The new gross domestic product (GDP) numbers released by the government on Tuesday show that the Indian economy continues to maintain its growth momentum despite a tough global environment. At 8.9% for a second quarter in a row, the economy is growing near its trend rate. Fears of overheating seem to be overdone right now despite intolerably high inflation and rising asset prices. The Indian economy seems set to close the year with economic growth of between 8.5% and 9%.
Despite the overall pretty picture, there are two underlying trends that deserve closer attention. First, the revival in farm output this summer from its drought-induced trough in 2009 has pushed up GDP in the second quarter. Farm output has grown at the fastest rate in 11 quarters. Maintaining this growth rate is almost impossible given the long-term stagnation in agricultural productivity. A lot will depend on non-farm output trends after the winter crop is harvested.
Meanwhile, manufacturing growth has slowed and has also been volatile in recent months. There have been problems with the way the index of industrial production is calculated, but that is the best indicator we have for now. The wild swings in factory output every month have been a worry for some time now. Indian manufacturing growth has slipped from 13% in the first quarter to 9.8% in the second quarter; not reason enough to hit the panic button, but surely something to keep a close watch on.
Second, the GDP numbers show that private sector demand continues to pick up. A huge increase in government spending had supported economic activity in the crisis months of late 2008 and early 2009, but the private sector has now stepped in to pick up the slack in domestic demand that could have arisen as the government tries to cut its fiscal deficit.
Yet, private consumer demand seems to be doing better than private investment demand. High frequency data on dispatches of cement bags, new telecom subscribers, car sales and airline bookings suggest that consumer spending continues to be robust. The revival in farm output should help boost rural demand as well.
Economic growth seems to be well balanced at this juncture, with private consumption, government consumption and fixed capital formation growing at close to double-digit levels. Interest rates are close to neutral levels (though the short-term money market is gasping for cash). Inflation seems to have peaked. These factors could put India in a sweet spot, especially if corporate investment accelerates and the world economy does not serve up another shock.
Is economic growth in India on a sustainable path? Tell us at firstname.lastname@example.org