The advance estimates of gross domestic product (GDP) for 2009-10, when compared with the GDP numbers for the first half of the year, show some interesting trends. GDP growth during the first half of the year was 7%, while the advance estimates put annual growth at 7.2%, which means a decent bounce during the second half. But that was on expected lines; in fact, the 7.2% estimate for the full year is lower than the Reserve Bank of India’s forecast of 7.5%. It’s worth remembering, though, that one reason for the rebound is the lower growth during the second half of 2008-09.
Also See Base Effect (Graphic)
The only sectors in which growth is expected to be lower in the second half of 2009-10 are agriculture, construction, and community, social and personal services. Of these, community, social and personal services had a growth rate of 9.9% in the first half and 8.2% for the full year. While this implies substantially lower growth in the second half, there’s a base effect at work here as well, because these services grew rapidly in the second half of 2008-09.
The GDP estimates for the full year have a 2004-05 base, while the earlier estimates for the first half were on a 1999-2000 base, but that shouldn’t make too much of a difference in growth rates.
Among the sectors expected to do badly, the impact of the drought will be felt in farm output in the second half, but the estimate for the full year is actually above most analysts’ estimates, implying a good rabi (winter) crop. However, the lower growth in construction, from 6.8% in the first half to 6.5% for the full year, is a worry.
On the expenditure side, as the chart shows, private final consumption expenditure is expected to rebound in the second half. Government final consumption expenditure growth is estimated to decline from 18.1% in the first half to 8.2% for the full year, but then again, this expenditure had jumped in the second half of 2008-09, so the base effect is important.
The matter of concern here is the decline in the growth of gross fixed capital formation from 5.8% in the first half to 5.2% for the full year, coming on top of very muted capital expenditure growth in the corresponding period of 2008-09.
Exports for 2009-10 are estimated to decline 15.8%, while imports are expected to decline 17.2%. In the first half, exports declined by 12.6% and imports by 25.7%. So while a recovery in imports is expected in the second half, the outlook on exports does not look so rosy, which is against the received wisdom, although part of that may be on account of a stronger rupee.
So, overall, here’s the picture for the second half of the year: growth in private consumption, albeit slow, despite decline in agriculture; a slowing in government consumption expenditure as the impact of the Sixth Pay Commission arrears fades; a recovery in imports; and slowing capital expenditure.
Gaurav Kapur, senior economist with ABN AMRO Bank, points out that it will be challenging for manufacturing activity to maintain its pace if capital expenditure does not pick up.
The finance minister will need to keep that in mind when presenting his budget.
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Graphic by Yogesh Kumar / Mint