The news that the Indian economy grew by a mere

5.3 per cent in the third quarter of 2008-09 serves as the first official acceptance of the economic slowdown in India. For many months we have been hearing the government and policy-makers talk about continuing high growth in India, based on the strong domestic economy or buoyant investment climate. The misconception that India would not be affected by the crisis was part of the reason for lack of adequate policy action. Notice how monetary policy has gone into a freeze despite the disturbing news month after month on stagnation in exports, industrial output and prices. This has to do to a large extent with the illusion that somehow magically things will be fine with India. As this newspaper has repeatedly argued since mid-September, India cannot be insulated from the world’s major economies and that the sooner we accept this and take action to prevent further damage, the better off we shall be. The dangers posed by not taking action are far greater than the risks posed by any action that is taken to provide a counter-cyclical impetus to the economy.

One of the reasons cited for the Indian economy not being hit is the belief that agriculture will not be hit. Unfortunately, we see that in quarter three the agricultural sector also got affected and grew at just 2.2 per cent. The only sector that grew rapidly was services, and here a dose of realism is necessary. Government salaries have been revised; the way output in the service sector is computed is by adding together incomes of people in the service sector. So income of government employees going up thanks to the pay commission appears as higher growth of output in this sector.

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