India’s economy accelerated by an unexpected 9.3% in the April-June quarter even as inflation dipped below 4% for the first time since April 2006.
The gross domestic product (GDP) acceleration from 9.1% growth in January-March this year, despite the credit squeeze, will only queer the pitch for easing of the interest rates, which are presently at a five-year high. The Reserve Bank of India (RBI) has in the last three years raised interest rates seven times.
“Buoyant investment as well as consumption is driving growth,” said finance minister P. Chidambaram. “Despite the compulsions of a tight money policy, we will ensure that productive sectors of the economy are not deprived of credit and that investment remains strong. I am confident that we will return a growth of close to 9% this year,” he added, noting that the past three years’ average of his government is 8.6%.
MIXED PICTURE (Graphic)
“This (acceleration) is mainly due to a strong growth of 3.8% in the farm sector, over and above the 3.8% in the previous quarter, catching the tail-end of the good rabi (summer crop) harvest,” chief statistician Pronab Sen said.
Manufacturing grew 11.9%, only a bit lower than 12.3% a year ago; services accelerated to 10.6% from 9.9%, while construction was marginally up at 10.7% from 10.5%.
Despite the impressive performance in the latest quarter, most analysts believe the tight money policy has begun to impact capacity expansion in many industries, particularly small and medium enterprises which no longer have access to cheap credit.
Sales of automobiles, especially motorcycles, have already begun to slow down.
Planning Commission deputy chairman Montek Singh Ahluwalia said: “Growth has widely been expected to fall. RBI has expected an 8.5% growth for the year. So, 9.3% growth is good.”
Sen, more forceful in his assessment, said overall growth would most likely be around 8.7%, even while some analysts raised their forecasts on the basis of the good first-quarter figures. JPMorgan raised its estimate from 8% to 8.6%, Morgan Stanley from 7.7% to 7.8% and HSBC from 8% to 8.3%, while Citigroup retained its forecast at 9.3%.
Meanwhile, despite the decline in the inflation rate, as measured by the wholesale price index, to 3.94% for the week of 18 August, from the average of 6-6.7% throughout January to March, Saumitra Chaudhuri, member, Prime Minister’s Economic Advisory Council, warned, “inflation is not dead yet, not by a long shot”.
Sen had said in an earlier interview that because price rise was very high same time last year, inflation could show a temporary dip before moving above 4% later this year.
At the same time, with bank lending, especially to the real estate segment, still on the rise, most analysts do not expect an easing of interest rates, despite the dip in inflation. Sen expects a small rate cut in the busy season credit policy, with the cash reserve ratio remaining unchanged.
A senior economist working for the government, who didn’t wish to be identified, said that “considering that the RBI had not been very successful in managing inflation either in 2004 or 2006, it is probably right to continue its cautionary stance.”
Even domestic demand continues to be high, reflected in the only slightly slower pace of private consumption growth, 5.5% in this quarter compared with an average increase of 6.2% in the previous four quarters. Fixed capital formation, by contrast, expanded 15.9%, sharply higher than the average of 14.7% in the previous year.
Sen said the rate of growth of consumption was flagging only in durables so far, though data shows a much longer lag than in investment.
The prognosis for the year remains weak though, as the kharif agriculture prospects look uncertain with the onset of floods in many regions.
Any shortfall in foodgrain production could trigger inflationary pressures, especially at a time when due to global scarcity, the option of using imports to augment supplies may not be readily available. The infrastructure bottlenecks could only complicate this picture further.
In addition, as RBI warned on Thursday in its annual report for 2006-07, any further fallouts in the housing market in the US could lead to a reassessment of global risk and thereby impact foreign capital flows to emerging market economies such as India.
Indeed, US Federal Reserve chairman Ben Bernanke, speaking in Jackson, Wyoming, noted that while problems were triggered largely by heightened concerns about higher-risk subprime mortgages made to people with blemished credit histories or low incomes, “global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans.”
The Fed “will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,” Bernanke said.
Back in India, “monetary tightening, INR (Indian rupee) strengthening, a weaker external environment and domestic financing constraints will all slow growth,” said Anindya Mitra, senior analyst, Moody’s Investor Services. “Recent political troubles within the ruling coalition could also dampen business sentiment...”
(PTI and Jeannine Aversa of Reuters contributed to this story.)