India Shining

The robust GDP growth figures announced on Wednesday indicates that the India story is still intact, though it might not feel that way on Dalal Street. GDP grew 9.3% in the fourth quarter of ’05-06 and by 8.4% in fiscal ’05-06 as a whole. A 3.9% growth in agriculture during the fiscal, rising to 5.5% in the last quarter, along with continuing strength in manufacturing and rapid growth in the services sector has resulted in the third consecutive year of 7% plus growth. In case of agriculture the low base effect (0.7% in ’04-05) has helped raise growth rates. Agricultural production has shown dramatic fluctuations in the last four years, ranging from -6.9% in ’02-03 to 10% in ’04-05. Indian agriculture remains afflicted by low productivity, with yields in paddy, for instance, lower than Myanmar. Raising the growth rate in agriculture to 4% is essential if a sustained GDP growth of 10% is to be achieved. That would mean increased public and private investment in irrigation and cold storages, introduction of new high-yield technologies and contract farming. The other problem area among the real sectors is mining, which grew only 0.9%. Here the governments needs to evolve a consensus to open up coal mining to private investors and make it easier for the latter to get leases for other minerals.
The government’s macro challenges are the current account deficit and rising interest rates. FIIs have been selling Indian equities over the past few weeks. This is alarming. Net equity inflows from FIIs were $10.7 bn in 2005, and helped finance the current account deficit (CAD). An outflow would widen the CAD. By some estimates it could reach 3.5% of GDP as imports rise and crude prices stay around $70. Not surprisingly, the rupee has been one of the worst performing currencies in 2006. The solution is to encourage more FDI by opening up sectors such as retail, insurance and banking. Rising interest rates, on their part, will dampen both consumption and investment, though imports will also slow down. On the fiscal front the impact of the seemingly unending series of spending commitments remains to be seen. With the current set of policies, GDP growth of 7% is eminently possible; 10% needs structural reforms.

-- The Economic Times Editorial