By tomorrow, the data on index of industrial production for January 2008 would be released. This data will tell the world if the 8.7% rate of growth of the Indian economy for this fiscal would be sustained or even improved upon, as the finance minister seems to believe.
I will have to do some number crunching here. GDP growth in the third quarter of this fiscal has slipped to 8.4% year on year. This means in the fourth quarter, GDP has to grow by at least 8.3% to ensure the advance estimate for this year is maintained.
To get there, the IIP data has to pull itself up quite a lot in January from the 5.3% it logged in November and 7.6% in December. This could be a tough call. Why? The share of fixed capital formation in the GDP has eased to 31.6% in the third quarter of the year from an average of 33% in the first two quarters. Despite the heavy slowdown in consumer durables and therefore in overall consumer goods, the sharp rise in capital goods spend has kept the uptick in the economy. The easing on capital spend means there could be a potential problem developing in the economy, despite the hiccups of interest rates on consumer spend. The IIP figures would show if a trend of capital investment deceleration is developing. One has to remember that the latest authoritative RBI survey on industrial sentiments has shown more entrepreneuers taking a glum look at their future investment plans, so this is quite possible.
The other worry lines come from the deceleration in the services sector. This part of the economy has two tigers. The construction sector and the omnibus banking, financial services and real estate sector. Here too, the growth rate has slipped to 7% in the construction sector and just about 11% in the latter, from about 14% in the first three quarters of the year. Both have taken a hit again from the credit squeeze.
The cumulative impact is therefore a slowdown in services, in industry and, of course, in agriculture, which we shall not dwell upon here. Since the other striker in services, exports too has eased up, it is up to industry to bring home the bacon. This means the odds of keeping the 8.7% rate of growth of GDP have lengthened.
But just to keep the debate in perspective, there is no recession building up in the economy. Instead, chains around the feet of the economy are tightening due to the combined onslaught of higher interest rates and higher than anticipated inflation. This is tripping up the growth momentum.
The new joker in the theatre is the inflation rate, hovering at about 5%. By itself, this is not a bad call at all. Indeed, for a growing economy, the rate can be seen as seasonal. The arrival of the winter crop in the market is likely to jab it down. Incidentally, the better measure of inflation in urban areas, CPI for industrial workers, has remained static in January and February. Globally, with the US economy in recession, world commodity prices are sure to soften.
That helps emerging economies. The impact of the Sixth Pay Commission on pushing additional liquidity into the economy as add-on disposable income for government employees is also likely to be muted. Indications are that its payout would be less than the Fifth Pay Commission. But in an election year, high inflation is supposedly political suicide. No votes would be lost if growth loses momentum. The choices are fairly obvious. Growth will have to bow to make room for a political statement.
