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13 December, 2010

Economy looking up

BRP Bhaskar
Gulf Today

With parliament unable to function for several weeks, the Indian political scenario presents a depressing picture but there is good news from the economic front. The rate of growth of industrial production has climbed back to two digits and the authorities expect faster growth this year than was earlier anticipated.

The finance ministry, in its mid-term review, said the economy could grow at the rate of 8.75 per cent or even above 9 per cent in the current fiscal.

“It is estimated that growth in 2010-11 will be 8.40 to 9.10 per cent,” it said. “The range indicates the possibility of crossing the 9 per cent mark this year itself, but is wider than the earlier estimate owing to higher risk factors, which includes the economic situation in the Euro area turning worse.”

Official figures released last week showed a growth of 10.8 per cent in industrial production in October, which was way above the targeted figure of 8.5 per cent. What made this possible was a spurt in the manufacturing sector, which registered a production increase of 11.3 per cent.

In July, industrial production had soared to 15.1 per cent but there was a sharp fall later and the growth rate was only 4.4 per cent in September. The cumulative growth for the period April-October this year was 10.3 per cent as against 6.9 per cent for the corresponding period last year.

Automobile and television sales pushed up the growth rate of consumer durables to 31 per cent. As a result, despite the tardy growth of only 0.1 per cent in non-durables, there was an overall growth of 9.6 per cent in consumer goods production.

The message that flows from these figures is that the country can look forward to achieving a growth rate of 8.75 per cent in the current year.

Two factors helped the Indian economy to withstand the impact of the global meltdown with comparative ease. One was that the process of integration with the global economy was far from complete. The other was that the country’s financial system was still in the conservative mould of the pre-globalisation era.

However, there is room to doubt if such factors can be relied upon beyond a point. The recent revelations of massive manipulations by the powerful corporate sector and the high volatility of the stock market contain warnings that cannot be ignored.

The Bombay Stock Exchange, which touched the pre-meltdown levels earlier this year, came under severe selling pressure in the wake of the 2G spectrum allocation scam, which has brought parliament to a standstill. To make things worse, some grave irregularities in housing finance also came to light. The head of a public sector corporation and some bank executives were among those arrested by the Central Bureau of Investigation in connection with suspicious housing loans.

Some outflow of foreign capital was also reported. However, the authorities do not see that as a major problem. They believe India retains the ability to attract capital as it offers a better return on investments than most countries.

Global financial experts generally share the Indian authorities’ optimistic outlook. Early this year Morgan Stanley had raised its estimate of India’s economic growth rate from 8 per cent to 8.5 per cent. It cited increased domestic demand and investments as the key driving forces.

At the same time, it warned that higher growth would be followed by higher inflation. This is a problem the authorities are well aware of. Finance Minister Pranab Mukherjee recently acknowledged the need to return to fiscal consolidation. He noted that India has a trade deficit of $56 billion and a current account deficit of three per cent and said they could not be maintained at these levels for long.

One worry for India in this context is the Euro crisis. Europe accounts for 36 per cent of India’s exports. Europe’s economic health therefore has a bearing on India’s.

“The government needs to keep a watch on the surging inflation number,” Mukherjee said. Planning Commission deputy chairman Montek Singh Ahluwalia concurred. “We cannot afford to relax the vigil on inflation,” he said. “It still remains a matter of concern.”

The whole sale price index, which is watched closely to gauge inflationary trends, was 8.62 per cent above the previous year’s level in September and 8.58 per cent above in October.

The Reserve Bank of India, the country’s central bank, is already in the process of exiting from the “accommodative” policy that was laid down to tide over the situation resulting from the global meltdown. It is expected to step in if inflation does not decline to an acceptable level by March next year.

While the economy does well, politicians and even businessmen may be able to get away with their misdeeds. -- Gulf Today
, Sharjah, December 13, 2010.

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