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The Relative Growth Story

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In its second report issued in October, the World Economic Outlook, the International Monetary Fund (IMF) gladdened hearts amongst finance ministry mandarins by projecting India's GDP growth for 2010 at 9.7 per cent, higher than the government's 8.5 per cent. It prompted finance minister Pranab Mukherjee to proclaim that India would achieve double digit GDP growth in the next two years.

Oddly enough, most economists in India are beginning to express concerns about the ability to achieve the projected growth rate for 2010-11 (FY11). If that confuses you, you are not alone. That is because IMF's projections are for the calendar year 2010 (CY10); the government's projections are for FY11 ending March 2011.

But IMF's forecast for CY11 suggests India's GDP growth will fall to 8.4 per cent, which is in contrast to our government's hopes of double-digit growth. The decline is projected on the basis of a worsening global situation; while there may be no double-dip recession, growth in most developed countries will slow down further. Remember the rapid revision in expenditure side GDP growth for the second quarter by the Central Statistical Organisation (CSO) from 3.5 to 10.7 per cent? The IMF measures expenditure side GDP growth (in other words, national income is measured at market prices), compared to the government, which uses GDP measured at factor cost (or measured in production costs).

But can one quarter make that much of a difference? HSBC's purchasing managers' index (PMI) suggests that the economy may already be slowing. Manufacturing PMI for September declined to 55.1 from 57.2 in August; services sector PMI declined more sharply, from 59.3 in August to 55.6 in September. A PMI reading of below 50 indicates economic contraction.

"The principal driver of growth in the past few quarters has been financial services," says Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai. "Even the advance tax receipts have been lower than anticipated." Exports have been underperforming, and inflation still remains stubbornly high. That inflation will be higher is beginning to gain acceptance even in government circles.

 Finance secretary Ashok Chawla acknowledged to The Wall Street Journal recently that average inflation could be close to 8 per cent, rather than the official position of 3-4 per cent. That sentiment echoes what Olivier Blanchard, IMF's chief economist had been saying earlier about inflation in developed countries: that it makes little sense from a policy perspective to target 2 per cent inflation in a world irretrievably changed by the global financial crisis.

For India, growth in the fourth quarter of FY11 is likely to be lower than previous quarters. Usually, activity in the fourth quarter tends to be higher, not lower. In their report of 8 October, Taimur Baig and Kaushik Das of Deutsche Bank say the growth momentum, while comfortable, may be slowing.

So, what is more certain? That the economy will grow in double digits in two years, or that it will moderate somewhat? As Albert Einstein pointed out: "As far as the laws of mathematics refer to reality, they are not certain; as far as they are certain, they do not refer to reality."

(This story was published in Businessworld Issue Dated 18-10-2010)