Despite severe credit tightening by the Reserve Bank of India (RBI), the country’s gross domestic product (GDP), or the national income, powered by resurgent industrial growth, is expected to grow robustly in the last quarter of 2006-07, say economists.
As a result, there is a good chance of realizing the record growth of 9.2% projected by the government for the year, triggering fears in some quarters that RBI may now be pressured to follow through with another round of interest rate hikes to rein in runaway growth.
But RBI may yet hold off, since the rising cost of credit has already pruned expectations, and growth in the current fiscal year is projected at 8-8.5%. The government will release the revised estimates on Thursday.
Forecasts for the last quarter range from the very optimistic 10% by Credit Suisse, JP Morgan Chase Bank and Bank of Baroda to 9.5% by rating agency Crisil and the Institute of Economic Growth (IEG), New Delhi.
GDP grew by 8.9%, 9.2% and 8.6% in the first three quarters of 2006-07, resulting in an average growth of 8.9%. As a result, even if the country was to log the lowest estimate, projected by Crisil, the country would realize a 9.2% growth for the full year.
A 9.5% quarter growth will be a record in over three years—the economy had grown 11.3% in the October-December quarter of 2003-04.
“India is at a stage where a sustained growth of 9-10% is entirely feasible and the country must try to sustain this,” says Kaushik Basu, a professor with the Delhi-based Indian Statistical Institute and at Cornell University in the US.
While services have been growing rapidly, it is the resurgence in industrial production that has enhanced prospects for 2006-07. Manufacturing output, as measured by the index of industrial production (IIP), grew at a 10-year high of 12.3% in 2006-07, taking overall industrial growth to 11.3%.
“The Central Statistical Organization’s estimate of 9.2% for 2006-07 would be met particularly due to continuous robust growth in the industrial sector,” says IEG professor N.R. Bhanumurthy, who puts together the institute’s Monthly Monitor.
“As both services and agriculture are expected to grow at their current levels, 9.2% is achievable,” he added. The averages for agriculture and services (excluding construction) so far in the year come to 2.2% and 11%, respectively.
But some are even willing to overlook the farm sector’s drag. “This rabi crop has been good and IIP numbers have been strong, suggesting that growth for the fourth quarter will be around 9.8%,” said Yes Bank’s chief economist, Shubhada Rao.
Bank of Baroda’s chief economist Rupa Rege Nitsure says the economy could grow at 10% for the last quarter. While there had been some slowing in credit growth and consumer lending in December and January, industrial production has been robust for February and March, she says. “We have not really seen any signs of slowing in credit growth and money supply in February and March,” Nitsure adds.
“Data revisions for prior quarters could cause lower growth to be reported in January-March, and we may not get 10%, but the full year growth looks on track,” adds Rajeev Malik, an economist with JP Morgan Chase.
Crisil’s director and principal economist, Dharmakirti Joshi, agrees. “Industry did exceptionally well last year. Although the growth momentum of some segments like durables has been hurt by monetary tightening, this is yet to percolate to other segments.”
The data bears him out. Over January-March, industry grew at an average of 11.7%, with manufacturing at 12.7%. Among use-based sectors, only consumer goods have shown a relatively low growth of 10% in the quarter, while capital goods and intermediate goods grew by 18% and 13%, respectively, reflecting that capacity expansion is continuing apace.
Joshi adds that “the capex (capital expenditure) cycle is very strong. The share of consumption in GDP is 58% compared with 33.8% of investment (in 2005-06), but the incremental contribution of investment to GDP is now almost equal to that of consumption. This balancing out between consumption and investment is a healthy sign”.
Experts agree that the monetary tightening hadn’t begun to really bite till March, and it is only the current year that will finally see an impact of the stricter credit policy. Growth in interest-sensitive segments such as construction and durables will noticeably slow, says Joshi. Early indications are that it could be happening. Credit Suisse economist Sailesh Jha says that “the slowing we are observing on the growth front is in consumer durables, property market transactions, cement production, commercial vehicle sales, motorcycle sales and passenger car sales”.
“The lag effect of monetary tightening will be felt in the first half of 2008. So, we are a little conservative in our estimates,” says ABN Amro’s senior economist Gaurav Kapur, who expects the current fiscal to grow at 7.8%. Yes Bank’s Rao also says that the lack of infrastructure, particularly power, is increasingly impacting growth rates.
But Basu cautions that further measures to tighten growth could boomerang.
“There is a lot of pent-up demand in the system,” he explains. “If we take more steps to tighten growth, there will be even greater inflation, which is caused by our failure to anticipate the high growth. Most firms, caught unaware with inadequate capacity, are reacting to this with higher prices.” With higher private investment, growth will rise and even inflation will moderate, he believes.
Inflation has already declined to 5.27% in the week to 12 May. “It’s poised to ease further owing to the recent monetary tightening, softer food price inflation and a favourable base effect,” says Malik.
He expects it to drop into RBI’s comfort zone of 5% next month. The bigger worry, he says, is a moderation in export growth, owing to softer external demand and the sharp appreciation of the rupee’s real effective exchange rate.
Saumya Roy in Mumbai contributed to this story.