Mumbai: A recent finance ministry statement says that India's economy will grow at 8 per cent this financial year.

At the outset, it seems a very optimistic assumption. Why? Because most other institutions and associations like the Reserve Bank of India (RBI) and the Confederation of Indian Industry (CII) have spoken about growth between 6-6.8 per cent.

A closer look at the components of the gross domestic product (GDP) and other factors like inflation, which could effect growth, brings forth a very different picture.

Growth will rebound on the back of agriculture
There are no differences of opinion among economists and analysts that the GDP growth will rebound to 6 per cent-plus levels this financial year mainly due to a 7-per cent-plus growth expected in agriculture. This is mainly the result of a good monsoon and a low base in agricultural production (GDP agriculture showed a decline of 3 per cent during the last financial year).

There seems to be little threat to the agriculture growth, on any account, at this point of time. But a rise in the price of crude could push up diesel costs, a key input in agricultural production, and raise the input cost for farmers. A rise in crude prices also translates into higher inflation and thus reduces the real growth rate of the economy. It will mean that the farmers' income in real terms is lower.

Services growth shows improvement
The growth in the services sector is showing an uptrend, as trade, hotels, transport and business services are up on the back of improvement in industrial production. Communication, banking and insurance, too, are growing under the umbrella of an improved policy environment. In the present scenario the services sector is expected to grow at around 7.2 per cent.

Surprises could come from manufacturing
The overall industrial growth has been above expectation at 5.8 per cent in the April-June quarter of this financial year, mainly on account of a 6.4-per cent growth in manufacturing.

This, despite the fact that last year there was a severe drought and rural incomes declined by around 3 per cent. This normally should have affected the demand for industrial goods right from the first quarter (April-June 2003). But to everybody's surprise the impact is hardly visible. This can mainly be attributed to the 12-per cent rise in urban incomes in the last financial year and this seems to have more than made up for the fall in rural incomes.

One of the places where the rise in urban incomes is very much visible is in the way car sales have been growing. Also there is also a rise in exports of manufactured goods like steel due to the demand coming from China as a result of the preparation for the 2008 Olympics in Beijing. All these factors could help the industrial growth to reach the range of 5.5-6 per cent.

The possible growth scenario
Creating possible growth scenarios (see table-India: Growth scenarios FY2004) leads to the conclusion that though the economy will definitely grow at 6 per cent-plus levels but reaching the 8-per cent target still seems impossible. The economy, most probably, will grow at a rate of 6.8 per cent in this financial year but inflation, still hovering around 4.5 per cent, continues to be a risk to this forecast.