CSO forecasts GDP growth at 7.1%

CSO forecasts GDP growth at 7.1%
Business Standard, February 10, 2009, Page 2

The predictio is the the slowest in last six years

India’s economy is projected to grow 7.1 per cent in the current fiscal, the slowest in six years, due to the adverse impact of the global economic crisis, especially on the manufacturing sector.

Economists are calling the preliminary estimates by Central Statistical Organisation (CSO) “optimistic” because industrial production and export growth have deteriorated in the last four months.

Pointing to early signs of slowdown, like investment growth — as measured by gross fixed capital formation (GFCF) — dropping to single digits for the first time in six years, experts have called for additional fiscal stimulus to revive demand. In addition, they have urged the Reserve Bank of India to lower interest rates as headline inflation is expected to drop to the 3 per cent level by March 2009.

Based on today’s estimate, the government expects the growth rate in the second half of the current financial year at 6.4 per cent as the economy grew 7.8 per cent in the first half ended September 2008.

“Key numbers like capital formation point to slowdown. Fiscal spending needs to be raised,” said Govinda Rao, director, National Institute of Public Finance and Policy (NIPFP). He expects the economy to expand 6.5-7 per cent in the current fiscal.

Asia’s third largest economy grew at an average rate of 8.9 per cent for four years till April 2008. In 2007-08, it grew 9 per cent.

“This (7.1 per cent projection) does appear a bit optimistic given that industrial production, exports and tax collections have seen a sharp deceleration and in some cases a contraction,” Rohini Malkani, economist with Citi India, wrote in a research note. She predicts that the economy will grow 5.5 per cent in fiscal 2009-10.

Six out of eight components of Gross Domestic Product (GDP) — the sum of goods and services produced in the country— showed lower growth compared with the 2007-08 figures. Only mining and quarrying as well as community, social and personal services are expected to post higher growth rates.

Agriculture, expected to register robust growth because of increased acreage for winter crops, is projected to grow 2.6 per cent in 2008-09, as against 4.9 per cent in the previous fiscal. The Prime Minister’s Economic Advisory Council’s “Review of the Economy 2008-09” had projected a growth rate of 3 per cent for agriculture.

Manufacturing is expected to grow only 4.1 per cent as against 8.2 per cent in 2007-08. The services sector, which contributes more than 55 per cent to India’s GDP, is projected to grow 9.6 per cent, much higher than the estimates by non-government research agencies.

GFCF, seen as a proxy for investments, dropped to single digits in 2008-09. This is cited as evidence of slowdown as mostly private sector investments drove 60 per cent of India’s growth rate in 2007-08.

In order to compensate for the likely drop in private sector investment, the next government will have to increase spending, say experts.

“If we continue the fiscal stimulus into the next year, our economy will not be slowing as much as the rest of the world,” said Montek Singh Ahluwalia, deputy chairman of the Planning Commission.

The advance estimate by the CSO is followed by a quick estimate and a revised estimate. The final figure comes two years after the financial year is over. With overall growth slowing, the per capita income based on 1999-00 prices is expected to grow 5.6 per cent to Rs. 25,661 in the current fiscal, as against 7.6 per cent in the last fiscal. Per capita income in today's prices is estimated at Rs. 38,084 in fiscal 2008-09, an increase of 14.4 per cent.