There is a background to Q2 2009-10 real GDP growth figures of 7.9% and that is growth of 6.7% in 2008-09 (5.3% in Q3 and Q4) and 6.1% in Q1 of 2009-10. Let?s face it. No one expected 7.9% and there are legitimate reasons for that. First, there was the spectre of drought, even if it didn?t turn out to be as bad as was initially feared.?Second, exports are still declining (6.6% dollar decline in October), though rate of decline is slowing.?Third, Q2 of 2008-09 didn?t have low base of 5.3%, growth for second quarter last year was 7.1%. For 2009-10, most forecasts are in a band of 6 to 7%, with government towards higher end of range and non-government towards lower end. Consequently, most people would have expected a shade over 6% in Q2 (including PM?s Council) and 7.9% is way out of line. Disaggregated, in Q2 we have agriculture growth of 0.9%, manufacturing of 9.2%, mining of 9.5%, electricity, gas & water supply of 7.4%, finance, insurance, real estate & business services of 7.7%, trade, hotels, transport & communication of 8.5% and construction of 6.5%.

There are indeed post-facto rationalisations of why everyone went wrong. First, agriculture has done better than expected. Decline due to drought will show up in Q3. Second, liquidity has stimulated domestic demand more than expected, and festive season distorted trends. Third, industry (and manufacturing) has done better and that is perhaps explained by a build-up of inventories. Fourth, services (overall growth of 9.3%) did much better because of Pay Commission installments. (Community, social and personal services grew by 12.7%.) Fifth, numbers are often revised later and perhaps the agriculture number will be revised downwards later. The fact remains these are post-facto rationalisations and the economy has performed better than expected. There is no question of getting back to 8.5%-plus trends until the global economy and exports recover. Until then, we are on a band of 6 to 7%. However, because of these better-than-expected numbers, for 2009-10, most projections will now switch from closer to 6% to closer to 7%. And that band will be changed from 6 to 7% to 6.5 to 7.5%.?The Sensex (and capital markets) has over-reacted and there are legitimate concerns about how strong the revival is. Weak agriculture numbers will show up in Q3. There will be exit from stimulus packages.

What does exit from stimulus packages mean? There is fiscal policy, monetary policy and structural reforms. No structural reforms worth the name have surfaced since the global financial crisis. On fiscal policy, there is the expenditure part and tax exemption part (concentrated in three packages between December 2008 and February 2009). Contrary to impressions about a wonderful counter-cyclical fiscal package devised by government after the global crisis, expenditure (and resultant widening of deficits) occurred before September 2008. Given UPA?s predilections, is there any reason why public expenditure (regardless of efficiency) should not continue? Pay Commission will spill over into state and local governments.?NREGS remains. Right to education (and perhaps right to food) expenditure will follow. On fiscal policy, exit therefore means exit from tax reductions, not public expenditure cuts. If direct taxes are reformed and if there is GST, tax exemptions will go, as they should. Given the inflation bogey, exit from monetary policy is different.?Tightening is certain.?What is unclear is timing (January/April) and its content (mopping up liquidity, CRR hike, repo or reverse repo hikes). However, let us also remember Q3 and Q4 are good quarters for exports and there are signs of some revival in external sector. Low bases in Q3 and Q4 of 2008-09 also help the cause of higher growth in last half of this financial year.

While scepticism about recovery is fine, all recovery is with respect to a benchmark. We aren?t back on 8.5% and 9% trajectories.?But we aren?t on 5 or 5.5% either.?We seem to be inching up to something like 7% in 2009-10 and 7.5% in 2010-11. Whether that is good or bad is relative. After all, a difference between 7.5% and 8.5% translates into (depending on composition of growth) something like 1.5 million fewer jobs created. There is also the point about government patting itself on the back for having ensured India?s weathering the storm well. That?s a proposition that has to be taken with several pinches of salt. As was mentioned, public expenditure occurred before September 2008 and even in 2007-08. To interpret such government action as counter-cyclical, one would have to agree that UPA anticipated global crisis and acted accordingly, a dubious proposition. A counter-factual proposition also remains, worth remembering since tight monetary policy is almost certain. What would have happened to growth had RBI not hardened interest rates in 2007-08? And there?s a final speculative proposition, too. Post-1991, has there been enough unshackling of entrepreneurship to ensure the economy chugs along at around 7%, regardless of what government does? As long as government doesn?t do something positively malign. Consequently, imagine what growth will be like if government becomes benign and introduces sensible policies for infrastructure (roads, electricity), law & order and public goods & services.

?The author is a noted economist