achieved during 2004-05. The entire slack left by this deceleration has been taken up by services, which accelerated from 9.8 per cent in the first quarter to 10.1 per cent in the second. The most significant contribution came from the finance, insurance, real estate and business services category, which ratcheted up from 8.3 per cent to 9.9 per cent, reflecting the buoyancy in both banking activity and the financial markets.

Three years of excellent growth (despite one bad and one indifferent monsoon) and moderate inflation despite the huge increase in oil prices, are a record that any country can be proud of. While it may seem churlish on such occasions to say "yes, but...", the hard questions should not be avoided. Dr Singh spoke of achieving 10 per cent growth with a little help from some dramatic policy changes; the very changes that his government as well as its predecessors have aspired to, with some progress but hardly any closure. Unfortunately, apart from earnest appeals to people resisting these changes, he has not articulated a strategy to set them in motion. In fact, the Prime Minister's optimism about achieving 7.5 per cent growth even in a business-as-usual scenario might prove to be counter-productive in this situation. People might well be inclined to ask why controversial and perhaps difficult changes need to be made when the economy is capable of doing pretty well without them. The answer is that the experience of the last 15 years tells us that reforms have been a powerful driver of improved economic performance. What should also be borne in mind is the Prime Minister's warning that the limits to growth are internal, and that India has a time window of opportunity that must be seized now. Complacency and the inertia that stems from it will cost us dearly.