- The PM's Economic Advisory Council (EAC) projects GDP growth for 2007-08 of 9%, the upper band of most projections. The finance minister says that in 2008-09, growth could touch 10%.
- The index of industrial production grew by 11.1% in May 2007 YoY. True one or two sectors such as food have seen very high growth rates and this has boosted the overall index but, even if we adjust for this and any future deceleration, we should be seeing industrial growth of around 10% at least in 2007-08. The EAC projects industrial growth of 10.6%.
- The EAC, however, thinks it will be difficult to meet the target of reducing revenue deficit to zero by 2008-09. Can be done says FM.
- Two of the tallest figures in Indian finance, Deepak Parekh and K V Kamath, think interest rates have peaked and are due to soften.
- The current account deficit for 2006-07 has ended up at 1.1%, way below the earlier alarmistic forecast of 3%. A rising trade deficit has been offset by larger flows of "invisibles" ( comprising software exports, remittance and one truly 'invisible item' that is nearly $23 bn and for which the RBI has no explanation).
- Capital inflows continue to be large with FDI for the first time becoming larger than portfolio flows. The rise in forex reserves is set to continue.
- On top of it all, the Sensex has shot past the 15,000 mark and risen further, putting analysts (who thought it was overvalued and due for a correction) to shame.
So, what is driving Indian economic growth today? As the EAC points out, investment has emerged as the key driver outstripping consumption. In 2006-07, investment contributed 4.75 percentage points towards growth compared to 4.62 percentage points contributed by consumption out of a total growth of 9.35%. Despite this increase in investment (which tends ot be inflationary in the short run), the EAC thinks the inflation rate can decline to 4%.
What could wrong? Not much. In the short-run, a big monsoon failure could derail growth prospects. Over the medium term, the EAC sees the farm sector and power sectors as something of a drag. I believe this is unlikely. Farm sector growth will remain low but this has been the case for a while now. As for power, if the economy could grow in the face of low addition to capacity for over a decade, I would reckon the prospects are better now since we are big additions to capacity now.