Economic Survey - Economy in high-growth trajectory

The economy seems to have decidedly `taken off' and moved from a phase of moderate growth to a new phase of high growth. That is the prominent theme of the Economic Survey 2006-07, presented to Parliament on Tuesday by the Finance Minister, Mr P. Chidambaram.

Pressing its claim, the survey points to signs of industrial resurgence, with the industrial sector growing from a low of 2.7 per cent in 2001-02, moving up to 7.1 and 7.4 per cent in 2002-03 and 2003-04, accelerating to 9.5 per cent in the next two years to touch 10 per cent in the current fiscal. Also, the growth impulses within industry seem to have spread to manufacturing.
A notable feature in the current growth phase is the high rate of investment, measured in terms of gross domestic capital formation that has steadily climbed from 31.5 per cent in 2004-05 to 33.8 per cent in 2005-06.

There are other positives. The generally laggard infrastructure index grew 8.3 per cent in April-December 2006, up from 5.5 per cent in the same period of the previous year; the public sector turned its dissavings into positive savings and the corporate sector reported a sharp increase in savings at 8.1 per cent in 2005-06, which helped it to finance a large part of its investment in the ongoing capital-expenditure cycle.

Capital inflows into the country have also remained strong and even domestic flows to the capital market have been high. Initial public offerings grew 30.5 per cent in calendar year 2006 to Rs 1,61,769 crore and on an average, there have been six IPO issues per month.

Sustaining factors

According to the survey, this growth in the economy is sustainable for a variety of reasons. First, the high growth from a growing number of the population in the working age group would lead to a rise in savings. Second, efficiency improvements in the economy since 1999-2000 reinforce the confidence in the high-growth phase. Third, opening up of new avenues in services, beyond IT and IT-enabled services, bolster confidence in the high growth rate.

The fourth positive factor is the low possibility of an `overheated' economy, typified by a strained labour force and capital stock. This can be obviated through rapid growth in capacity addition through investments. Moreover, the moderate merchandise import growth rules out indications of overheating.

The incidence of poverty is down to about 22 per cent in 2004-05 from 26.1 per cent in 1999-2000, as per the NSSO's 61st round large-scale sample survey on household consumer expenditure.

On the burning issue of inclusive growth, the survey emphasises that putting more people in productive and sustainable growth seems to be a solution but adds that inclusive growth cannot come without growth itself.

As for the downsides, the survey notes that risks for a sustained high growth could be from rapid unravelling of global macro-economic imbalances, volatile oil prices and delays in the completion of the Doha Round. "But, for the present, they appear to be limited," assures the survey.