Slow,not yet steady

GDP numbers show signs of an upswing. It must be protected by a policy framework that supports growth.

GDP numbers show signs of an upswing. It must be protected by a policy framework that supports growth.

At 4.8 per cent,the GDP growth numbers for the second quarter of 2013 June-September were slightly better than in the first quarter. This was on account of a significantly better performance of agriculture due to a good monsoon,manufacturing,services,construction and infrastructure. Though growth was only slightly better,it is consistent with other evidence which suggests that the worst may be over and the economy may have reached a turning point. While there is a danger of being over-optimistic about a turnaround,there are reasons to believe that if the policy framework and global environment can continue supporting growth,we could see a slow upswing in the business cycle.

Two factors appear to be contributing towards a turning point in the business cycle. First,there is an increase in exports. While part of it is due to the improvement in US GDP growth,the depreciation of the rupee has also added to making Indian exports competitive. For the last two to three years,mainly since 2009-10,though India was witnessing higher inflation than the rest of the world,the rupee was not depreciating. This meant that exports were becoming uncompetitive. The second quarter of 2013 is thus partly seeing the impact of the rupee correction in the first quarter. Second,there is a small improvement in projects. If the government effort of giving project clearances is working even to a very small extent and has delivered an improvement in investment activity,then this is a boost for the economy.

Looking ahead,there are three reasons for concern. First,though project clearances have been given,company and bank balance sheets are not healthy and may not be able to raise financing for projects. There are huge NPAs in the system,many of which are not even out in the open and have still to be hidden by either rolling them over or in the form of restructured loans. Second,as the laws remain unchanged,could some of the projects that have got clearances become stuck again in the courts? Third,the difficulties in mining are still to be solved and without that power could pose a constraint. Unless these issues are immediately addressed by the government and regulators,it may be difficult to sustain the small upswing visible in the business cycle. This is going to be particularly important in the coming few months as the finance minister struggles to cut down expenditure in the light of lower tax collections and disinvestment proceeds so as not to cross his laxman rekha on the budget deficit.