ALMOST AN EIGHTH WONDER

ALMOST AN EIGHTH WONDER
The Economic Times, December 1, 2009, Page 1

7.9% India’s GDP beat all forecasts, showing that the economy is in fine fettle. The big govt dilemma now is when to end stimulus & raise rates. And even as global mkts fluctuated to the impact of the Dubai crisis, Sensex cheered the growth show

Our Bureau NEW DELHI

INDIA’S economy gave yet another indication of its rapidly improving health, prompting greater ambition from policymakers still chary of withdrawing the stimulus medicine responsible for the recovery.

Gross domestic product (GDP) expanded by a surprisingly strong 7.9% during the July-September second quarter, its fastest pace in a year and a half. The growth was driven largely by a pickup in manufacturing, increased government expenditure, robust investments and modest growth in farm output despite the drought, data released on Monday show.

“I am hopeful that if this trend continues, we will have higher GDP growth than anticipated. I hope it will be around 7%,” finance minister Pranab Mukherjee said.

The economy had expanded 6.1% in the first quarter. The growth in the first half of the year is now a respectable 7% as against 7.8% during the same period a year ago. In the fiscal year ended March 2009, the economy grew by 6.7%, its weakest in six years and way below rates of 9% or more in the previous three years.

While the stock market cheered the news with a 294-point rise in the BSE’s benchmark Sensex index, yields firmed up in the bond market on heightened expectations of the RBI hiking interest rates sooner than expected.

But Montek Singh Ahluwalia, deputy chairman of the Planning Commission, was of the view that the troubles that could be induced by high inflation were not a worry now.

“I don’t believe there are serious worries on inflation except food prices. Food prices are a matter of concern, but I don’t think conventional monetary policy will take care of that problem,” he said.

The central bank, too, was guarded in its opinion. Reserve Bank of India (RBI) deputy governor Subir Gokarn said he would not be surprised if growth slowed in the December quarter.

“While it is a recovery and it seems to be gaining strength, we should not ignore the fact that it is still being driven substantially by public spending,” Mr Gokarn told reporters.

In late October, the RBI began its exit from its expansionary monetary policy by withdrawing some liquidity support measures and restoring the proportion of deposits that banks should invest in government bonds to 25% from 24%.

“Surprises in agriculture and industrial output, and our view that the services industry will gradually benefit from the industrial recovery suggests a more broadbased expansion in the current financial year,” said Sonal Varma of Nomura Financial Services, which raised growth projection by one percentage point to 7% after the second-quarter numbers were unveiled.