Growth slows, but momentum intact

Growth slows, but momentum intact

The economy, pressured by a combination of the credit squeeze initiated by the Reserve Bank of India (RBI) and appreciation of the rupee against the dollar, grew slower at 8.9% in the quarter ended September, and substantially lower than the 10.2% in the same quarter last year.

However, investment continued to accelerate, ensuring that the growth momentum would be sustained, despite a decline in consumption levels in the economy.

The growth in gross domestic product (GDP), at constant prices, was 9.3% in the quarter ended June, returning an average growth of 9.1% for the first half of the year, data released by the Central Statistical Organisation on Friday showed. Over the same period, the gro-wth averaged 9.9% in 2006-07.

“There is some moderation," finance minister P. Chidambaram said, “but the sustained rate of investment gives me confidence that full-year growth will remain close to 9%."

GDP at factor cost at constant (1999-2000) prices has been estimated at Rs7.1 trillion in the second quarter of fiscal 2008, and Rs14.34 trillion for the first half.

Sector-wise performance in the latest quarter was mixed, with manufacturing and services showing a deceleration, and the slack being partially picked up by construction, and mining and quarrying.

Growth in manufacturing slowed, from 12.7% a year ago to 8.6%. Trade, hotels, transport and communications firms were the hardest hit; as a result of the credit squeeze slowing sales of cars and motorcycles. It decelerated to 11.4% in the second quarter, compared with 14.2% in the same period last year.

This was partially offset by the improved showing of 3.6% in agriculture, compared with 2.9% a year ago, and of 7.7% in mining and quarrying, compared with 3.9% last year in the same period.

“The sliding index of industrial production has been pointing towards a moderation in manufacturing GDP. And a slowdown in industrial activity does have a moderating impact on services as well, especially transport services," Dharmakirti Joshi, principal economist at rating agency Crisil, said.

This is also evident in the declining consumption levels, which dropped to 55.2% as a percentage of GDP in the second quarter, from 58.8% in the preceding quarter. At the end of the first six months of the current fiscal, it averaged 57%, compared with 58.8% a year ago. Similarly, the growing pressure of the rupee has led to a decline in the share of exports to 17.2%, compared with 17.9% in the second quarter last year; the share of imports, presumably due to a cheaper dollar and slowing demand, dropped to 15.5%, compared with 17% last year.

The government’s chief statistician Pronab Sen felt that the September drop in industrial production, which was essentially a statistical phenomenon due to Diwali falling in October rather than September as in last year, had been instrumental in pulling growth down. Sales of consumer durables peak during Diwali. “The October numbers again will be higher than what we are expecting," he said.

Taking a cue from the continuing surge in investment levels in the economy, analysts say that the current growth momentum would be sustained. “Look at the share of gross fixed capital formation in the economy. It has grown steadily from 27.9% in April-June 2006 to 30.3% in this quarter," said Saumitra Chaudhuri, member, Prime Minister’s economic advisory council. “We could well end up with 9% this year."

The share of gross fixed capital formation, or the investment measure in the economy, rose to 30.3% at the end of the second quarter, compared with 28.6% last year. As a result, India is setting aside a little less than one-third of its income as investment.

Even construction continues to expand strongly, accelerating to 11.1% in the second quarter. “Possibly business construction has not been impacted much by rising interest rates," Joshi said. “The strong investment hints at sustainability of over 8% growth in the medium run. So, what we are witnessing is a soft landing."

RBI has forecast an 8.5% growth for 2007-08.

However, most analysts do not believe that a slower growth would lead to a softening of the monetary policy. “A gentle slowdown is exactly what RBI would like to see," said Robert Prior-Wandesforde, senior economist, HSBC Holdings Plc., “and we expect the central bank to remain on hold for a few months yet."

Both Chaudhuri and Sen felt that industrial growth figures could bounce back in the next quarter, though the year might end with less than 10%. But Devendra Pant, associate director with Fitch Ratings, said, “In a reversal of the trend so far, we could see industrial growth trailing overall GDP growth henceforth."

Chidambaram cautioned that the remaining half of the year could face turbulence from the world market. “We have adopted a tighter monetary policy; commodity and crude prices are also high worldwide, and all this points to overall moderation this year from last year’s 9.4%," he said

But Rajeev Malik, executive director (Asia economic research unit), JPMorgan Chase Bank, said India “is less exposed—though not immune—to softening external demand than other emerging Asian economies owing to its lower dependence of goods exports, except for the IT sector".

While agreeing that India faced less risks because exports represented only 20% of its GDP, former RBI governor Bimal Jalan said, “The fears are real. So, is the expected credit crunch in the US. It is very difficult to say how this will all pan out, especially in our financial system. I’m glad though that the India story is still holding out."

(Pragya Singh contributed to this story.)