The Indian economy grew by 6.7 per cent in the first three quarters of 2009-10. In the third quarter, growth slowed down significantly to 6 per cent from the high growth of 7.9 per cent in the second quarter. This was partly due to negative agricultural growth of -2.8 per cent and partly due to a marked deceleration in the growth of services to 6.3 per cent.  Researchers at ICRIER have looked at the latest data to re-estimate their growth forecasts for the full year, 2009-10.

Separate forecasts have been worked out for the agricultural and non-agricultural sectors.  The weighted average of growth in the two sectors yields forecasts of aggregate GDP.

Agricultural GDP Growth

The second advance estimates of crop production made by the Ministry of Agriculture show a fall of 7.5 per cent in total output of foodgrains for 2009-10. Oilseeds output is estimated to decline by five per cent and sugarcane by 11.8 per cent. Cotton and jute, however, have shown a marginal increase of 0.2 per cent and 0.7 per cent respectively.

Foodgrains and commercial crops together constitute less than half the total agricultural output. Other non-crop production includes fruits, vegetables, milk, meat, eggs, etc. However, the acute drought situation in the country must have affected the production of non-crop products as well. Unfortunately, there are no correct estimates of the production of these products so far. The CSO advance GDP estimates for 2009-10 have assumed a growth of 2.5 per cent in the production of fruits and 4.8 per cent growth in vegetables. There are serious doubts about the veracity of these estimates. The sharp rise in the prices of fruits, vegetables, milk, eggs, meat, etc. in this year could indicate shortfall in the production of these products.

ICRIER researchers had forecast agricultural growth for 2009-10 on the basis of an agricultural growth model in October 2009 (ICRIER Working Paper No. 241). The model has three variables: (1) deviations of rainfall from normal, (2) net sown area and (3) three-year moving average of agricultural growth. The model was estimated for the period 1990-91 to 2008-09. 
.
The first two variables, viz., rainfall and net sown area, capture the supply shock resulting from the failure of the monsoon. The lagged, three-year moving average of agricultural growth captures the limits to growth in India’s agriculture due to capacity constraints.

Based on the latest information on the progress of agricultural cropping, we have estimated a three per cent fall in the net area sown for the entire year. This is based on the fact that the area sown during the kharif (summer) season fell by 5.4 per cent and during the rabi (winter) season (up to 5th March, 2010) by 0.4 per cent.

The model has forecast a fall in agricultural value added by 2.4 per cent (chart 1).   Taking into account the weight of agriculture in GDP, this would mean a decline in GDP by 0.4 percentage points in 2009-10.

Chart 1: Forecast of Agricultural Growth (%) 2009-10

Source: Computed based on data from CSO and Ministry of Agriculture & Co-operation.

Non-agricultural GDP Growth    

We have used the leading economic indicators (LEI) approach to forecast non-agricultural GDP growth. The set of leading economic indicators are: (i) production of machinery and equipment (ii) non-food credit (iii) railway freight traffic (iv) cement sales (v) net sales of the corporate sector (vi) fuel and metal prices (vii) real rate of interest (viii) BSE sensex and (ix) exports. A composite index has been constructed for the period 1997-2009 with the quarterly series of growth of these variables (except for the real rate of interest where the level, and not the growth, has been used), using the ‘principal component index’ (PCI) method. The advantage of PCI is that it performs the required scaling of data and assigns weights to different indicators. The PCI method assigns weights to each leading indicator component by an iteration process based on its contribution to total variation in the composite index.

The leading economic indicator index (LEI) given in Chart 2 below clearly shows that after moving down from the first quarter of 2006-07, LEI bottomed out in the first quarter of 2009-10 and has started moving up in the third quarter.

Chart 2: Leading Economic Indicators Index

Source: Computed based on data from various Government of India departments, Reserve Bank of India, Bombay Stock Exchange and CMIE.

Once the index of leading indicators is available, it is used to identify the appropriate model specification for the final regression analysis. In this empirical exercise, it was found that the index of leading economic indicators (LEI) with a 5-quarter lag explains the variation in non-agricultural GDP growth most precisely. However, since the selected leading indicators do not capture the impact of external shocks such as the IT boom bust of 2000-01 and the current global crisis, which directly or indirectly impacted the Indian economy, we used a dummy variable to capture their impact.  The LEI, with a 5-quarter lag and the shock represented by a dummy variable (equal to 1 with shock and 0 without), are used to forecast India’s non-agricultural GDP growth. The estimated equation for non-agricultural GDP growth forecast, given below, is satisfactory with an adjusted R-square value of 0.55 and all the co-efficients significant at one per cent level.

          GRNon-agriGDPt  =  8.72  + 1.54 LEIt-5  - 3.13 Dummy
                                     (41.52)  (5.67)         (-5.72)

The in-sample forecast suggests that the crisis had started impacting non-agricultural GDP growth partially in the third quarter of 2008-09 before having its full impact in the fourth quarter. The fiscal measures taken during December 2008 to March 2009 began to cushion the impact of the shock in the first quarter of the current financial year. The impact of the shock is expected to be fully neutralised from the third quarter of 2009-10, especially because monetary policy measures are also expected to make their impact felt with theual time lag. With these assumptions, we estimate that non-agricultural GDP would grow by 8.3 per cent in 2009-10.

Non-agricultural growth has been 7.9 per cent in the first three quarters of 2009-10. The growth of 8.3 per cent for the full year implies a growth of 9.5 per cent in the fourth quarter of 2009-10, reflecting the strong growth in industrial production in recent months.

Table 1 brings together the forecasts for both agricultural and non-agricultural sectors.

Table 1: GDP forecast for 2009-10

The estimated aggregate GDP growth for 2009-10 works out to 6.5 per cent, which is marginally lower than the actual growth of 6.7 per cent in 2008-09. This estimate hinges crucially on our estimates of a decline in agricultural output. If the negative growth in agricultural production turns out to be insignificant, then GDP growth for 2009-10 would be 6.8 per cent.