The Advance Estimates for GDP in 2008-09 say that it will grow by 7.1 per cent during the year, significantly lower than the 9 per cent clocked during the previous year. These numbers have obviously been put together on the basis of the first three quarters, for which data is still coming in (the December numbers for the Index of Industrial Production will be published this Thursday and the first estimates of third quarter GDP at the month-end). Given the sharp decline in a number of indicators since October, there were widespread expectations that the number would be below 7 per cent, contrary to what various government spokespersons have been saying. In the event, the government’s position has been vindicated. These numbers may yet be revised downwards but, for the moment, they have come as a relief to the government, and perhaps a signal that the situation is not as dismal as some private forecasters have said.
The sectoral patterns broadly conform to expectations. Agriculture is forecast to grow by 2.6 per cent, significantly lower than the 4.9 per cent clocked last year. This is primarily the result of the high base and does not reflect any trend downturn in production growth. Manufacturing, a powerful engine of growth over the previous four years, is expected to drop from 8.2 per cent growth in 2007-08 to 4.1 per cent this year. Construction is also shown as slowing sharply, dropping from over 10 per cent growth last year to 6.5 per cent in the current one. The service sectors appear to be holding up quite well, though. Trade, Transport, Hotels and Communication, the largest single segment and accounting for more than a quarter of GDP, is expected to slow marginally from 12.4 per cent in 2007-08 to 10.3 per cent this year. The financial services segment is also said to be slowing, but somewhat more sharply, from 11.7 per cent to 8.6 per cent. This comes as a bit of a surprise, in the context of how badly the financial sector has been hit, and may be explained by the increased activity by banks. The one segment that is said to accelerate relative to the previous year is the Community, Personal and Social Services category, which includes government services. This is estimated to grow by 9.3 per cent this year, up from below 7 per cent last year, reflecting the impact of the higher salaries being paid to central government employees. As states and public enterprises implement their own pay hikes next year, this segment will provide further support to, in all likelihood, a still slowing economy.
Looking at growth from the demand side, private consumption expenditure is estimated to grow by about 6.7 per cent, somewhat slower than overall GDP, while investment spending is expected to grow by a reasonably healthy 8.8 per cent. This comes on the back of 8.5 per cent and 13 per cent growth in these two components of demand during 2007-08. Clearly, investment activity is slowing down but is showing some resilience in the face of an overall deterioration in the economic situation. Whether this will continue and for how long depends on the ability of the government to restore confidence about medium- and long-term growth prospects. Meanwhile, as in so many areas, it looks like the government is set to carry the burden of sustaining growth at respectable rates. Whatever misgivings there may have been about the substantial hike in government salaries, it could not have come at a better time.
