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Slow GDP growth sets stage for fresh rate cut

Slow GDP growth sets stage for fresh rate cut
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First Published: Mon, Feb 09 2009. 01 15 AM IST

Updated: Wed, Feb 11 2009. 10 33 AM IST
New Delhi: The Indian economy is expected to grow at 7.1% in 2008-09, the slowest pace in six years, with the country’s nodal statistical agency projecting an across the board, except in mining and social services, slowdown in the economy.
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Together with the fall in the inflation rate to an 11-month low of 5.07% for the week ended 24 January, it has set the stage for another round of policy rate cuts by the Reserve Bank of India (RBI).
RBI governor D. Subbarao had signalled so during an interaction with reporters in Kuala Lumpur on Sunday.
Significantly, despite the slowdown, investment levels in the economy are projected to rise to a record 37.1% in 2008-09.
Also See Sluggish Pace (Graphic)
The “advance estimates” of national income released on Monday by the statistical wing of the government, the Central Statistical Organisation, are calculated using anticipated levels of agricultural and industrial production, budget estimates of government expenditure and performance of key sectors—railways, communication, banking and insurance. The current gross domestic product (GDP) figure will undergo four rounds of revisions before the “final estimates” for 2008-09 are released.
Economists expect the current GDP at factor cost and constant prices, estimated at Rs33.51 trillion, to be revised downward. “The chances of current advance estimate of GDP being upwardly revised is very little while the chances of it being marginally reduced is significantly high,” said Dharmakirti Joshi, principal economist, Crisil Ltd.
Yes Bank chief economist Shubhada Rao said the GDP estimate is slightly above her expectation of 6.7% for the current year. “There may be some correction in growth of manufacturing sector going forward which may pull GDP growth rate marginally below 7%,” Rao added.
The services sector is anticipated to grow at a robust rate of 9.6% in 2008-09 while industrial growth is estimated to halve to 4.8% from previous year’s level. Farm sector growth is likely to decline to 2.6% as against 4.9% a year ago.
In the services sector, the community, social and personal services sector, which includes government spending, is estimated to grow at 9.3% as compared to 6.8% last year. Economists say this is because going ahead government spending will be the key driver of growth.
“As private spending comes down, government is compensating through higher public expenditure,” Joshi said.
The growth in government final consumption expenditure is also estimated to increase from 7.4% in 2007-08 to 16.8% in 2008-09.
The Indian government has already announced two rounds of fiscal stimulus packages for industry to boost economic activity and domestic demand.
Planning Commission deputy chairman Montek Singh Ahluwalia on Monday told reporters that the economy needs more stimulus to sustain a high level of growth. “If we can continue the fiscal stimulus into next year, then the Indian economy will not be slowing as much as the rest of the world,” he told reporters in an informal interaction.
Asked about 2009-10 growth estimates, Ahluwalia said, “I think something around this level (FY09 level) or a bit less will be satisfactory.”
The Prime Minister’s economic advisory council in its recent economic outlook said that the economy will bounce back to expand between 7% and 7.5% in the next fiscal, against the consensus view that growth will be sluggish in 2009-10 as well.
Though growth has been moderating, investment growth has so far been robust.
The government data shows investment (gross capital formation) for 2008-09 is expected to be 37.1% of GDP as compared with 35.9% of GDP last year. However, economists point out that investment is always impacted with a lag and in 2009-10, investment growth will be significantly lower.
Per capita income which signifies general economic betterment, grew 5.6% in real terms to Rs25,661 as compared to 7.6% a year ago. However, at current prices, per capita income grew 14.4% due to high level of inflation during the year.
External affairs minister Pranab Mukherjee, who has been given charge of the finance ministry, is expected to unveil more spending plans on 16 February to support the economy in an interim budget for the first four months of the next fiscal year starting 1 April.
“The government has clearly indicated that its policies will be more directed towards creating and preserving jobs. So I expect the interim budget to focus on small and marginal enterprises, exports and housing sectors,” Rao said. India’s exports declined for a third straight month in December as the global recession reduced overseas orders. Exporters may shed 10 million jobs by next month, estimates the Federation of Indian Export Organisations, a trade group.
Subbarao has also indicated that that there is room to adjust interest rates further to spur economic activities as inflation eases. “We do have room for interest rate adjustments and we will make all adjustments as deemed appropriate,” Subbarao said in Kuala Lumpur. The central bank left the reverse repo rate at 4% and the repo rate at 5.5% after it unexpectedly cut borrowing costs on 2 January to coincide with the government’s second fiscal package.
Meanwhile, finance ministry and central bank officials will meet on Tuesday to discuss extra borrowings for the current fiscal year required to fund the additional expenditure incurred on account of extra spending, economic affairs secretary Ashok Chawla said.
The stimulus is almost running into Rs1.5 trillion by way of excess expenditure and Rs50,000 crore by way of loss of revenue from direct and indirect taxes, Chawla told reporters in New Delhi.
Bloomberg and Reuters contributed to this story.
Graphics by Ahmed Raza Khan / Mint
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First Published: Mon, Feb 09 2009. 01 15 AM IST