The slowdown in the Indian economy began much before the full force of the global crisis hit us in the guts. Both the new growth numbers released by the government on Monday and the recent talk about how to take India back to 9%-plus growth need to be analysed against this background.
Economic growth peaked in the fourth quarter of 2006-07, when the Indian economy grew at a blistering 9.3%. The quarterly growth rate then fell in the next five consecutive quarters. It was 5.8% in the fourth quarter of 2008-09 and jumped a bit to 6.1% in the first quarter of the current fiscal year.
Illustration: Jayachandran / Mint
The new quarterly growth numbers released by the government on Monday thus tell us something important: This is the first time since 2007 that growth in a particular quarter is higher than in the previous quarter.
But what is more important is the immediate backdrop. The economy is clearly stabilizing after the global shocks since September 2008, when credit markets froze and economic activity in many important countries shrank. It appears that the huge fiscal stimulus since the beginning of this year has done the trick, even though it has led to a huge increase in government deficits and debt.
The most heartening thing is that year-on-year industrial growth in the April-June quarter was 5% compared with 1.4% in January-March. This was balanced by a marked deceleration in services: from 8.6% to 7.8%. Agricultural growth was more or less flat.
What now? It is quite obvious that farm output will shrink because of the weak monsoon. Even if services continue to grow at current rates, a lot will depend on the performance of the industrial sector. The recent revival in industrial activity will have to pick up speed in the coming months. It is too soon to assume that this is a given. Both consumer demand and private sector investment demand needs to revive strongly if second and third quarter economic growth is to stay between 6% and 6.5%.
The mild increase in growth comes along with expectations that inflation is on the rise. Consumer prices are already growing at double-digit rates and wholesale price index inflation too could be between 5% and 6% by the end of 2009. Higher inflation and a mild growth revival will force the Reserve Bank of India to go into battle. But we believe that the central bank should wait till the end of 2009 before it raises interest rates. There is time to wait and watch.
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