For four successive years the economy has outperformed official forecasts convincingly. Ever since he presented his first full Budget in 2005, the Finance Minister, Mr P. Chidambaram’s estimates of the pace of growth have not just been met; they have always been bettered. It was only in the current Budget that the Government felt confident enough to assume that a GDP growth of 8.5-9 per cent was achievable throughout the Eleventh Plan. At first glance, that seems a normal increment from an average 8 per cent growth during the Tenth Plan, but given some features of the dream run since 2004, the premise could be questionable.

When the Chairman of the Prime Minster’s Economic Advisory Council, Dr C. Rangarajan, recently said that the overall economic situation was still buoyant, he was discounting the September data on output growth that has been the lowest since October 2006. Inflation has abated, he said, to less than 5 per cent; the trade deficit was not worrisome, presumably because of the cheaper dollar and receipts from Invisibles that mitigate the current account deficit to a great extent. But evidence also points to the impact that high interest rates have had: slowing down credit growth across the spectrum over the past year, reducing the accessibility of smaller enterprises to funds and, most importantly, consumer spending. The past four months witnessed lower manufacturing growth, even in August, when overall output growth recorded a sharp increase of 10.7 per cent compared to July’s 7.1 per cent. Given that the 8 per cent GDP growth so far has been largely consumer-demand driven, any restrictions on spending, like choking the flow of nutrients to an active crop, will have their impact on industrial growth, and consequently on the pace of the overall economy. Is it any surprise that the RBI should have scaled down its projections to a little over 8 per cent since its monetary policies have been inspired precisely by its concern about “overheating”? While the organised sector is still buoyant, it will grow at a lagged pace because of a shift in the aggregate demand indicators. Real private final consumption expenditure declines have been matched by an increase in gross fixed capital formation in the first quarter of 2007, a feature that bodes well for long-term growth prospects though not for the immediate future.

High interest rates will continue to erode consumer spending as the year wears on but the darkest lining in the silver cloud is, of course, food inflation for the poor that still averages 8 per cent and weakens claims that the current growth can either be sustained or is inclusive. A pegged-down forecast and better resource allocation would sound more convincing.

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