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Business News/ Home Page / GDP set to surge amid farm surprise
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GDP set to surge amid farm surprise

GDP set to surge amid farm surprise

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New Delhi: A strong recovery in manufacturing and a less than anticipated contraction in farm output are expected to propel the economy to a faster growth pace of 7.2% in the year ending March, putting pressure on the government to partially withdraw stimulus measures.

The advance estimate released by the Central Statistical Organisation (CSO) on Monday, while lower than government forecasts, exceeded market expectations and is faster than the year-ago growth rate of 6.7%.

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While a survey of professional forecasters by the Reserve Bank of India (RBI) pegged the gross domestic product (GDP) growth rate at 6.9%, both RBI and Prime Minister Manmohan Singh have forecast a 7.5% pace. In the first half of the fiscal, the economy grew 7%.

Reacting to GDP growth data, Planning Commission deputy chairman Montek Singh Ahluwalia favoured an early withdrawal of the stimulus package. “We should say stimulus has succeeded and we should begin to phase it out now," he told reporters.

Also Read Estimates show weak investment demand

Finance secretary Ashok Chawla evaded a direct reply.

“In terms of what the future policy framework is going to be, I think you will have to wait for the Budget," he said. The government is scheduled to announce the Union Budget for the next fiscal year on 26 February.

Shubhada Rao, chief economist at Yes Bank Ltd, said the government may start a partial withdrawal of the fiscal stimulus with private demand beginning to pick up.

“It may not withdraw fully the 4% excise duty reduction given to the industry," she said. “However, it may close the gap."

The government’s estimate of a marginal 0.2% contraction in agricultural output, may have underestimated the impact of last year’s drought.

“We were anticipating at least 1% contraction in farm output," said N.R. Bhanumurthy, economist at the National Institute of Public Finance and Policy. “The farm output growth will be revised downward once we get the third-quarter GDP figure as the impact of drought will be fully reflected in the third quarter."

Bhanumurthy expects that the revised estimate of GDP for the current fiscal won’t be more than 7%.

“The government should pare its 7.5% growth expectation for the current fiscal and base its budget calculations and expected revenue collection figures for next year on a lower GDP growth," he said.

Chief statistician of India Pronab Sen said he had been expecting a greater contraction in farm sector growth and was “a little surprised".

However, Sen reasoned that, as the share of foodgrains in total agriculture output has dropped to 12%, the contraction in food production has now little impact on overall farm production.

The impact of the monsoon may take longer to percolate through.

“They are anticipating strong growth in rabi (winter crop) output. One has to wait and see," said Rao.

The stock markets initially reacted negatively to the data, with the Bombay Stock Exchange’s benchmark Sensex falling more than 200 points before recovering to end in positive territory with a gain of 20 points.

The data from the department of agriculture and cooperation which was used by CSO to estimate GDP showed production of foodgrains and oilseeds is expected to decline 8% and 5%, respectively from the previous agricultural year.

According to the latest data, the size of the Indian economy is estimated at Rs61,64,178 crore. Per capita income is estimated at Rs43,749, growing 9% over the previous year.

Consumption expenditure continues to boost the economy with growth in private consumption and investment demand being laggards. While government expenditure is expected to grow at 8.2%, private consumption expenditure and investment are seen expanding at 4.1% and 5.2%, respectively, over the previous year.

Bhanumurthy said the government needs to start looking at growth vis-a-vis inflation now. “To control inflation, fiscal tightening should happen. The Reserve Bank of India has already started monetary tightening. You cannot have a loose fiscal policy and a tight monetary policy. There needs to be consistency," he said.

RBI warned the government that a stronger recovery increased the risk that already high food price inflation would spread to other commodities in its third quarter review. Food price inflation is hovering at around 17%.

The anticipated recovery is led by a revival in industry but services continue to lag behind. While industry, including construction, is expected to grow 8.1% compared with 3.6% in the previous year, services are projected to expand 8.8% against 10.5%.

“Services need to pick up if India has to achieve more than 8% growth," said Gaurav Kapur, senior economist at ABN Amro Bank.

Graphics by Ahmed Raza Khan/Mint

PTI contributed to the story.

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Published: 09 Feb 2010, 12:44 AM IST
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