Excluding agriculture, growth in the rest of the economy is estimated to be a mind-boggling 8.8%. At this rate, double-digit growth should be a breeze. Photo: AFP
After whetting our appetite for high-growth numbers, the Central Statistics Office (CSO) didn’t let us down in its estimates for the current year. It confirmed our gut feeling the economy is doing better than last year.
Gross domestic product (GDP) growth at market prices and at 2011-12 prices, according to the new series, will be 7.4% in the year to 31 March compared with 6.9% in the last financial year. If we take gross value added at basic prices, the expectation is the economy will grow by 7.5% in 2014-15, faster than the 6.6% growth in 2013-14. What’s more, the icing on the cake is that even this 7.5% growth rate is because agriculture disappointed. Excluding the agricultural sector, growth in the rest of the economy is estimated to be a mind-boggling 8.8%. At this rate, double-digit growth should be a breeze.
Note that GDP growth at current prices for 2014-15 is estimated at 11.5%, well below the 13.4% forecast in the budget. That implies two things. One, the acceleration has happened in real growth, rather than in prices. The CSO appears to have discovered many things that weren’t counted earlier and which are priced very low indeed. And two, because nominal growth is lower, it doesn’t help the government’s finances.
What has propelled growth higher? Private consumption is very strong, estimated to grow at 7.1% this fiscal year. The government, too, seems to have supported growth, with its consumption estimated to go up by 10%, despite all the talk about belt-tightening. And there also seems to be an improvement in capital expenditure, despite all the worries over lack of investment demand and stuck projects.
This rosy outlook seems tempered somewhat by a deceleration in growth in the December quarter. At 7.5%, GDP growth has slowed down from an extraordinary 8.2% in the September quarter. But then, as mentioned earlier, poor agricultural growth is the culprit.
True, manufacturing growth seems to have slowed, but that’s because of the high base effect. The sector saw a spurt in growth in the December quarter of 2013-14. The construction sector, however, has seen a sharp slowing of growth from 7.2% in the second quarter to 1.7% in the third, without an appreciable base effect. Services are doing splendidly.
Best of all, the high growth has come about with very low inflation. Inflation according to the GDP deflator is as low as 1.4% for the December quarter. Wasn’t it only a few months back everyone was talking of stagflation, or low growth and high inflation? Thanks to the new statistics, all that is history.
The worry was that supply-side constraints were holding back growth and keeping inflation high, that the problem was structural rather than cyclical. Well, it now looks like we can easily manage 7.4% growth and perhaps 8.5% growth next fiscal years, without structural reforms.
That’s not all. All other indicators such as bank credit, corporate data and industry numbers suggest the economy is either at or slightly above the bottom of the cycle. If we can achieve such wonderful growth rates at this stage of the cycle, imagine how fast we could grow at its top. Our potential growth rate, it turns out, is much greater than the measly 7-7.5% we thought it was.
What it is and what the new output gap is are things for the Reserve Bank to wrestle with. The government must now set its sights higher. With reforms, 12% growth, or even more, should be no problem, now that statistics have made it possible.
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