New Delhi: India’s economy expanded at the fastest pace in 10 quarters during the first three months of the current fiscal as manufacturing quickened, and trade and hospitality recovered on the back of a lower base.
The focus has now shifted to the central bank, which is scheduled to carry out a mid-quarter policy review on 16 September.
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During the April-June quarter, gross domestic product (GDP) grew 8.8% compared with 6% in the year earlier. While farm output rose 2.8%, industry and services sector registered growth of 10.3% and 9.6%, respectively.
The “Survey of Professional Forecasters”, conducted by the Reserve Bank of India (RBI) in June, pegged first quarter growth at 8.7% and overall growth in 2010-11 at 8.45%.
The robust growth numbers led the government to forecast higher growth in the current fiscal than its earlier estimate of 8.5% even as economists reacted cautiously.
“The numbers are quite encouraging...more encouraging point is 12.4% growth, which has been registered in the manufacturing sector—I think the highest growth rate in the last 11 quarters... I do hope it will be possible to maintain this level of growth,” finance minister Pranab Mukherjee told reporters in Delhi.
“We shall have to reach 4% growth in agriculture to have sustainable growth. Keeping that in view, I am quite confident that...GDP growth will not be less than 8.5% to 8.75%,” he added.
Planning Commission deputy chairman Montek Singh Ahluwalia said overall GDP growth in this fiscal will be slightly better than 8.5% as projected earlier. He added that though the growth rate of the manufacturing sector is likely to be low during the rest of the year, the agriculture sector will register a good performance.
The Index of Industrial Production fell to a 12-month low at 7.1% in July, having grown at 11.6% in the first quarter.
However, Samiran Chakraborty, head of India research at Standard Chartered Bank, said the chance of GDP growth exceeding 8.5% is “pretty bleak”.
“The growth numbers in the first quarter are due to a strong base effect. The momentum of growth will slow down from here onwards during the current fiscal as the base effect becomes less and less positive,” he added.
Economists found some of the data, showing GDP measured from expenditure side growing at 3.7%, difficult to explain. While private consumption grew 3.4%, investment rose 3.7% in the first quarter. In contrast, nominal GDP from the expenditure side grew 24.8%, while private consumption and investment rose at 26.5% and 18.75%, respectively.
“If one goes by this data, it is very worrisome. There is either a problem in the data or this means only inflation is driving the monetary part of the economy and the real economy is not growing,” Chakraborty said.
“Going by this data, both investment and consumption, which constitute 90% of GDP, are contributing less than one percentage point to the 3.7% GDP growth rate. This is a terrible break-up of GDP,” Chakraborty said. The consumption data also shows discrepancies—going up to 1.9% from -0.3% during the same quarter a year ago.
Deutsche Bank said in a research note that the data from the expenditure side continues to remain suspect.
Chief statistician of India T.C.A. Anant could not be reached for comment as he was travelling.
Asked whether the central bank would raise its key policy rates given growth is now more robust and wholesale price inflation is still hovering around 10%, Chakraborty said it would depend on whether RBI looks at the headline GDP figure or the internals.
“If it looks at the headline GDP growth rate, it would be comfortable in raising rates. However, if it looks at the internal consumption data, it may tone down its stance,” he said.
“Taking into account trends in non-food credit, non-oil imports, inflation and growth, we maintain our view of a further 50 bps (basis points) of tightening in 2010. This would take the repo and reverse repo rate to 6.25% and 5% by December 2010,” said Rohini Malkani, economist at Citigroup India. A basis point is one-hundredth of a percentage point.
RBI governor D. Subbarao recently hinted that the central bank may follow a calibrated approach going forward.
“There is evidence that growth is getting more broadbased. Inflationary pressures too are easing because of improved supply position as also the impact of monetary tightening effected by the Reserve Bank. Going forward, the Reserve Bank will calibrate policy action to the evolving growth-inflation dynamics,” he said.
“Given the uncertainty in the world and the lags in monetary transmission, it is not possible to offer more precise guidance,” Subbarao had said in Bangalore on 27 August.
While a normal monsoon so far this year and an expected good kharif harvest may provide a cushion for economic growth, uncertainty in the external environment may act as a dampener for GDP growth. India’s merchandise exports increased 13.2% in July, the slowest pace in nine months.
Some of the world’s biggest economies are decelerating, adding to signs that the global recovery may be losing its momentum. Last quarter, economic growth in the US slowed to a 1.6% annual rate, China’s expansion eased to 10.3% from 11.9% in the first quarter and Japan’s economy grew at less than one-fifth of the pace economists estimated.
However, in its quarterly policy review in July, RBI said that with a stronger growth outlook, high generalized inflation has emerged as the key macroeconomic concern.
“The major policy concern, therefore, would be to contain the inflationary pressures and anchor inflationary expectations. The acceleration in growth seen so far needs to become self-sustaining, with durable pickup in both private consumption and investment demand. Hence, the calibrated approach to normalization of monetary policy continues to be appropriate,” it said.
PTI and Bloomberg contributed to this story.