Opinion - Editorials

Flattering but of limited value

Two different reports of last week are flattering to the Indian economy and can reinforce the existing optimism. However, a closer examination will show that they are considerably less significant than what they purport to be in the first instance. The Central Statistical Organisation (CSO) has revised upward its earlier estimate of growth for 2005-06. It is not the first time that earlier calculations have been found to be conservative. In fact, frequent revisions in the published data, which have become a cause for concern, can cast doubts on the integrity of official statistics. A noteworthy aspect this time is that the growth rate has been raised from an already impressive 8.4 per cent to a spectacular 9 per cent. That would bring last year's economic growth in line with this year's strong trends — as captured by the provisional estimates — and lend credence to the view that henceforth a 9 per cent annual growth might well become the norm. Indeed, the most recent CSO's advance estimates place current fiscal's growth rate at 9.2 per cent on top of last year's 9 per cent. However, further corroboration is needed especially for the sharp revision made in the agricultural growth for 2005-06 from 3.9 per cent to 6 per cent, on which basis alone the GDP growth has been marked up. The CSO has not yet released the sector-wise disaggregated figures. Hence it is not possible to assess where the previously unrecorded growth momentum has come from. But this year, agriculture has been a laggard: it is only strong industrial performance supported by the services sector that has contributed to the robust economic growth.

The revision of India's sovereign rating to investment grade from speculative grade by Standard and Poor's was long overdue. The other two leading rating agencies, Moody's and Fitch have already done so, the former as far back as three years ago. That all the three have now upgraded the sovereign rating of the country is a welcome development and is entirely in line with the growing perception of India as an attractive investment destination. However the value of such rating is quite limited. As a rule, grade mark-ups have followed rather than influenced the several positive developments that have lifted the Indian economy in recent years. There has been an impressive growth in both foreign direct investment and portfolio flows into the country and the S&P report recognises India's strong external liquidity and growth prospects that are to some extent offset by "weak fiscal flexibility." There again, the rating agency may not be original but its enhanced country rating should give a boost to foreign capital flows especially in the vital infrastructure areas.

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