8.9% surprise revives dream of 9% growth3 min read . Updated: 01 Dec 2010, 12:45 AM IST
8.9% surprise revives dream of 9% growth
8.9% surprise revives dream of 9% growth
New Delhi: Will India return to the 9%-plus economic growth rate it witnessed in the boom years between 2005-06 and 2007-08? The country’s chief economic adviser thinks so and the finance minister is bullish, though not enough to predict a 9% number, but analysts say achieving that target this fiscal year will be difficult given the slowing in factory output and the fade-out of the base effect.
The government’s hopes seem to have been stoked by brisk economic growth between July and September.
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“Amid all the depressing news there is a good news... We may be confident that at the end of this year, the GDP (gross domestic product) growth will not be less than 8.7-8.75%... It may be more," finance minister Pranab Mukherjee told reporters, soon after the Central Statistics Office (CSO) said in a statement that the Indian economy had expanded by 8.9% in the second quarter, beating market expectations.
Mukherjee’s reference to depressing news may have to do with the series of scams involving government and Congress party officials that have come to light in recent months, crippling Parliament, where no business has been done since the ongoing winter session began on 9 November.
Kaushik Basu, chief economic adviser to the finance ministry, said achieving 9% growth in the current fiscal is not impossible any more. “We are very close to that," he said.
Growth in the second quarter (Q2) was driven by a robust recovery in the farm and services sectors. While agricultural growth was expectedly robust at 4.4%, on the back of a lower base and a normal monsoon, the services sector, especially “trade, hotels and transport", registered a growth rate of 12.1% against 8.2% a year ago. Basu said if India can do well in business services, which grew at 8.3%, “then it is possible that we will break into 9% sooner than we expected".
However, Citigroup India economists Rohini Malkani and Anushka Shah, in a research note, maintained their full-year growth estimate of 8.4%. “With the favourable base effect likely to fade in the coming months, we expect GDP to moderate in second half of FY11," they said. The base effect refers to high growth arising from a low base for the corresponding period last year.
Industry was driven by robust manufacturing growth of 9.8% in Q2. “Industry growth is in line with expectations. However, prospects of slowdown remain in this sector," said HDFC Bank Ltd chief economist Abheek Barua. In September, factory output unexpectedly slowed to 4.4%. Barua has revised his growth forecast for the current fiscal to 8.7-8.8%, from 8.4% earlier.
The expenditure side data showed strong investment demand and rising household consumption supporting growth. While investment demand grew at 11.08% in Q2, compared with 4% a year ago, private consumption demand revived, growing at 9.28% as against 7.84% in the previous year.
“While the investment demand growth is better than the pre-crisis average (2005-September 2008) of 9%, private consumption demand is closer to the pre-crisis average of 15% for the same period," said Samiran Chakraborty, head of India research at Standard Chartered Bank Ltd. “This shows we are back to some kind of trend growth in consumption and investment."
However, Chakraborty said growth in the second half will be lower than the 8.9% average in the first half due to slowdown in factory output growth. “To what extent the slowdown will be counter-balanced by farm and services sector is a question mark. Though we will not repeat 8.9% growth in the second half, it will not collapse," he said.
Economists said they do not expect the central bank to raise lending rates anytime soon.
Barua said the Reserve Bank of India (RBI) will be on hold till January as the liquidity situation is very tight.
“Over the next few months if growth momentum continues and inflation slows, RBI may pause for a relatively longer period of time," Chakraborty said.
“With inflation likely to be a bit sticky, we maintain our view of RBI likely to hike rates by around 75 basis points during the course of 2011, taking the repo/reverse repo rate to 7/6%, respectively," said the Citigroup India report.
Repo rate is the rate at which RBI lends to banks and reverse repo rate is the rate at which it absorbs surplus liquidity from the banks.
The growth momentum was reaffirmed with the government revising growth rate for 2009-10 to 7.7%, from 7.4% estimated earlier. Growth estimates for previous quarters were also revised upwards by CSO.
This is on account of “using the new series of Wholesale Price Index with base 2004-05, and also subsequent revision in Index of Industrial Production from April 2008," CSO said.
PTI contributed to this story.