Stimulus exit looms as Pranab waits for third quarter.
India’s gross domestic product (GDP) grew 7.9 per cent in July-September 2009, up from 6.1 per cent the previous quarter, beating expectations and fuelling speculation that the government might look at exiting stimulus measures.
A revival in domestic demand, especially an increase in private consumption on the back of stimulus measures, saw GDP rising the highest in a quarter since January-March 2008 when it stood at 8.6 per cent. The figure was highest even by the government’s estimates with Finance Minister Pranab Mukherjee raising his own growth prediction for the current year to 7 per cent from 6.5.
“I do hope it will be possible for us to achieve 7 per cent-plus (growth rate), but still it is too early to predict. I will wait for the third quarter figures,” Mukherjee told reporters. Analysts had predicted a lower growth of 6-6.5 per cent for the quarter.
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the figures suggested that the economy was back to its normal growth trajectory.
The growth compares well to 7.7 per cent recorded in the pre-slowdown period of July-September 2008. The domestic economy was worth Rs 17.90 lakh crore in the first half ending September 2009, growing 7 per cent. The half yearly growth though was lower compared to 7.8 per cent in the same period last year.
The sectors that showed significant growth in the second quarter of 2009-10 over last year were mining and quarrying at 9.5 per cent, manufacturing at 9.2 per cent, electricity, gas & water supply at 7.4 per cent, construction at 6.5 per cent, trade, hotels, transport and communication at 8.5 per cent, financing, insurance, real estate and business services at 7.7 per cent, and community, social and personal services at 12.7 per cent. They helped in making up for the less than 1 per cent increase in agriculture output.
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“The growth in manufacturing is due to the increased unlocking of investment in the sector and, therefore, recovery is in place,” Pronab Sen, chief statistician and secretary, ministry of statistics and programme implementation, told Business Standard.
The impact of drought is likely to tick in the third quarter figures. Though kharif production is expected to be 15 per cent lower compared to last year, it carried a low weightage of 18 per cent in GDP figures for agriculture, forestry and fishing.
“Therefore, bulk of the estimates of GDP of this sector to the extent of 82 per cent in Q2 are based on the anticipated production of fruits and vegetables, other crops, livestock products, forestry and fisheries, which are estimated to register positive growth rates in the range of 3-4 per cent,” said a government press note.
Sen said the third quarter would be critical as the agriculture GDP would turn negative. Analysts doubt whether the show would be repeated in the third and fourth quarters. Ramaya Suryanarayanan, economist, DBS Bank, expressed doubts on the agriculture GDP. “If it is this good, why are food prices rising so fast? It is not clear if it is a sign of aggregate demand pressures or a sign that the GDP data may have to be revised lower. The data appears unsustainable,” she said, adding that 2009-10 could clock 6.7 per cent growth with year-on-year growth slowing to 6.4 per cent in the next two quarters.”
Improved growth and rising inflation have led to concerns among industry whether the Reserve Bank of India (RBI) and the government would start withdrawing stimulus measures undertaken to combat global downturn. Ahluwalia said traditional monetary tools of RBI might not be effective in curbing food inflation. Food inflation had already crossed 15 per cent during the second week of November.
Experts are not sure whether the growth in demand could be sustained without the stimulus. “The timing of the rollback of stimulus measure would be crucial. I think RBI will consider raising rates and gradually start the rollback process,” said DK Joshi, principal economist, CRISIL. According to J Moses Harding, head of global markets, IndusInd Bank, external pressures called for delay in unwinding of stimulus and a status quo on interest rates for some more time.
Even within the government, a wait-and-watch approach is preferred. “I do not think it is the right time to withdraw stimulus measures because the third quarter GDP will be the deciding factor,” said Sen.
Tax cuts and increased liquidity had improved consumer confidence and pushed up demand. “The composition of demand-side GDP, which rose 6.7 per cent in the July-September quarter suggests that private demand bottomed out in the previous quarter and is picking up,” said Sonal Verma, economist, Nomura Financial Advisory and Securities. Government consumption rose 26.9 per cent, largely due to the pay arrears, contributing 2.2 percentage points (pp) to real GDP growth.
Fixed investment rose 7.3 per cent from 4.2 per cent in the previous quarter, which Verma said reflected increased traction in ongoing investment projects due to better availability of financing. Private consumption and fixed investment together contributed 5.6 percentage points to 6.7 per cent real GDP growth, compared to 2.3 percentage points in the previous quarter, suggesting that a recovery in private demand is well underway.
“Finally, net exports contributed a hefty 6.1 percentage points to real GDP growth, as imports dropped more than exports, while the change in inventories surprisingly fell by 45.4 per cent year-on-year in the July-September quarter versus a 3.2 per cent rise in the previous quarter on destocking,” Verma added.