Record year; what next?

The GDP (gross domestic product) numbers for the last financial year have come in somewhat higher than expected""growing at 9.4 per cent, compared with the 9.2 per cent indicated in the advance estimates released four months ago. This is the best annual growth performance in the current streak and second only to 1988-89, when GDP growth exceeded 10 per cent. However, unlike that year, which was entirely driven by the recovery of agriculture from the severe drought of the previous summer, last year's growth was driven entirely by the twin engines of manufacturing and services, while agriculture did not do too badly, either. Manufacturing clocked in at 12.3 per cent, slightly below the leading service component, trade transport, hotels and communication, which came in at 13 per cent. Another strong performer was construction, which grew at 10.7 per cent. Several other sectors too""financial, insurance, real estate and business services""grew at impressive rates, by over 10 per cent, and, importantly, electricity, gas and water supply by over 7 per cent. In a very real sense, 2006-07 must rank as the best-performing year for the economy since the 9.4 per cent growth rate was achieved on a high base and since all sectors have been firing away.

But while celebrating a tremendous performance (incidentally, beating all forecasts by a handsome margin), these numbers are history. What is of importance in the figures released by the Central Statistical Organisation are the signals they contain about the current year's performance. There are no real sector macro-economic indicators for the first quarter available yet, and concerns about the growth-deterring effects of recent monetary policy measures have been mounting for some time. Do these numbers provide any early indications of a moderation in the growth rate? Perhaps yes, but the signals are not unambiguous. Looking at the numbers for the fourth quarter of the last financial year, the GDP growth rate was 9.1 per cent. This, along with the third quarter growth of 8.7 per cent, shows that the second half of the year grew slower than in the first half, when the growth rate was 9.6 per cent and 10.2 per cent in the first and second quarters, respectively. Deeper analysis is needed to identify the contributory factors, but the broad pattern appears to reinforce the expectations of mildly moderated growth, reflected in virtually all the major forecasts for the current year.

While it might be argued that forecasters should not be taken too seriously, given how they have systematically under-estimated real performance in recent years, there could be room for concern about inflation. The GDP deflator, the difference between GDP measured at constant and current prices, is the broadest measure of inflation in the economy, reflecting increases in the prices of services, which are not captured in the Wholesale Price Index (WPI), the most visible indicator of inflation. In 2006-07, the GDP deflator measured inflation at about 5.8 per cent; however, during the fourth quarter, it increased at a substantially higher rate of about 6.8 per cent. While this is not very different from the average increase in the WPI during the quarter, it suggests that several services are also seeing substantial increases in their prices. The anticipated slackening in the inflation rate as food prices subside may not therefore quell entirely the underlying inflationary pressure, if the drivers of rising prices of services persist.