Thursday, September 3, 2009

A good sign, see if it is sustained

While 6.1 per cent is well below the 7.8 per cent growth seen in the same quarter last year, the point is that it is still within the baseline 6-9 per cent projection. So while this is encouraging, it might be premature to read this as a clear indicator of recovery being on the way or a step towards a high growth path. There have been some bright spots in specific sectors, with an encouraging upturn in industry, manufacturing and the services sector. In services, though, there has also been some moderation in community, social and personal services — all primarily in the government sector — which has witnessed a moderation from 12.5 per cent in Q4 of 2008-09 to 6.8 per cent in the first quarter of 2009-10. This indicates that stimulus packages had taken effect, but are now on the wane and playing out. The other interpretation is that the growth trigger is coming from non-governmental areas, and that there is less dependence on government spending as a trigger. This, however, should logically be reflected in higher revenue collections, of which there is no sign as yet. More stimulus packages are, however, on the way, with various state governments agreeing to implement the Sixth Pay Commission’s recommendations in their respective areas.It must be remembered at the same time that certain stimulus measures by the government to manage the crisis, such as reducing taxes, increasing expenditure, focusing on rural expenditure, might not be there this year, or not to the same extent. Governmental support to weather the global economic crisis is moderating, and there is also concern over agricultural growth, which is likely to be impacted by the deficient monsoon. This could shave off one or two per cent from the GDP growth figures. The second quarter of this fiscal year is crucial: if the economy can pull off a similar or better performance then the second-half growth rate could be higher in FY10. The government is trying its best and is working in top gear. Some economists feel if some fiscal space is created in the second half through higher tax collections, with the private sector showing signs of recovery, then higher support from the government might be forthcoming. Ultimately, the economy has to run on its own steam and not through artificial respiration in the form of stimuluses. Globally, the scepticism is even greater, as is evident from the statement of G-20 finance ministers meeting this week. There is confusion on whether the global turnaround is due only to trillions of dollars poured into the various economies that stimulated growth, or whether it is the real thing. A real fear is that if and when the trillions of dollars are withdrawn, as they have to be over a period of time, then the turnaround might go into reverse gear. In America, for example, consumers are still hesitant to go on a buying spree because the dollar buys less than it did earlier and also due to layoff scares. But that is the catch: if consumer spending (which in the US accounts for 70 per cent of the economy) does not go up, chances of a robust recovery will remain a distant dream. While India’s economy is less affected by global behaviour, it is still critically dependent on the global economy for exports and finance — the two big engines of growth. All eyes will now be avidly focused on the second-quarter GDP figures. Source : The Asian Age - Editorial

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