Monday, October 02, 2006

India scales a new height

A joyous ‘whoa’ would have been uttered by the economists and the people who look after the economic activities, when the news that India ha scaled a new height in the GDP growth hit the stands. A whopping 8.9% in the immediate past quarter is the highest ever and it is better than the previous quarter by a considerable 0.4%. Isn’t the picture looking very pretty? Well truly it may not be that rosy.

The unprecedented increase in the service sector (13.2%, which interestingly accounts for more than half of the GDP growth) and manufacturing sector (11.3%) has bolstered the GDP growth and every Indian has a reason to feel happy. However a meager increase of 3.4% in the agriculture and poor turnout in electricity and construction should raise qualms in the minds of people. The robust GDP growth in the first quarter is also largely due to a 31 percent rise in bank credit, 36.2 percent growth in commercial vehicles, 32.2 percent rise in passenger traffic by the aviation industry and 48.9 percent spurt in telephone connections

Agriculture, which held the “Numero Uno” position in contributing to GDP growth, before India emerging as an IT hub, has seen dramatic decrease in the recent past and this quarter results also follow the pattern. A heavy dependency on monsoon, poor irrigation and failure in adapting modern farming techniques have all collectively let agriculture down and it shows negatively in the growth rate.

The following key points should be noted before any conclusion can be drawn
1) The GDP growth, instead of receiving equal contribution is leaning heavily on the service sector alone
2) Agriculture growth has kindled only little interest in the mindset of the bureaucrats
3) The increase in GDP has also resulted in the increase of inflation rate

Of all these points the most disturbing one is the alarming raise in the increase of the inflation rate, which has resulted due to the considerable raise in the salary of the middle class people. Well it is needless to say that it doesn’t augur well for the economy. In the early 1990’s Japan faced similar problems and India would only do well if she copies a leaf out of Japan’s book in tackling inflation.

The surge in the global oil prices has also joined hands with the local problems in fuelling inflation rates and though India cannot control the global factor, she can certainly control the local factor. The fact that RBI has already slashed tax rates for goods spurts positive hopes

Ostensibly the GDP growth may look very optimistic. Still there are issues, which the RBI and the financial ministry should address to. Controlling inflation and promoting other sector activities, especially agriculture are two of the easiest ways to trigger further growth and only that can help India beat China, which continues to be the Asian supreme with a Herculean 10% GDP growth.