Growth helps markets recover

GDP belies estimate, up 9.3% in fourth quarter.

Surpassing all expectations, the Indian economy grew a stunning 9.3 per cent in the January-March quarter, raising the possibility of a hardening of interest rates.

The growth is higher than the revised October-December 2005 rate of 7.5 per cent. The GDP growth for 2005-06 has been raised to 8.4 per cent from the advance estimate of 8.1 per cent in February this year.

The robust showing came on the back of a surprising turnaround in agriculture and despite a decline in mining.

Late evening, the government released another set of numbers that showed it had managed to keep fiscal deficit close to the revised estimate figure of Rs 1,46,175 crore for 2005-06, a marginal increase of just Rs 173 crore (100.1 per cent of the full-year target).

The government has said the fiscal deficit in 2005-06 would be 4.1 per cent of the gross domestic product, lower than the earlier estimate of 4.3 per cent.

Commenting on the growth, the fastest in over two years, Finance Minister P Chidambaram said "more reforms were needed" in order to sustain it, adding that had mining and electricity sectors met expectations, the GDP growth rate would have been 8.5 per cent.

"India needs more reforms in all areas and higher foreign investments to sustain high economic growth. More capital and investments are needed in agriculture as the gross capital formation in the sector is stagnant," he said.

The projected growth rate for the current year is pegged at 7.5-8 per cent.

Commenting on the GDP growth, Planning Commission Deputy Chairman Montek Singh Ahluwalia said the data was more encouraging than expected. "I am happy with the growth rate. This is not evidence of the economy over-heating. There is need for a concerted effort to carry forward from here," he said.

The data evoked some surprise as it showed that agriculture, which accounts for a fifth of the country's GDP, grew 5.5 per cent in the January-March quarter, compared with 2.9 per cent in the previous quarter. The trend may only continue now that the monsoon is expected ahead of schedule.

Manufacturing, which accounts for nearly 15 per cent of GDP, expanded 8.9 per cent, faster than a revised annual growth rate of 8.3 per cent in October-December. Services, which constitute about 54 per cent of GDP, grew 9.6 per cent in January-March, maintaining the momentum of the past two years.

Some analysts, however, said that rising interest rates and the recent sharp correction in stock prices might dampen consumer spending. Stating this, JP Morgan said slower consumer loan growth would also contribute to a slight moderation in the output of financial services.

Chidambaram added that he was greatly disappointed by the performance of the mining sector.

"I have flagged mining as a sector which requires wider and deeper reform and new models to explore and excavate India's mineral resources," he said. Electricity, gas, and water supply had also shown slower growth. "We expected 6 per cent; I am now told it is 5.3 per cent," he added.

On the issue of interest rates, Chidambaram said the government would continue to balance interest rates, exchange rates and keep inflation down.

He added that increased oil prices would have some impact on inflation, but he saw no impact on growth. The Reserve Bank of India will review its monetary policy on July 25.