The gross domestic product (GDP) estimates for the second quarter (July-September) of fiscal 2010-11 were a welcome reassurance that the economic recovery witnessed over the past year is on track. Data released by the Central Statistical Organisation (CSO) estimated that GDP in the second quarter of FY11 at constant prices was 8.9 per cent higher than the corresponding period in FY10. GDP growth rates exceeding 8.5 per cent in successive quarters seems to indicate that the economic momentum gathered over the previous year has solid foundations and the annual target of 9 per cent is imminently achievable. The balanced contribution from various sectors of the economy was even more heartening. Agriculture (including forestry and fishing), the traditional underperformer, registered a year-on-year (y-o-y) growth of 4.4 per cent during the period, due to bountiful rainfall over significant portions of the country, particularly the major food-producing states. Manufacturing, construction and services sectors grew at 9.8, 8.8 and 9.7 per cent, respectively, which resulted in an all-round economic performance over the quarter.
Gross Fixed Capital Formation (GFCF), a measure of public and private investment, grew 16 per cent y-o-y during the same period. The investment to GDP ratio for the latest quarter stood at 34.4 per cent, a slight decline from the previous quarter. The increase in the investment rate has dropped 2-3 percentage points from the high noon of 37.5 per cent of GDP achieved during 2003-08, but is still higher than the sub-25 per cent investment levels prior to 2000. This rate of investment is impressive and pales only in comparison to the targets achieved earlier and the breathless rate of investment in China. GFCF in the recent past has been driven predominantly by a surge in infrastructure investment, particularly in the power sector. However, whether this will suffice to expand capacity sufficiently to meet the sharp, expected rise in the demand for power arising from rapid industrial growth and increased demand from households, is a different question altogether. Persistent problems of land acquisition and fuel linkages also raise questions regarding the timeliness with which capacity expansion will be achieved.
The other worrying aspect is the rather tardy progress in other infrastructure sectors such as roads, ports and airports. The “original” target of constructing 20 km of roads a day proposed by Transport Minister Kamal Nath, has been pared by half, while progress in augmenting port and airport capacities is equally unimpressive. It would take a lot more than the growth in the power sector to induce a sustained, virtuous cycle of investment-led growth. The limited capacity expansion in the private sector too remains a cause for concern. Barring a few bright spots, such as steel, automobiles and oil and gas, investments were low in other sectors, presumably due to overcapacity caused by feckless expansion during the high growth years of 2003-08. The CSO estimates indicate that the GFCF numbers are stronger than the IIP numbers for second quarter of FY11, suggesting that infrastructure growth is leading growth in manufactured goods and transportation equipment, which is what the IIP represents. Present levels of investment in infrastructure are motivated by expectations of future demand across the economy. But to sustain high growth, the economy needs a more stable polity and a more energetic government.