Q2 GDP growth slows to 8.9%

A slowdown in manufacturing saw gross domestic product (GDP) growth for the second quarter of the financial year slow to 8.9 per cent against 10.2 per cent in the same period last year.

The numbers, however, have bettered most economists' and policy-makers' expectations of 8.7 to 8.8 per cent, suggesting that the country is on track to end the year at 9 per cent growth.

The stock markets also reacted positively to the news with the benchmark Bombay Stock Exchange Sensitive Index rising 360 points

"Despite a slowdown in manufacturing, the high gross fixed capital formation rate of 30.3 per cent and sustained rate of investment give me the confidence that the annual growth rate will be pretty close to 9 per cent," Finance Minister P Chidambaram said.

Data released by the statistics office saw manufacturing grow at its slowest pace in the last two-and-a-half years, at 8.6 per cent.

Growth this quarter was mainly on account of agriculture and services.

In terms of the first half (April to September 2007-08), the growth rate declined to 9.1 per cent from 9.9 per cent in the same period last year.

Economists consider the Q2 growth figures better than expected because they have been achieved despite a high base effect, a weakening rupee that has impacted exports and higher interest rates as a result of the Reserve Bank of India's tight monetary policy under which it raised policy rates and banks' reserve requirements several times to ease price pressures.

"The current moderation in the growth rate is consistent with the RBI policy. I don't expect any change in the monetary policy if the current trend of persists," said Subir Gokarn, chief economist, Standard & Poor's Asia-Pacific.

"GDP growth has now averaged 9.3 per cent in the last eleven quarters. A slight moderation in growth is discernible owing mainly to the effect of monetary tightening, but the overall momentum is still strong," said Rajeev Malik, senior economist, JPMorgan Chase Bank.

He added that growth is likely to slow further once the full impact of monetary tightening works its way through the system. Softer external demand owing to a stronger rupee will also contribute to slower growth going forward.