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Business News/ Money / Government spending boosts GDP growth
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Government spending boosts GDP growth

Government spending boosts GDP growth

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Nevertheless, it’s an improvement from the third quarter, when the y-o-y growth in GFCE was as high as 56%, with private consumption expenditure growing at 2.3% y-o-y and capital formation growing at 5.1%.

Just to put things in perspective, it’s worth recalling that in the first quarter of fiscal year 2008-09, GFCE’s growth rate was negative y-o-y, private consumption was growing at 4.6% and capital formation growth was as high as 9.2% y-o-y.

But it’s true that the third quarter of the fiscal marked a low for the economy and both consumption as well as investment demand have picked up since.

The sector-wise break-up of the gross domestic product (GDP) data also tells a similar story, with growth in community, social and personal services at 12.5% y-o-y in the fourth quarter, compared with 22.5% in the third. Apart from mining and manufacturing, growth rates have picked up in all sectors in the fourth quarter, compared with the preceding one. The biggest turnaround has been in agriculture, but the construction sector too has increased its growth rate substantially, while the services sector has been resilient.

Recall that robust credit flows to the real estate sector had indicated that construction was indeed growing strongly.

It’s true that the third quarter of the fiscal marked a low for the economy and both consumption as well as investment demand have picked up since. Ahmed Raza Khan / Mint

But if government expenditure has been the main driver of growth in the third and fourth quarters of fiscal year 2009, the big question is whether it can continue to deliver in future, given the rising fiscal deficit and the fact that it has already led to higher bond yields. Robert Prior-Wandesforde, economist at HSBC, believes that although the scope for a further fiscal push is difficult, the economy will benefit from “the lagged benefits of the previous collapse in commodity prices, the extra oil and gas output set to be pumped from Indian fields, the prospect of a regional if not world trade recovery and the impact of the interest rate cuts, which should start to filter through towards the end of 2009 and in 2010." The impact of better liquidity is already being seen as firms take advantage of it to repair their balance sheets.

The market, though, has been rallying in the hope that the government will give a big push to infrastructure. Pranab Mukherjee had also indicated when he presented the vote-on-account that there would be scope for fiscal push of another percentage point or so of GDP when the final budget would be presented. Also, all the indications seem to point towards more spending in the budget, which is why the sectors that have been going up the most are realty and capital goods. Engineering and capital goods companies have been pinning their hopes on a government push in the infrastructure sector for order inflows. How the government can reconcile higher spending and borrowing with lower interest rates, though, remains to be seen, especially now that oil prices are rising again.

Write to us at marktomarket@livemint.com

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Published: 29 May 2009, 12:33 AM IST
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