Growth rate may now come down to 6.5%: CII

Growth rate may now come down to 6.5%: CII
The Economic Times, August 11, 2009, Page 8

BUT still India’s GDP growth defied prophesies of doom to expand by a creditable 6.7%, one of the highest growth rates achieved by major economies, although lower than the 9%-plus growth seen in the preceding three years.

While predictions for GDP growth in the current year have ranged from the World Bank’s 5.1% to 7%-plus by the prime minister’s economic advisory council, the failure of the monsoon risks tilting those predictions to the lower end of the forecast band.

“We expected GDP to grow at close to 7%, but the growth rate may now come down to 6-6.5%,” said CII president Venu Srinivasan.

University of Chicago professor and former chief economist of the International Monetary Fund Raghuram Rajan said the below-average monsoon could shave as much as one percentage point off India’s GDP growth this year.

“The monsoon will have an effect, but not as devastating as it would have been in the past. Now hopefully it takes a fraction of a percentage point or a percentage point off growth, which still looks reasonably healthy,” Mr Rajan, a former advisor to Prime Minister Manmohan Singh, was quoted as saying.

There are also fears that the monsoon failure could feed inflationary expectations, and agricultural economists are apprehensive that the growth rate for the primary sector, which has grave implications not just on food security and the government’s import bill but also the health of manufacturing and other sectors, could be on a par with the severe drought year of 2002-03.

“It is a very bad situation in terms of crop output from all accounts. It could be a drought situation on a par with 2002 in terms of farm sector growth,” an economist with think-tank Icrier said.

However, Pronab Sen, the country’s chief statistician, said it was too early to predict a crop failure. “There is no real threat to economic growth this fiscal on this account. Rising food prices have more to do with speculation at this stage than a crop failure. Before every harvest, a lot of speculation activity takes place, driving up prices,” he said. Economist DK Joshi of ratings firm Crisil concurred, saying it was too early to cut GDP growth forecast. “Although there will be a fall in agriculture output, improving external environment and recovery in industrial activity may offset it. We have seen this happening during earlier droughts,” he said. These views are supported by economic data emerging from different parts of the world. The US is increasingly seen as being on the mend after it declined just 1% in the second quarter to June-end, prompting rating agency Moody’s to upgrade its second-half outlook for the economy, which accounts for about 23.5% of the world economic output.

Nobel Prize winning economist Paul Krugman, not known for his optimistic views about the US economy, also thinks the recession may have bottomed out. “It’s quite possible, though not certain, that retrospectively, we’ll say the recession ended in July or August, maybe September,” Mr Krugman was quoted as saying in Kuala Lumpur, adding the world economy may face several years of weak growth without falling into a “double-dip” recession.