Growth worries

When the new government took office, it stated that GDP growth in the range of 7-8 per cent per year would be an acceptable achievement, given the emphasis it planned to put on equity and welfare.

The Union Budget, presented on July 8, was accompanied by a paper on the medium-term macroeconomic outlook, which pegs nominal GDP growth at 12 per cent per year over the next three years. As long as inflation is in the 4-5 per cent range, the Budget is consistent with the government's growth aspirations.

Given this, it came as something of a surprise that the finance minister, who presumably had the final say on the assumptions underlying the Budget, should state that he expected growth this year to be in the 6-7.4 per cent range.

Look below the surface, however, and there are several reasons why the finance minister's pessimism may be warranted. For one thing, with agricultural growth having been over 9 per cent in 2003-04, no one could reasonably expect this sector to show very much, if any, growth this year.

Thus far, the monsoon has proved to be elusive for many parts of the country. While still not quite at the level and spread of deficient rainfall as in 2002, there is little question that agricultural production will be hurt.

While industry has been chugging along at over 6 per cent per year for two consecutive years, the factors that have been driving it thus far are losing momentum.

Interest rates are now on the way up, which means that the growth rates that were seen in housing, automobiles, consumer durables""all largely driven by cheap borrowing""will necessarily slow.

The national highways and other roads programmes are still going strong, but annual expenditure has plateaued. The one new driver in sight, private investment spending, which was expected by many observers to pick up the slack this year, has been gathering momentum.

However, its sustainability is dependent on perceptions of an improving investment climate, including the policy environment. While the Budget may have provided some reassurances on this score, constant public bickering among the coalition partners on key policy issues cannot but harm sentiment.