India has become one of the fastest growing countries in the world. The speed with which India’s gross domestic product (GDP) or national income has grown in the recent past has been exceeded by only one populous country, that is, China. For the first time since India became politically independent six decades ago in 1947, the country’s GDP will be expanding by an average of 8 per cent a year four years in succession.

Significantly, these high GDP growth rates are expected to be sustained in the coming years, indicating that India has come a long way since the decades of the 1950s, the 1960s and the 1970s when the country’s national income grew at barely 3.5 per cent per year.

Rapid Growth

While rapid growth of GDP does not necessarily imply that the benefits of economic growth are spread evenly across different segments of the population nor does fast growth of national income automatically lead to reduction in inequalities of income and wealth, most economists are of the view that India will not be able to address its pressing problems associated with poverty and unemployment unless the economy grows quickly. In other words, speedy growth of GDP is a necessary condition for poverty alleviation though not a sufficient condition.

On January 31, the Central Statistical Organization (CSO) in the Ministry of Statistics and Programme Implementation, Government of India, released its ‘quick’ estimates of GDP growth for the financial year ending March 31, 2006, which increased the rate of growth of GDP for 2006-07 9 per cent against its previous ‘revised’ estimate of 8.4 per cent. The increase was a consequence of the CSO’s sharp upward revision of the growth rate of the agricultural sector from 3.9 per cent to 6 per cent. The growth of the manufacturing sector was also increased, though marginally, from 9 per cent to 9.1 per cent.

The high 9 per cent rate of growth of GDP was account of an impressive expansion in the growth rates of particular sectors such as agriculture, forestry and fishing, manufacturing, insurance, construction, financing, real estate, business services and transport. Earlier, the country’s central bank and apex monetary authority, the Reserve Bank of India, had upped its GDP forecast for 2006-07 from 8-8.5 per cent to 8.5-9 per cent.

On February 7, the CSO released its ‘advanced’ estimates or forecast of GDP growth for the current financial year that will end on March 31 – this proportion has been projected at 9.2 per cent. The rosy forecast has been driven by expectations of a robust performance of manufacturing industry and a sharp growth in financial services. The financing, insurance, real estate and business services sector is slated to grow by 11.1 per cent during 2006-07 against 10.9 per cent in the previous year.

Manufacturing industry is expected to grow by 11.3 per cent this financial year against 9.1 per cent during 2005-06. Mining and quarrying is likely to grow 4.5 per cent against 3.6 per cent. According to the CSO, the segments of the economy that are expected to slow down are construction (from 14.2 per cent to 9.4 per cent) and, more importantly, agriculture (from 6 per cent to 2.7 per cent).

Savings  and Investment

The overall growth of GDP during the second quarter of the current financial year (July to September) had stood at 9.2 per cent in comparison to 8.4 per cent in the corresponding quarter of the previous year. During the first quarter of 2006-07 (April to June), GDP growth had clocked 8.9 per cent.

Union Finance Minister Palaniappan Chidambaram recently told mediapersons that the “more heart-warming” feature of the CSO’s revised estimates for 2005-06 was the significant progress made by the country on the savings and investment front. The earlier estimates of savings and investment in 2004-05 at 29.5 per cent and 30.5 per cent respectively had now been revised to 31.1 per cent and 31.5 per cent – the corresponding figures for 2005-06 have been placed at 33.4 per cent and 33.8 per cent.

In other words, India is currently saving and investing roughly one-third of its total national income. Mr Chidambaram said his government’s policies had been evidently successful in promoting savings and investment. “The investment-GDP ratio at 33.8 yielding a growth of 9 per cent shows that there has been a gain in efficiency and productivity… (that) are reflected in the numbers,” he added.

Services Sector

Recent data provided by the CSO indicates that the services sector currently accounts for more than half the country’s GDP. According to the quick estimates for 2005-06, the share of the services sector in GDP at factor cost stood at 54 per cent. This proportion had stood at just over 52 per cent two years earlier in 2003-04.

The services sector has been subdivided into three broad sections: trade, hotels, transport and communications accounting for 26.2 per cent of GDP, financial services comprising 13.5 per cent and community, social and personal services taking up the remaining 14.3 per cent.

As far as industry is concerned, its share in the country’s GDP has gone up slightly from 25.7 per cent in 2003-04 to 26.1 per cent two years. This sector has four broad sub-sections: mining and quarrying (2 per cent), manufacturing (15.1 per cent), electricity, gas and water supply (2.7 per cent) and construction (6.7 per cent).

By way of contrast, the share of agriculture, forestry and fishing in India’s total national income has declined from 22.2 per cent in 2003-04 to 19.9 per cent as per the revised estimates for 2005-06.

The Indian economy had grown by 8.5 per cent in 2003-04 and 7.5 per cent in 2004-05. Before 2003-04, the country’s GDP had grown by more than 8 per cent only during three years. These three years were 1967-68 (when GDP grew by 8.1 per cent), 1975-76 (9 per cent) and 1988-89 (10.5 per cent).

In the past, after every year during which GDP grew by more than 8 per cent, the growth rate would slump. Thus, 1968-69 saw the GDP growth rate falling to 6 per cent. During 1976-77, GDP growth stood at a niggardly 1.2 per cent, while during 1989-90 the proportion was 6.7 per cent.

On this occasion, however, given the manner in which the Indian economy has expanded, there is every reason to believe that the rate of growth of GDP could be sustained.

GDP- Target

On October 18, 2006, presiding over a meeting of the Planning Commission, Prime Minister Dr Manmohan Singh said 10 per cent economic growth “is an ambitious target, but I do believe it is a feasible one”. His remarks came just after the Commission approved the Approach Paper to the Eleventh Five-Year Plan that commences on April 1, 2007.

The Approach Paper states that India would aim for an annual GDP growth rate of 9 per cent over the 2007-12 period with the growth rate touching the 10 per cent mark in the last two years of the Plan period. If these targets are met, India’s growth rate would become comparable to that of its bigger neighbour China, the only country in the world that has in recent times been able to grow at 10 per cent or more on a sustained basis for over a decade. Dr Singh said India “would be finally emerging into the front ranks of fast growing developing countries”.

Disclaimer: The views expressed by the author in this feature are entirely his own and not necessarily reflect the views of PIB.