Exceptional Growth

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In terms of meeting domestic targets, the original Tenth Plan (2002-07) target of 8.1 per cent average annual growth remains out of reach, though the more modest target of 7 per cent set in the mid-term appraisal (MTA) of the plan is achievable, provided the tempo is maintained in 2006-07. The new CSO series shows that gross capital formation rose by nearly three percentage points to 30.1 per cent (at current prices) in 2004-05 after hovering around 23-25 per cent at the beginning of the decade. Gross domestic savings inched up marginally by two percentage points to 29.1 per cent, though the decrease in government dissaving has been remarkable.

As in recent years, the momentum in 2005-06 has been driven by the tertiary sector (9.2 per cent growth); the expansion in the manufacturing sector too has been excellent, with growth this year (9.4 per cent) the highest in a decade. The biggest disappointment has been the mining sector (a mere 1 per cent) and to a lesser extent agriculture (2.3 per cent). Among services, the sub-sectors of trade, hotels, transport and communication (11.1 per cent); finance, insurance and real estate (9.5 per cent); and construction (12.1 per cent) grew most rapidly. While manufacturing did very well last year, independent estimates suggest a slowing down of new investment in this sector. Agriculture’s recovery from the dip in 2004-05 has been far less impressive than during a similar upturn in 2003-04. The expansion of 2.3 per cent is also surely desultory considering the monsoon bounty of 2005 and falls far short of the 4 per cent annual growth required to meet even the scaled down sectoral target of 2.2 per cent for the fiveyear plan period. This would have done little for accelerating employment and reducing rural poverty. What is more worrying is that the gross capital formation in agriculture actually fell by around 6 per cent in 2004-05 (at constant 1999-2000 prices) as compared to the previous year, which will surely have implications for future growth prospects.

A salient point that the MTA underlined might be relevant here: sustained growth requires the stability imparted by public investment, as the Indian economy is much more vulnerable now to the vagaries of the business cycle than before. Public investment was thus targeted to grow much faster than private during the last three years of the Tenth Plan but in fact, exactly the reverse trend has set in. The rise in private gross capital formation began to outpace that of public investment beginning in 2003-04 and the gap has only grown wider in the following year. The fact that government saving turned positive in 2004-05 should make the task of effecting public investment easier. In the area of infrastructure especially, investments that have been lined up in the power sector, roads, airports and gas and petroleum need to be spurred to keep pace with demand.

Medium-term uncertainties do remain. Global imbalances in the form of a high US current account deficit, a growing asset bubble and high oil prices create uncertainties about inflation and exchange rate risks. Domestic inflation has been range bound at the 4 per cent level though a tight liquidity situation has emerged, partly cyclical, due to the rapid pick-up in credit offtake. There has been some slowdown in the private corporate sector as well, with revenues and net profits this year not displaying the heady numbers of 2004-05. Still, business confidence remains high, and capital inflows continue to be strong. EPW

Economic and Political Weekly February 11, 2006