Half Way Into The Fiscal

Written by Saumitra Chaudhury | Updated: Sep 29 2003, 05:30am hrs
With the end of the South West (SW) monsoon and half of the financial year drawing to a close, it is as good a time as any to review the year. The SW monsoon has of course been most wonderful except for Karnataka. For the country as whole, rainfall between June 1 and September 24, 2003, was 2.1 per cent more than the long period average. The northern and western states received rain in excess of 20 per cent of the long period average, while most states, especially rain dependent areas, had rainfall more moderately in excess of the norm. Only Karnataka closed the year with precipitation in the deficient category. So did Kerala but unlike Karnataka it is not in the rain shadow.

Further, the distribution of rainfall was rather well behaved pouring in July and slowing down as the crops matured. Floods were hardly as vicious as might have been expected from so much rain. The kharif crop is certainly set to scale new records and the recharge of soil moisture should set the ground for a bumper rabi crop as well.

Gross domestic product (GDP) from agriculture should soar in the second through fourth quarters of the current fiscal and the first quarter of the next fiscal corresponding to the harvest cycle and crop year. First quarter GDP is due to be released tomorrow. The agricultural component ought to be representing the closing quarter of the last crop year which has been cast as the worst crop year in a very long time. Given this, it is hard not to have a sizeably negative change for the quarter in so far as agriculture is concerned. Even with industry and services doing quite well, overall GDP growth should be significantly below 5 per cent.

But that should not act as a party pooper. For 2003-04 as a whole, GDP growth is poised to cross 6.8 per cent. In the annual accounts unless changes have been made it is the GDP of the crop year that is counted, not one quarter of the last crop year and three quarters of the current one. With the terrific monsoon set to produce a huge harvest in both the kharif and rabi seasons, growth of up to 9 per cent is not beyond the feasible.

Industry and services continue to do well, as testified to by industrial output growth up to July and the ability of the economy to absorb both higher domestic and imported goods.

Strong growth in this fiscal has, however, already been factored in by the market the uncertainty is about how long the current run of expansion will hold. A sensible approach is to start with the underestimation of GDP last year. After all, non-agricultural GDP expanded by 6.7 per cent, no matter the official squeeze on agricultural output. Now, if we remember that hence for this year the denominator is understated, it would mean that a 6.8 growth is actually one of little below 6.5 per cent. That of course helps in holding together our sense of proportion.

The fact of the matter is that the non-agricultural component of our economy, which accounts for three-quarters by weight, appears capable to deliver somewhere above 6 per cent rate of growth on a sustained basis. Combine this with the volatility of agriculture, exacerbated by the machinations that have come to dominate this sector, and the economy seems set on a growth trajectory in excess of 6 per cent per annum.

This is despite the languid pace of reform in government finances and public service provisioning. That the pace is languid, but not non-existent, is brought home by the fact that electricity generation is barely growing, notwithstanding what is happening to the rest of the economy. In part this is due to the monsoon and consequential lower irrigation and air-conditioning demand. But mostly it is due to the curtailment of power theft.

The cost of this languid pace is foregone growth of as much as 1.5 percentage points each year. The best outcome of the elections forthcoming this year and the next is that it does not produce surprises and that governments do not turn even less stable.

The author is economic advisor to ICRA, (Investment Information and Credit Rating Agency)