Official optimism

Two optimistic forecasts about the economy have been made in as many days. The Prime Minister's Economic Advisory Council, under the chairmanship of the very experienced and careful C Rangarajan, has forecast 9 per cent GDP growth this year, with low inflation (4 per cent) and good export growth (18 per cent), as well as continued fiscal correction. In his wake, the finance minister has gone one better and held out the prospect of 10 per cent GDP growth next year""provided agriculture grew at 4.5 per cent. If those numbers bear out, the economy will have grown at an annual average of 9 per cent through the life of the Manmohan Singh government""a prospect that no one held out in 2004 when he was sworn in.

Of the two forward-looking statements that have been made, it is Dr Rangarajan's numbers that need closer scrutiny, because Mr Chidambaram has given no detailed sectoral break-ups or supporting macro-economic numbers to buttress his optimism. The exception is agriculture""and since 4.5 per cent growth in this sector has not been seen for many years, the finance minister may well have been expressing a hope rather than making a serious forecast. Nor can he be privy to any special information that reaches his North Block office, since he is talking of a financial year that is still more than eight months in the future. Dr Rangarajan's estimate is noteworthy for the additional reason that he is distinctly more optimistic than the Reserve Bank of India, which has forecast both slower growth and higher inflation this year, along with slower export growth.

The two standard reasons for expecting some kind of slowdown this year have been the higher interest rates (which have hit demand in the sectors where customers depend on credit""like motor vehicles and housing), and the impact of a more expensive rupee on export performance. A third and fourth reason would be the sudden slowdown in credit offtake and the skyrocketing oil prices. Consumers have been protected so far from the effects of the second of these, but as the inflation curve flattens out, the petroleum minister will be under increasing pressure to do the sensible thing and pass on the higher costs. Against these negative trends, the one strong indicator of continued momentum in the system is the handsome level of advance tax collections so far. The first-quarter financial results of companies are not yet available in sufficient numbers to give an independent sense of how the corporate sector is doing, so one must go by the pointers provided by advance tax collections. Then there is the abundance of financial liquidity despite everything that the RBI has done so far""so that bankers have begun arguing for a drop in interest rates! And, of course, the monsoons so far have been good even if a trifle erratic, so it should be a good crop year as well.

Given these contradictory trends and strong industrial growth in the initial months, it is safe to say that overall GDP growth this year should not be less than 8.5 per cent. Getting up to 9 per cent could need some luck with the global economic environment. But given the accuracy of official statistics, it is possible to argue that no one will know the difference between 8.5 per cent and 9 per cent, so it is best to go by secondary indicators, of which there is no shortage. Survey-based data do suggest, for instance, a small dip in business and consumer confidence levels, but none of it so alarming as to change the course of rapid growth, on which the economy is set.