India’s real gross domestic product (GDP) grew about 8.6% year-on-year (y-o-y) in the fourth quarter of FY10, slightly higher than expectations. Industry, with a growth of 13.3% y-o-y, has been the prime driver of this growth. While a favourable base effect did contribute to the impressive growth number, the “real” pick-up in economic activity (led by timely policy stimulus) remained the key growth driver.
In FY10, real GDP grew 7.4% y-o-y, higher than the Central Statistical Organisation estimates of 7.2%, primarily driven by industry and actively supported by services. In FY10, industry outperformed services reversing the trend seen in FY09. This performance has been supported by fiscal stimulus, easy monetary conditions, improvement in sentiments and favourable base effect.
Underperformance of the services sector was due to slower growth in community and social services as government expenditure declined compared with the previous fiscal. Meanwhile, agriculture performance (at 0.2% in FY10) has been lacklustre due to dismal monsoon in 2009. However, the India Meteorological Department forecasts a largely “normal” monsoon in FY11, which augurs well for agriculture performance.
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During FY10, private consumption slowed down, while capital expenditure seems to have picked up, particularly in the fourth quarter of FY10. Government expenditure continues to remain strong (but lower than the previous fiscal). During FY10, negative contribution of the net exports component declined, which means this component contributed positively to the GDP growth against FY09. However, contributions from government expenditure and net exports are likely to reduce. Therefore, pick-up in private consumption is important to sustain uptrend in investments.
We have maintained that the Reserve Bank of India’s (RBI) cautious approach to monetary tightening is appropriate, given lingering global uncertainties and nascent global economic recovery.
In the coming months, the Index of Industrial Production would moderate from its current double-digit growth rates and headline inflation will also see some softening. Besides, excess liquidity conditions are fading as reflected in the reverse repo balances. Taken together, we feel that pressure on the RBI to tighten the monetary policy has reduced and, therefore, it will continue with its “baby steps” approach using repo or reverse repo instruments.
Globally, the economic data has improved considerably on the back of policy stimulus. However, due to deepening European debt problems and emerging concerns of possible slowdown in China, the global environment has turned somewhat uncertain of late.
Few risk indicators (VIX, Libor spreads) suggest some spillover of European problems to other parts of the world. Besides, sharp weakening in the euro and worsening demand prospects in Europe are producing added headwinds for Chinese exports. Indian growth prospects remain on track by and large, but in case European problems persist, there could be some knock-on effects on the Indian economy.