New Delhi: India’s gross domestic product (GDP) in the fourth quarter (January-March) of 2008-09 grew 5.8%, faster than what was widely expected by economists, leading some of them to conclude that the economy has stabilized and the central bank’s loose money policy may be coming to an end.
The economy grew faster than what was widely expected by economists, leading some of them to conclude that the economy has stabilized and the central bank’s loose money policy may be coming to an end. Paras Jain / Mint
The economy expanded at this rate despite a contraction in manufacturing, but this was more than offset by the growth in the services sector and pick-up in agriculture.
The government’s chief statistician, Pronab Sen, says the future course of the economy will depend on the resumption of investments, which rose higher than expected in the fourth quarter of FY09.
GDP for fiscal 2009 expanded by 6.7%, lower than 9% recorded the previous year, but at the upper end of the range forecast by Reserve Bank of India (RBI) governor D. Subbarao in his monetary policy speech in April.
At current prices, India’s GDP measured Rs49.33 trillion for the year, ensuring that India remained a trillion-dollar economy.
“There are growing signs of stability and probably the worst is behind us,” Shubada Rao, chief economist at Yes Bank Ltd said.
The implication of stabilization is that “the need for further interest rate cuts has eased,” wrote Sherman Chan, economist at credit rating agency Moody’s, in a report.
Following the release of fourth quarter GDP numbers, some economists revised upwards their GDP estimate for 2009-10. “We are raising our GDP forecast to 6.3% y-o-y (year on year) in FY10 from 5.3% earlier, as the initial conditions for a gradual domestic demand-led recovery are now in place,” said Sonal Varma, economist at Nomura Financial Advisory and Securities (India) Pte Ltd, in a report.
However, Sen was sceptical about using fourth quarter GDP data of 2008-09 to draw clear conclusions for the current year. “We are seeing clear discontinuities,” said Sen, referring to difficulty in drawing trends from the fourth quarter GDP data.
The 5.8% growth in the fourth quarter came largely on the back of growth in agriculture and government spending. Agriculture grew 2.7% over the corresponding period of the previous year, compared with a contraction of 0.8% in the third quarter (October- December) of 2008-09. The government’s final consumption expenditure in real terms in the fourth quarter was Rs1.31 trillion, higher by 21.29% over the previous year.
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This is because the Centre expanded its fiscal deficit to revive demand and combat the slowdown. For 2008-09, the fiscal deficit in the interim budget of February was revised upwards to 6% of GDP compared with the original budget estimate of 2.5% of GDP.
According to Rao, the key to recovery is “how do we translate government spending into private spending”. Investment demand has been the primary driver of India’s growth since 2004. Even as economic activity slowed down in 2008-09, investment grew faster and increased as percentage of GDP. Gross fixed capital formation, or investment levels, in real terms for fiscal 2009 was Rs11.63 trillion, higher by 8.18%. As a percentage of GDP, it was 32.2% compared with 31.6% the previous year.
According to Manoj Vohra, director, research, Economist Intelligence Unit, the growth rate in investment fits in with the growth in construction during the year. Moreover, a lot of projects which were in the middle of their completion cycle when credit markets began to choke last year are continuing, he added.
The quarterly real investment growth showed an interesting trend. In the third quarter of 2008-09, in which India clearly experienced the impact of global financial turmoil, investment grew by 5.05%.
In the next quarter, investment growth increased to 6.52%. Sen said investment over the next few quarters held the key to GDP growth. “Going forward, are they (companies and governments) going to restart projects? That is the big question,” Sen said.
Economists Mint spoke to expressed cautious optimism about the current financial year, and added that the economic intent of and measures presented in the budget would play a key role in influencing confidence and, consequently, investment.
Even as the economy beat expectations, the next fiscal year would not be an easy one. Ahmed Raza Khan / Mint
Addressing the media earlier this week, finance minister Pranab Mukherjee had said: “Sustained stimulus to growth can be harnessed by the next round of economic reforms.”
Manufacturing was the worst performer in the fourth quarter of 2008-09. Manufacturing output contracted year-on-year by 1.4% to Rs1.25 trillion. For the full year, manufacturing output in real terms was Rs4.87 trillion, higher by 2.4%. Sen saw a silver lining in the manufacturing data as it was not as bad as it was initially expected.
On 27 February, when the government first announced GDP data for the third quarter of 2008-09, manufacturing output had contracted by 0.2% compared with the corresponding period of the previous year.
In the revised GDP data released on Friday, manufacturing output in the third quarter of 2008-09 had grown by 0.9% to Rs1.21 trillion.