Advance estimates for GDP growth at 6.9 percent is extremely good news for the economy. And this is not just in the context of the short run because it implies that growth this year is going to be high. It is good news in the long term sense, too. First, because a growth rate of 6.9 per cent in 2004-’05 follows a year of 8.5 per cent growth in ’03-’04. It is not unusual to see growth of 7 per cent after a year of low growth because there is a low base effect. But to have such high growth following a year of high growth is quite unusual. The last time this was seen was in the investment-led boom of the mid-’90s. Indeed, investment data suggests that this time as well the boom is investment-led. The data for the third quarter results of the corporate sector also suggest that the economy is on the upswing of a business cycle. The projection augurs well for tax collections in the year.The second reason why these growth numbers are excellent news for the Indian economy is that the growth rides on high growth in manufacturing at 9 per cent despite poor agricultural production. Agricultural growth is expected to be merely 1.1 per cent. This marks a new trend in the drought proofing of Indian manufacturing. In the past, especially before the ’90s when there was a bad monsoon and agriculture performed poorly, growth in the manufacturing sector would fall sharply both in that year and in the following one. In the decades before the ’90s, total GPD would actually fall in such instances.Even though agriculture itself has not become drought-proof — crop output continues to be dependent on the rain — the resilience of the economy to the monsoons has become greater because of the reduced dependence of the entire economy on agriculture. This has happened through two channels. First, the share of agriculture in GDP has declined. This means a fall in agricultural growth directly impacts GDP growth less. Second, there is the indirect channel through the linkages with manufacturing. A fall in agricultural output would affect manufacturing because of a reduction in the demand for manufacturing output and because of the disruption of raw material supplies to agriculture. This effect has diminished with the liberalisation of the economy. High exports and high growth of services provides demand, reducing the importance of demand from the agricultural sector. Import liberalisation helps in the maintaining the availability of inputs. Recently agriculture minister Sharad Pawar demanded that oil seed imports be further liberalised and custom duties reduced. Steps such as these will help in further reducing the dependence of the economy on the monsoon.
