Two events that took place last week provide food for thought. Literally.
Three sets of data issued by the government reveal that agriculture, despite the worst monsoon in 33 years, is not doing as badly as imagined, industrial output in December rose to a 16-year high expansion rate of 16.8% and projections for growth in national income for 2009-10 were rosier than expected at 7.2%.
On the other hand, participants at a meeting of the Commission on Growth and Development, which consists of government officials, business executives and policymakers supported by a few countries and institutions such as the World Bank, met in New Delhi and concurred that the global economic meltdown was not an aberration and instead was a game changer; worse, none of them was willing to predict how the new world economic order would look or behave.
Taking the two together, the implicit conclusion is that India has delinked from the world.
The government’s spin doctors have already begun to talk up the economy; they are suggesting that the recovery in India is for real and very soon the economy would revert to the 8%-plus growth trajectory that it averaged in the last decade.
Not necessarily, if we review the economic data put out by the government with the desired objectivity.
Also Read | Anil Padmanabhan’s earlier column
Agricultural growth, according to the latest projections, is expected to stage a partial recovery that dramatically mitigates the damage from drought—as a result, the overall decline would be only about 0.2%.
This claim is premised on certain assumptions or bets, which in such challenging economic times can be termed potentially dangerous.
The national income data is based on advance estimates submitted by the ministry of agriculture. Here again, there are crops that can be forecast—foodgrains, fibres, oilseeds and sugar (that have a collective weight of 56% in total agricultural output)—and those cannot be forecast and are simply guesstimates—fruits and vegetables; medicinal crops; kitchen garden produce (with a collective weight of 44%).
The advance estimates, conforming to the estimates included in national income, on agriculture put out by the ministry reveal that the items that can be forecast decline by 7%.
In the case of items that cannot be forecast, we have to simply go by the residual method. Fruits and vegetables, which have a 24% weight in overall agricultural output, the government claims, are growing at 4% (an interesting aside is that this implies no supply-side constraint and yet prices of fruits and vegetables are growing at 10%-plus). In net, agricultural output, which has 80% weight, is declining at 3%.
In other words, the residual portion, which accounts for 20% of agricultural output, has to grow by at least 10% to return an overall decline in agriculture of 0.2%.
This seems to be an improbable assumption, especially since a portion of this output, such as straw, is a by-product of foodgrain output, which even the agriculture ministry accepts has been affected.
Given the tricky circumstances of the global economy, it would be better to err on the side of caution and assume, as some economists suggest, that the agricultural sector will decline by about 3%. (More realistic, given that during the last drought in 2002-03, which was less severe than last year’s, agriculture output declined by 7.2%.)
Given its share in total national income of about 17%, this should translate into growth in the range of 6.8%; more modest than the 7%-plus projection, but will at least not trigger hubris—which would be logical given the 16-year-high headlines that the December industrial output drew from the media.
Although almost every media outlet flagged the fact that this had a base effect—since industrial output declined by 0.2% in December 2008, exaggerating the spurt dramatically—the headlines, especially in light of the earlier good news on national income projections for 2009-10, would have overshadowed references of circumspection.
What then is the fallout of reading too much optimism into the growth numbers of last week? Most obviously it would be tantamount to talking up the economy. At this stage it can only mean that the government is preparing the ground to effect a partial rollback of the fiscal stimulus—such that the government signals its return to the path of fiscal rectitude.
I am not sure you need to justify the end outcome; it is a credible objective and now a mantra that the country largely accepts.
However, the more damaging fallout is being prey to hubris.
This is the very same characteristic that allowed Wall Street high-fliers to lure the entire world into an unprecedented economic disaster; not only will we never return to a normal state of affairs, the new normal, as the economists spelt out in New Delhi last week, is anybody’s guess. To quote philosopher George Santayana: “Those who cannot remember the past are condemned to repeat it.” In this case, it is a very recent past.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at email@example.com