By Manish Sharma

At a time when the Chinese premier is warning the world about double-dip recession and the payment crisis in Euro zone is getting worse, the Indian growth story is really inspiring. The Indian economy achieved a growth rate of 7.4 per cent in fiscal 2009-10. For the last quarter (Jan-March) of 2009-10, it grew at a rate of 8.4 per cent. The expansionary fiscal policy along with the stimulus package in the form of pay hike for the salaried class, loan-waiver package for farmers, excise duty cuts and soft interest rate regime combated the slowdown well and paved the way towards reviving the growth cycle.

For fiscal 2010-11, the Prime Minister has set a growth target of 8.5 per cent. However, the picture of the current year will get clearer by the third quarter owing to the on-going worries of global slowdown and a hike in inflation and interest rates. Though the robust growth in the last quarter ensured that overall fiscal growth ends on a very strong note, at this point in time, only the growth forecast of the first quarter of this fiscal appears promising. This is mainly because of the base effect as the first quarter growth in 2009-10 was quite bleak.

While the initial momentum towards growth was mainly due to traction in government policy, the late surge was led by industrial revival aided by capital inflows. Industrial activity for fiscal 2009-10 grew at 9.3 per cent compared to 8.2 per cent in the previous fiscal. Sharp upturn in industrial activity and exports have accelerated growth towards the 8 per cent mark. Industrial production hurried to 15.1 per cent (Y-o-Y) during the first three months of 2010 compared with a trough of 0.3 per cent (Y-o-Y) in the corresponding period of previous fiscal. Similarly, exports have begun to rebound with a growth of 14.1 per cent between January and March 2010. During the past six months, seasonally adjusted exports growth has recorded a jump of 20 per cent.

In order to sustain the 8 per cent growth level, it is clear that investments need to offset moderation in consumption and slowdown in government expenditure. The expansionary fiscal policy mainly aided growth during the greater part of 2009. For instance, during July-September 2009, government expenditure grew by 30 per cent. But, policymakers are gradually removing fiscal underpinnings. Government expenditure shot up just 2.1 per cent in Jan-March 2010. The growth in the last leg has been driven by investments rather than consumption. Investment growth has picked up sharply and jumped by 17.7 per cent in the fourth quarter of 2009-10, whereas consumption continues to decline and grew merely by 2.6 per cent in the last quarter.

It seems the government has stopped funding the growth due to fiscal compulsion, and so a transition from government-stimulus to private demand has been made. However, fall in consumption and government expenditure might pose worry especially in rural regions that depend primarily on agriculture growth, which posted a dismal 0.2 per cent, down from 1.2 per cent clocked in 2008-09. A lot of companies have raised money to add capacities that are so crucial to roll out investment-led demand.

Going forward, capital inflows will have to play a crucial role as private investment replaces public spending. Thus, external risks remain imbibed in the growth outlook. The ongoing turmoil in Europe can upset the growth momentum. Also, the slow pace of the government’s structural reforms may affect investment growth prospects. These two factors will likely determine the upside and downside risk to growth.

Indiabiznews, June 05, 2010