No downturn in growth trend: Virmani

Arvind Virmani, Chief Economic Advisor to the Ministry of Finance, on Saturday said he was confident...

Arvind Virmani, Chief Economic Advisor to the Ministry of Finance, on Saturday said he was confident the economy would bounce back from its current state. Discussing trends in economic growth and inflation, he reiterated more than once, there is no downward trend in economic growth. Rather the Indian economy was simply in the midst of a downward slide in a short-term cycle.

“There’s a danger that a cyclical downturn can be misinterpreted as a downturn in the trend growth rate,” he said. Inflation is at a high rate but not high enough to affect the economy’s growth. “Inflation by itself cannot hurt. The economy continues to grow. With the current rate of inflation, there will be many who will be fine albeit at the expense of others,” said Virmani.

Chronicling the last few years of growth, Virmani brought to light the phenomena of investment-led growth that has been propelling the economy 1994-95 onwards. “Average incomes have doubled from 3.7per cent to 7.3 per cent in a decade, within the same generation. This is unprecedented,” he added.

This growth has been primarily driven by doubling of the rate of growth of investment, from 9.2 per cent to 18 per cent (from 1956-81 to 1994-2007). Contribution of investment to GDP has risen from 30 per cent to 60 per cent. With a rate of investment so high, any dampening effect from high inflation or interest rates will not be enough to drive the rate of growth of the economy, significantly down.

He also pointed out that economic growth had not been driven by the service sector alone. The rate of investment in the manufacturing sector has grown by 30.5 per cent over the last 4 years. “Productivity enhancing reforms can moderate cyclical downturn and inflationary upturn. I am confident that we will attain 9 per cent growth in the 11th Five Year Plan,” said Virmani.

He attributed the 11.98 per cent inflation rate primarily to the global rise in commodity prices. “Inflation is a global problem that cannot be avoided,” he said. “The global commodity price shock facing countries has only been exacerbated by the oil problem. But with the exception of edible oil, our food prices have remained relatively stable.”

Virmani also rejected the charge that the economy had overheated and said that only a handful of countries in the world have maintained a 9 per cent growth over two decades. “One can see an increase n the production capacity of the economy a phenomenon that is the opposite of overheating.”