When it comes to numbers, there were hardly any surprises in the 2008-09 first quarter (Q1) gross domestic product (GDP) numbers released on Friday. For more than six months the usual refrain has been that the days of 9% GDP growth are over, at least in the near future.
Illustration: Jayachandran / Mint
One argument is that monetary tightening has killed growth and perhaps if monetary strings are loosened, the bird might fly again. The data, however, shows that bank credit grew by 25.8% in Q1 of 2008-09 over Q1 2007-08. The answer to slowing growth, therefore, lies elsewhere.Investment demand is key to this story. It has fuelled growth in recent years. The danger signal is that its growth has tapered off. This is quite clear from the gross fixed capital formation (GFCF) figures.
On a year-on-year basis, GFCF growth has fallen: from a high of 16.72% in Q1 of 2007-08 to a low of 8.96% in the first quarter of 2008-09. In an inflationary scenario, this source of growth is part of the solution to tame inflation while maintaining growth. This is clearly not happening. There are, however, sceptics who argue that as a percentage of GDP, GFCF is pretty high. At 32.3% of GDP in Q1 2008-09, the question is: How high can this figure go before it starts pinching consumption, the other leg of economic growth? The answer to this is not clear.
So what is likely to be the source of consumption and, in turn, growth? One source may be the big pay increase awarded to government employees by the Sixth Pay Commission. But this is a dangerous argument as it might fuel inflation instead of providing growth. The cursor again points to investment growth and it might be premature to think of monetary loosening given the still strong inflationary headwinds.
Agricultural growth, which usually provides the cue in such situations, has not been a happy story so far. At 3% growth in Q1 2008-09 even with a bumper wheat crop in the 2007-08 rabi season (that ended in June), agricultural growth can only be called dismal. The danger here is that commodities that usually fuel inflation have done poorly. Pulses grew by –7.9% over the same period of 2006-07, oilseed production fell by 12.6% in the rabi 2007-08 season and sugar cane too fell by –4.2% in the 2007-08 agriculture year. Perhaps a different strategy is called for in this situation.
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