India's Growth Data has Brightened Revival Hopes

By Sushma Ramachandran

A new Indian government under Prime Minister Manmohan Singh has taken charge for the second successive term at a time when there appear to be glimmers of light on the horizon for a revival of the economy that had slowed last year after logging an impressive annual growth of nine percent in the preceding three years.

As the United Progressive Alliance (UPA) government unveils its new programmes, the first indicator of better days ahead has been the official data on national income. The Indian economy, as per statistics, grew by 5.8 percent during the last quarter of 2008-09, bringing the overall economic expansion to 6.7 percent for the year.

These figures were much better than expected as most analysts had projected a growth of five percent for the last quarter. They have also buoyed the hope that 2009-10 may actually presage a recovery from the ill effects of the global economic gloom since last year.

It may be early days, but it is significant in this context that the head of Morgan Stanley Asia, Stephen Roach, is now more bullish on India than China for the first time in 12 years. He does warn, though, that expecting eight percent growth for India may be somewhat optimistic. Even Barclays Capital has raised its growth projections to 7.2 percent for the current fiscal against 5.5 percent earlier.

As for the latest official data on gross domestic product (GDP), it indicates that manufacturing continues to be a weak link, having dipped 1.3 percent, but services remain buoyant with a 12.5 percent expansion, albeit lower than in the past.

Agriculture, too, has performed better than expected instead of decelerating, which suggests that demand will remain strong in rural areas in the coming months. Besides, the all-important monsoon - the main source of rain in South Asia - is predicted to be "normal", which means prospects are bright for the current sowing season.

Clearly the outlook is good, but much depends on the impact of the global economy, especially in key areas like exports that continue to dip.

There are other indicators as well that suggest that the mood remains upbeat over the prospects and health of the Indian economy. This includes the proposed $23-billion cross-holding deal between India's telecom major Bharti Airtel and South Africa's MTN that will make their telecom operations rank among the top five in the world with some 200 million subscribers.

In addition, and perhaps even more importantly, the Congress-led UPA government has come to power with much larger number of seats this time and fewer coalition partners. It no longer has to rely on the munificence of the Left Front to stay in power. Clearly it is now being expected that the prime minister will be able to carry out a deepening of the economic reforms process during his five-year tenure.

This includes divestment of government stake in a large number of state-run companies, thereby helping to reduce the size of the fiscal deficit. President Pratibha Patil's speech to both houses of parliament Thursday specifically mentioned divestment, even though government equity will be retained at 51 percent or above. Even so, it will enable several large public sector companies as well as banks to go in for dilution of equity through various routes.

There is also speculation about foreign direct investment being allowed in the multi-brand retail space, as opposed to the nod at present only for single-brand retailing companies and wholesale cash-and-carry operations.

But the government has to consider the fact that India currently has the largest retail network in the world, mainly comprising small mom-and-pop shops, which are large employers. Policymakers will have to examine if the entry of multinationals could affect jobs in this sector.

Infrastructure is another area where the new government is expected to make major investments to stimulate the economy. This includes road development that had fallen into the doldrums during the last government when the then Surface Transport Minister T.R. Baalu changed the chairpersons of the National Highways Authority repeatedly, leaving little time for any incumbent to settle down. This portfolio now is with the Congress, with former trade minister Kamal Nath at the helm, who has promised early results.

All this has obviously improved sentiments, with the country's stock markets witnessing a bullish trend ever since election results were announced. The trends still continue, but much depends on the national budget to be presented in July. Some policies, like the promise of food grain at Rs.3 per kilogram, or less than six cents, to the poor may not find favor with the markets and may trigger market volatility in the months to come.

Yet, the big picture of the Indian economy suggests that at 6.7 percent growth, it remains one of the fastest growing in the world, even at a time of global recession. This may not be a great consolation since a huge number of jobs have been also been lost, putting millions of families into hardship.

Nevertheless, this impressive growth in such difficult times does indicate that the outlook is bright for an early recovery and faster economic expansion in the current fiscal. The new government at the helm must also ensure that the fruits of this growth are shared by the poorest of the poor. Otherwise there is little meaning in India being one of the world's fastest growing economies.