Most international organisations have appreciated the recent growth performance but have added that with the current state of the infrastructure and the fiscal deficit, last year's 7 per cent growth is unlikely to be repeated. There are two problems with this argument. One is that none, not even the Indian government, had predicted that the economy would grow by that much last year. So having done better than it had expected to do, the economy now has to live up to its own exceptional performance or be faulted. The second point is that 6 per cent growth would represent a deceleration but would still be quite creditable. So it is necessary to be clear about what the issue is. Any talk of recession brings images of a child who is in danger of failing, whereas the issue really is whether this reformed youth will be able to repeat last year's remarkable grades.
In the real economy, the signals are mixed. The luck with good monsoons is continuing and extremely good rains are likely to yield a record kharif harvest. This will set the ground for a far sharper rise in agricultural output this year compared to last year (2.4 per cent) and help lift the gloom that had descended with the realisation that the impetus for agricultural growth is tapering off.
But the industrial front does not give much cause for cheer. There is every sign of industrial output growth slowing down, though the statistics is by no means alarming. Overall industrial growth in the first two months of the current year (April-May) is a respectable 9.9 per cent, but the premonition of the future is dim. Advance information for selected infrastructure and other industries accounting for half the index weightage is discouraging. In the first four months of the current year (April-July) infrastructure industries have grown by a paltry 3.7 per cent, though major industries accounting for a fifth of the total weightage have grown by a respectable 9.5 per cent. Infrastructure is letting us down but what is so new about that?
The picture on the prices front is also mixed. The period of historically low below 5 per cent inflation has naturally ended, with the sharp hike in petroleum prices but there is no reason to suppose that after crossing 6 per cent, the inflationary curve will not flatten out and settle at around that figure. Again, this will be just about tolerable though not as good as the possibilities of a steady below 5 per cent inflation level that some were dreaming of earlier in the year.
On the forex front, the current signals are mostly positive. Reserves are creeping up and have again crossed $18 billion and the six-month forward premium on the dollar on an annualised basis is at around 10 per cent, which is par for the course. There is good news on the balance of payments front from two sources. Foreign investment prospects seem bright, both because of the renewed efforts of the government to attract foreign investment and the likely overall flow of investment to emerging markets. All the foreign currency flows will be needed to meet a hefty repayment scheduled for early next year, but if flows stick to present trends there will be no hiccups.
The major problem seems to be the fall in the rate of growth of bank credit to the non-food sector. If companies are not borrowing more, then they must be losing on the production front, a reality which will show up in output statistics only three months hence when production figures for the current period will be available. But why is industry not borrowing when it claims it wants to. Being unable to bring in equity because of the state of the sector could better reflect the largely positive signals coming from the real world.