T N Ninan: New wind

WEEKEND RUMINATIONS

No one could have forecast good news on the economic front after a sub-normal monsoon, especially when oil prices have climbed to the near-stratospheric level of $50 a barrel. Yet, the surprising fact is that the news is better than normal.

In fact, I am tempted to stick my neck out and say that a mini-boom is now developing, and the momentum will be lost only if oil prices climb much further. GDP growth will not match last year's 8.2 per cent, boosted as 2003-04 was by a record harvest following a drought year; but don't be surprised if all the major forecasters have to up their predictions yet again as the months pass.

If you are sceptical, take a look at the indicators. Corporate results for the July-September quarter have been outstanding: both sales and profits have grown by about 22 per cent, and this time the gains to the bottom line are not because of reducing interest cost. That's the last quarter; what about this one and the next?

The surest indicator of momentum building up is the sharp surge in bank credit to the commercial sector. Not since 1995-96 has credit expanded at today's pace; and if you talk to bankers, they say that this is only the beginning. The sudden drying up of liquidity in the system tells its own story.

Look then at the sectoral stories. The software sector is back to its heyday in terms of growth rates and optimism about the future. The automobile industry has just reported flattering sales numbers, and the fast-moving consumer goods sector seems to be having a good Diwali season. In short, consumers are still spending""including in the countryside. Exports have continued to do well, and imports have surged (a sure sign of domestic demand climbing).

The phone companies continue to enjoy terrific growth rates and a spurt in profits (as much as 250 per cent by Bharti!). Commodity prices are still holding up, and global demand is buoyant, so all the producers of steel and aluminium and petrochemicals and other goods are enjoying the boost to numbers.

The airline and hotel industries have not had it so good since the boom times of the mid-1990s. It is typical of the new mood that Infosys should talk of going from a billion dollars of sales to two billion in just 23 months, compared to the 23 years it took to reach the first billion.

Even the wealth effect (rudely shattered when the new government got sworn in) is back. Real estate prices have climbed 25 per cent or more this year, and despite concerns about a bubble building up, demand is buoyant. International investors are pouring money into the stock market, whose price indices are reaching for new highs. And since companies are expanding, they are hiring""so there are jobs going and therefore a sense of buoyancy on campuses.

What is pleasantly surprising is that this should be the mood in November, when the kharif harvest is already in and the poor crop should have been dampening demand and therefore business sentiment. In the cities, the sharp increase in fuel costs should have been a dampener, too. So far, they have not. It would be wise of course to expect the quarterly GDP growth rates to drop from the 7.4 per cent clocked in April-June. However, it is now hard to see the figure for the year as a whole dropping below 6.5 per cent.

That this should be possible in a year of poor harvests and high oil prices suggests a new resilience for the system, though it is also wise to keep in mind that the domestic negatives have been neutralised to some extent by global buoyancy and a benign environment for growth""helped by the excess liquidity that seems to exist in all the major markets.

GDP growth in the last two years averaged 6.1 per cent. If this year manages 6.5 per cent, then the average for the three years will have inched up to 6.2 per cent. That's noticeably better than the 5.7 per cent of the 1997-2002 Ninth Plan period, and suggests new wind in India's sails.