Economy recovers, but risks persist3 min read . Updated: 01 Jun 2010, 12:12 AM IST
Economy recovers, but risks persist
Economy recovers, but risks persist
New Delhi: Riding on an investment surge and an impressive burst of speed in the last quarter, India’s economy grew faster than expected at 7.4% in 2009-10.
However, the sharp deceleration in private consumption, a possible rate hike by the central bank that could choke fresh investments and external risks posed by a double-dip recession—or a threat of one—in some developed countries, point to the potential challenges to the economy achieving the projected growth rate of 8.5% for the current fiscal.
Finance minister Pranab Mukherjee expressed confidence that the economic momentum would be sustained and the economy would grow at projected levels. The government had projected a growth of 7.2% in 2009-10.
According to the latest data, the size of the Indian economy is estimated at Rs62.31 trillion ($1.31 trillion) and per capita income at Rs44,345, a growth of 10.5% over the previous year.
The Central Statistical Organisation, which releases the data, revised upward the gross domestic product (GDP) growth numbers for the second and third quarter of the fiscal while the first quarter’s growth rate was revised downward. The economy grew by 8.6% in the fourth quarter.
Farm growth was revised upward for a year that saw a drought to 0.2% against advance estimates of a 0.2% contraction; industry grew a robust 9.3% compared to an earlier estimate of 8.2%; but the services sector grew by 8.5% and not the 8.7% estimated earlier.
During 2009-10, growth in investment demand at 7.2% drove economic growth even as private consumption demand at 4.3% lagged behind. Economists see this as an area of concern. India’s chief statistician Pronab Sen said investment could not continue to play the role of private consumption. “Unless private consumption growth returns to 6%, it will be difficult to achieve 8.5% growth next year."
Samiran Chakraborty, head of India research at Standard Chartered Bank also said that a recovery in capital expenditure through expansion of capacities would depend on growth in private consumption.
Robust investment demand may not force the Reserve Bank of India (RBI) to act immediately to control its “inflationary bias", he said. “Given the kind of global uncertainty, RBI will tighten policy rate in a calibrated manner."
Sen said that though headline inflation rate will soften from now on, “the question is how quickly". “If non-food inflation takes life of its own, then RBI has to act."
Prime Minister Manmohan Singh last week said inflation, at 9.59% in April would moderate to 5-6% by December.
The central bank tightened its key policy rates by 50 basis points in March and April and is expected to continue raising policy rates to arrive at the pre-economic crisis neutral level of interest rates.
Several analysts have been conservative compared with the government in their growth projections for 2010-11. Rohini Malkani and Anushka Shah of Citigroup India maintained their GDP forecast of 8.4% for the current fiscal in an advisory released on Monday.
Chakraborty said he is not revising his growth forecast of 8.1% for the current fiscal ending 31 March 2011. “The upside from the GDP data is counterbalanced by the downside from the global developments."
Sen expects growth during the first quarter of the current fiscal to be “spectacular" due to a low base last year.
“However, as the base effect wears out after that, there are number of question marks (on the growth trajectory) like the impact of Greek crisis and the monsoon on the economy," Sen added.
The India Meteorological Department, which announced the onset of the monsoon on Monday, has projected a normal season at 98% rainfall.
A normal monsoon, after last year’s drought, will help boost the output of grain and oilseeds, and help cool inflation that has triggered widespread protests. Last year’s rainfall deficit—the worst in 37 years—saw India’s rice acreage dip by one-fifth and its water reservoirs reaching only 60% of the 10-year average.
In the fourth quarter, agriculture grew at 0.7% due to the better winter crop. However, the growth rate of community, social and personal services, mostly driven by higher government spending, declined drastically to 1.6% as compared with 8.8% during the same quarter a year ago. This is a result of a higher base last year due to the pay commission grants as well as the partial withdrawal, in the fourth quarter, of fiscal stimulus provided by the Union government to tide over the economic crisis.
Markets cheered the GDP data. The Bombay Stock Exchange’s Sensitive Index, or Sensex, gained 81 points on Monday to record its fourth straight session of gains, closing at 16,944.63 points.
PTI contributed to this story.