The economy, powered by a double-digit surge in manufacturing and services, grew 9.4% in 2006-07, the fastest in the last 18 years.
The government had earlier projected the growth at 9.2%.
Significantly, the country’s investment levels, most of which is emerging in infrastructure and capacity creation, is projected at 35.2%, ensuring that the current growth trajectory is likely to be sustained in the short run in spite of an ongoing credit squeeze. The savings rate is estimated at 34%.
The data “confirmed our belief that the eonomy had shifted to a higher growth trajectory,” said finance minister P. Chidambaram. “The time has come to shed lingering doubts about the sustainability of high growth and scepticism about the shift.”
With the growth rate in the last quarter of 2006-07, which averaged 9.1%, lower than the expected rate of 9.5%, there are some who now say that they think the Reserve Bank of India (RBI) will not keep tightening its money policy. The annual inflation rate, measured by the wholesale price index, has softened and dropped to 5.06% in the week to 19 May, the lowest since the middle of August last year.
Triggered in part by the strong growth, the Bombay Stock Exchange’s benchmark Sensex ended higher by 133.08 points, or 0.92%, at 14,544.46.
The last time the economy grew at a higher rate was in 1988-89, at 10.2%. But that was an aberration as it came in the year after a severe drought had crippled the economy. So, this is the first time that the economy has actually witnessed a sustained phase of economic buoyancy—growing at an average of 7.6% in the past five years, and close to 9% in the three years of the tenure of the United Progressive Alliance.
According to quick estimates released by the Central Statistical Organization (CSO), the country’s gross domestic product (GDP), based on constant prices (1999-2000), is estimated at Rs28.48 trillion and measured at current prices worked out to Rs37.43 trillion.
In five of the last eight quarters, the economy expanded at more than 9%. And in two quarters, the economy grew at double digit rates. The lowest it touched was 8%.
“Growth is good and 9.4% is better than 9%,” said former RBI governor and member of Parliament Bimal Jalan. “A 9% growth over a few years can work wonders for the people, provided they all get a chance to participate in the process.”
Chidambaram also emphasized that “a lower growth would be even less inclusive,” and added that “because we have high growth, we can claim that we will do everything possible to make the growth inclusive.”
The per capita income at constant prices has grown by 8.4% in 2006-07 to Rs22,483, over 7.4% in 2005-06 and 5.7% in the year before. In terms of current prices, the the per capita income is Rs29,382, reflecting a 14.3% rise against the 12.1% growth in 2005-06.
The overall growth was largely driven by a surge in manufacturing by 12.3%, of construction by 10.7%, of trade, hotels, transport and communication by 13% and financial services by 10.6%, which more than offset the slowdown in agricultural growth to 2.7%. In fact, the data shows that the decline in agriculture has accelerated in the last three years, resulting in a drop in its share in national income from 20.2% in 2004-05 to 19.1% in 2005-06 and 18.4% in 2006-07.
The consumer price index rose 6.67% in April from a year earlier, slightly lower than March’s annual rise of 6.72%, due to a decrease in fruit and vegetable prices, the government said. The consumer price index rose one point to 128 in April from March.
“In my opinion, the 9% growth is a little skewed in favour of services. It has to come down in the medium to long term. This boom in services could continue for another year or two,” said Rakesh Mathur, president, WelcomHeritage Hotels, a joint venture between ITC Ltd and Maharaja Gaj Singh of Jodhpur.
The data released by CSO shows that some of the service sectors have already begun to slow down. Construction, in particular, slowed sharply to 10.7% from 14.2%.
Habil Khorakiwalla, president of industry body Ficci, cautions that the rise in interest rates would have slowed down the demand for additional housing and dampen growth of the construction sector. Others, such as ABN Amro Bank chief economist Abheek Barua, feel that the sharp rise in bank prime lending rates may have already hurt some sectors, including small and medium enterprises, and general retail demand for credit. As a result, predicts Barua, “further rate hikes can be ruled out as RBI has already taken these factors into account.”
These could be the first signs of a tentative slowdown, some of which is visible in sectoral growth numbers in the second half. Former chief economic adviser Shankar Acharya notes that the rate of growth of corporate profits too has slowed.
But the finance minister seemed to disagree that there were signs of a slowdown. “The aim is to keep growth at a level higher than 9% this year,” he said. But the general consensus is that growth would slow to about 8% this fiscal. The Organization for Economic Cooperation and Development last week said growth will slow to 8.5% in 2007.
Acharya maintains that while the the rise in investment rates was welcome, the country’s weak infrastructure, especially in power, would be a drag on the economy.
Jalan points out that the pressure on prices could continue, as the disparity between agricultural and non-agricultural incomes would only increase if agriculture remained at near stagnation levels.
The government also released, for the first time, quarterly data for expenditure and capital formation from 2005-06 onwards. Though comparison is difficult because of lack of previous years’ data, the share of private final consumption expenditure in constant prices has declined to 57% in the year, from 59% of GDP in 2005-06.
(Saurav Sarkar contributed to this story.)