The Hindu Business Line : Sustaining the growth

CYNICS ARE PRONE to dismiss the 10.4 per cent GDP growth recorded in the third quarter of 2003-04 as being largely due to the munificence of the rain-gods. They are partially right. Agricultural production soared by 16.9 per cent in October-December 2003, from the drought-induced 9.8 per cent decline in the corresponding previous quarter. It is this statistical rebound, not reflective of any real buoyancy in the farm sector, that is seen as the main, if not the sole, factor pumping up the economy and the related feel-good-factor. But this is a somewhat exaggerated view. A closer look at the third quarter data shows that agriculture contributed slightly over 41 per cent of the 10.4 per cent overall growth; industry and services accounted for the remaining 59 per cent. Indeed, the services sector grew by 9 per cent and industry by 6.5 per cent, over and above their corresponding 2002-03 third quarter growth rates of 6.8 per cent each. In industry, manufacturing clocked an impressive 7.4 per cent growth from 6.9 per cent in October-December 2002. There is no statistical illusion behind these numbers, which point at a genuine recovery that seems reasonably broad-based.

Polemics aside, the key issue now concerns the sustainability of the present growth momentum. That, to a great extent, will depend on growth being investment-led, rather than simply demand recovery-driven. The latter — resulting from higher farm incomes this year, coupled with a general revival in global commodity prices — has undoubtedly helped corporates use their capacities better. But a bad monsoon, at a time when the water position in major reservoirs is far from comfortable, or a slowdown in China's relentless buying, may derail this process. To add to this, the rupee's continued strengthening — a fact of life now for exporters — has the potential to neutralise the advantage stemming from higher international commodity price realisations. Another negative portent could be higher energy costs and the likelihood of significant price correction happening post-elections. All said, fortuitous demand recovery is no substitute for investment and fresh capacity creation, which alone can deliver sustainable growth and, more important, generate new jobs for the country's rising working population.

The good news here is that corporate balance sheets have not been as healthy as they are now. And unlike the investment boom of the mid-1990s, which were financed at 17-18 per cent interest, the abundant liquidity in the system now provides more flexible, low-cost project funding options. Moreover, having used the prolonged recessionary phase to restructure not only balance sheets, but the whole shop-floor and nitty-gritty of business operations, India Inc is today better poised to launch into investment-mode. The same cannot be said though about the Government's finances and its unrestrained borrowing proclivity. While the dangers of over-borrowing are not apparent as yet, the fisc could nevertheless end up undermining the ability of corporates to raise resources for financing investments.