Government spending and farm output helped the Indian economy grow at 5.8% in the three months to 31 March, far better than expected and 60 basis points faster than the growth rate clocked in the third quarter of 2008-09.
This was a pleasant surprise and lends even more credence to the view that India will be one of the first economies to come out of the global recession.
The equity markets have taken the new growth numbers as yet another indication that the Indian economy has turned the corner. Share prices soared on Friday to an eight-month high. But there are still too many unanswered questions.
First, farm output is notoriously volatile and further growth in government spending is bound to hit the wall of fiscal discipline. So a sustained growth rebound will have to include a revival in industrial output and business investment. We see no signs of that right now.
Second, how far will the rebound take the economy? Most market expectations are anchored around the 9% rate that India averaged before the global recession hit us. It may be years before economic growth once again touches those dizzy heights. India seems to have found a bottom—but is still many quarters away from the old top.
Third, the new growth numbers may force both the government and the Reserve Bank of India to reconsider their policy stances. A rapidly growing deficit and aggressive interest rate cuts helped prevent a sharper slowdown. Now, if the threat of a breakdown of the growth engine is fast receding, is there a case for the government to start thinking of fiscal correction earlier than most people expect, and should the central bank change its policy stance to neutral?
These are some of the questions that equity investors do not seem to be taking on board.
That is unfortunate, because there could then be some mishaps down the line. So even as the latest estimates of economic growth are confidence boosters and there are signs that business confidence and job creation are recovering, we continue to believe that the Indian economy is not yet completely out of the woods.
Is the Indian economy on the path to recovery? Tell us at firstname.lastname@example.org