In a country where self-deprecation is a national pastime, the transcendence of Hindu rate of growth to an average of 8.6% between 2005-06 and 2010-11 is no mean achievement.
The survey also brings into focus other interesting aspects. First, there is a ratchet in the private consumption expenditure. Even in meltdown years like 2008-09 and 2009-10, its growth rate did not fall below 7.3% at constant market prices.
Second, gross fixed capital formation came down dramatically in 2008-09 and 2009-10. It appears that brownfield and greenfield expansions were shelved, while others kept awaiting land acquisition, environmental and regulatory clearances. The year 2010-11 saw a modest pick up in growth to 8.8% level at constant market prices.
The assumption of 9% GDP growth in the medium term would be naïve, unless the right enablers are in place. Some of these are modest inflation, manageable CAD, higher growth in services, superior infrastructure and technology upgradation.
The estimated WPI-based inflation for 2010-11 is 9.4%. Several econometric exercises have shown that in India, inflation above 4.5 to 5% could be detrimental to growth. At a time when inflation appears to be structural and commodity-specific, mere tightening of liquidity and raising interest rate can provide little succour. The survey indicates industrial growth has become volatile and is losing momentum.
The other area of concern is current account deficit. However, as valuations in the Indian market went up and other markets became more attractive, these funds exited. While one can be more liberal towards FDI, there is no alternative to higher growth of export of both goods and services in the long run. The target of 26% yearly growth set by commerce ministry is indeed welcome.
Export competitiveness in most emerging economies is dependent on factor cost arbitrage. We have successfully utilised it for skilled manpower in IT. However, in labour-intensive industries like garments, textiles, absence of labour market reforms has prevented us from doing so. Hopefully this will get addressed too.
Siddhartha Roy, Chief economist, Tata Sons
