With the Prime Minister's Economic Advisory Council projecting India's economic growth at 6.2-6.75 percent for the current fiscal, the question arises whether industrial output will rebound sufficiently to make up for the dismal performance of the farm sector.

The overall economic growth, compared to the 6.7 percent growth last fiscal, looks rosier than earlier anticipated, judging by the projection by the council, which has largely based it on robust industrial growth. But this projection seems premature. A clearer picture will emerge in a month or two after the rabi (winter) sowing when a better assessment can be made about harvest prospects.

As of now, the nation-wide drought during the kharif (summer crop) season, followed by disastrous floods in several key rice-producing states like Andhra Pradesh, point to a poor harvest of paddy as well as coarse grains and edible oilseeds.

Industrial growth is definitely picking up, judging by the latest data, but a revival of exports will depend largely on the buoyancy of global demand, especially in the largest markets of the US and Europe.

There is no doubt that the latest industrial growth data has been far more encouraging after the onset of worldwide downturn. The index of industrial production (IIP) for August rose a phenomenal 10.4 percent owing to double-digit growths in the mining, electricity and manufacturing sectors.

This brought the overall industrial growth for April-August to 5.8 percent as against 4.3 percent last year. Even taking into account the fact that this is on a low base of last year, the news of a rebound in industrial output is heartening. Apart from consumer durables, one of the key indicators for growth is the auto sector which has recently seen a spurt in demand after the sluggishness of the past year.

This festival season enabled the country's largest automobile manufacturer, Maruti Suzuki, to clear inventories in one of its biggest markets of Delhi during the Diwali weekend. But one has to wait to see if this growth is sustainable over the next few months in view of the failure of the kharif crop.

Rural demand is one of the critical factors underpinning industrial growth. In case this does not rise sufficiently over the next few months, there could be an impact on both manufacturing and infrastructure sectors.

Reports suggest that government purchases of paddy and rice dipped by 14 percent in the first 20 days of the current procurement season that began Oct 1. The state-run Food Corporation of India, a report said, only managed to purchase 3.97 million tonnes of paddy over this period as compared to 4.64 million tonnes over the same period last year.

Apparently, the drought has also affected the average quality rice in Punjab and Haryana while the higher quality rice produced in Andhra Pradesh will be hit by the floods in that state. Even the prime minister's council has pegged the shortfall of rice and coarse cereals at about 11 million tonnes owing to the impact of drought and floods. The net result is going to be a rise in rice prices, adding to the fears over food inflation being expressed by the panel.

In fact, the panel has identified inflation as the major worry for the economy in the short term. It expects wholesale price inflation to cross six percent by March 2010, a steep increase over the current level of about one percent. Its suggestion for strengthening the public distribution system is laudable, but the deficiencies in the system are a long-term problem.

Apart from rising prices of basic food items like rice, it has also warned about the cascading impact of global crude oil prices. Though the panel has factored in a price of $75 per barrel while forecasting inflation, world markets just recently saw crude oil touch $80 before subsiding to lower levels. Thus the external environment will also have an impact on inflationary pressures on the economy.

The strong performance of exports expected by the council in the latter half of 2009-10 can only materialise if the global economy becomes more resilient. The projection of exports reaching $189 billion against $182 billion last year seems overly optimistic, given the slow recovery of the world economy.

Currently, Indian exports are still declining month-on-month compared to last year, but government expectations are that the growth will start by December. On the positive side, the trade deficit is set to decline to $107 billion.

Despite its positive outlook for the economy this fiscal, the panel has been cautious about pulling back from the stimulus measures. In fact council chief C. Rangarajan has said there is no need to change policies unless capital inflows shoot up sharply and rapidly.

Clearly, neither the council nor the government, judging by Finance Minister Pranab Mukherjee's comment on the same lines, expect the Reserve Bank of India to make any changes in monetary policy this month. In fact, the expectation is that the fiscal stimulus measures will remain in place till the end of the current fiscal.

The optimism of the council is an encouraging signal that more and more green shoots of recovery are being seen in this country. At the same time, it is difficult to share this positive outlook in the light of the downturn on the farm front and uncertainties in the external environment. One would rather wait and watch a few more months before joining the chorus saying that the country's economic revival is well on its way.


* Sushma Ramachandran is an economic and corporate analyst. She can be reached at sushma.ramachandran@gmail.com

* The views expressed by the author in this feature are entirely the author's own and do not necessarily reflect the views of SME Times.