To nobody’s surprise, the GDP numbers for the third quarter of 2008-09 show just how severe the economic slowdown is. Many observers had been sceptical about the Central Statistical Organisation’s “advance estimates” for the full year 2008-09, released on February 7, which had projected GDP growth at 7.1 per cent. With the third quarter numbers being just 5.3 per cent, the CSO now has egg on its face. If the full year is to see 7.1 per cent growth, there would have to be a huge turnaround in the fourth quarter. The more likely outcome is that GDP growth during the fourth quarter will be even slower than in the third, and growth for the whole year therefore will fall below 6.5 per cent. That would be closer to the cluster of relatively pessimistic private forecasters and far below the estimates put out by various government agencies, from the finance ministry to the Reserve Bank of India and the Prime Minister’s Economic Advisory Council.
The Indian economy has enjoyed a good international standing because, despite record trade deficits and a ballooning fiscal deficit, the growth story has been good so far. Take that away, and many international observers (the rating agencies among them) will look more closely at what is going on. The probability of ratings downgrades increases, with the risk that foreign funds become more difficult to find than is already the case; and the rupee has moved down in the last few days, which was one of the risk factors that had persuaded the Reserve Bank to not drop interest rates further, as it should have done (and should still do). The situation now is that the fisc has got bloated, interest rates remain high because of the scale of government borrowing, growth has dropped, and the elbow room for policy action has shrunk. The future looks bleaker than it did a month ago.
Ironically, the primary reason that growth during the third quarter was not lower than 5.3 per cent was the implementation of the Sixth Pay Commission’s report, benefiting 8.3 million central government employees and pensioners. This caused the Community, Social and Personal Services segment, which accounts for about 12 per cent of GDP, to surge by 17.3 per cent over the corresponding quarter of 2007-08, a sharp jump from the approximately 8 per cent growth during pervious quarters. Without the surge, overall GDP growth during the quarter would have been only 4.2 per cent. Compared to last year, this category will continue to show high growth, as state governments implement their own salary hikes.
Two important sectors of the economy actually declined during the quarter. Agriculture experienced a sharp drop of 2.2 per cent, understandable against the almost 7 per cent surge of a year ago. This takes the growth rate for the April-December 2008 period to a mere 0.6 per cent. The pattern actually bodes well for growth rates next year if agriculture comes back to normal. Manufacturing also declined, by 0.2 per cent over the third quarter of 2007-08. The growth rate for the April-December 2008 period is, consequently, a rather modest 3.4 per cent, reminiscent of the sluggish 1998-2003 period. Recovery in this sector depends critically on the combined impact of the monetary and fiscal measures taken during the past few months. However, the negative tendency appears to be rather strong and is therefore likely to persist. One surprise is the buoyancy of the Finance, Real Estate, Insurance and Business Services segment, which grew by 9.5 per cent during the quarter. This appears to be at odds with conditions on the ground in most of these activities, the exception being bank credit which continued to grow during the quarter.