Easing off

That the latest figures for Indias economic growth are considerably better than expected is certainly cause for much relief. Most estimates,even those from government and therefore optimistic economists,put likely second-quarter growth under 7 per cent. But the official announcement from the Central Statistical Organisation on Monday estimated instead that Indias economy grew an adjusted 7.9 per cent in the second quarter of the financial year 2009-10. That is good news. But the reaction should not be unmixed with caution.

The first part to note is that much of this is a response to timely and effective government spending. Private consumption went up by 5.6 per cent over the corresponding quarter last year; but government spending rose by a whopping 26.9 per cent. Much of that is the pay commission; some of it is spending on various subsidies and transfers that have gone up since last year. This is,obviously,unsustainable. The finance minister recognises that. So we should hope for,and expect,the beginnings of an exit from expansionary fiscal policy in a few months. The recovering figures for industry,for example,give us a clue as to how to go about it. The auto parts sector,for one,a sector that was so badly hit by collapsing external demand,may no longer require the stimulus that excise cuts had provided. Thats an example of exit mechanisms that should be looked at closely. Of course the agricultural figures according to the break-up,agricultural output stagnated,neither growing nor falling dont reflect the impact of the drought that India has endured this year. Given the several independent estimates that show agricultural output falling by 15 per cent or so,next quarters figures will have to take that into account though because the base is low,they may not impact the overall figure too much. Then,too,the mining sector did well according to these figures reflecting movement in the gas sector.

That industrial production has gone up is,thus,helpful in determining the structure of exit; and the fact that these better-than-usual numbers are predicated on unsustainable factors also determines the degree to which the foot cannot be taken off the pedal. Any exit from expansionary policy must be well-designed. If theres one thing that these numbers make clear,it is that hiking interest rates is the bluntest possible instrument to use,and may well be counter-productive.