Stimulus-fed Q2 growth nears 8%

Stimulus-fed Q2 growth nears 8%
The Financial Express, December 01, 2009, Page 1

fe Bureau, New Delhi

India’s economy grew at a healthy 7.9% in the second quarter of this fiscal on the back of government stimulus spending, sturdy manufacturing and services sectors and better-than-expected farm output. The faster GDP expansion caught all forecasters by surprise, but some warned that growth could moderate in the current quarter, reflecting a decline in farm output due to the weak monsoon.

The UPA's economy managers reacted optimistically, setting their sights on achieving 7% growth for the entire year. Even as there was no official word on the withdrawal of fiscal and monetary expansion, analysts expect RBI to tighten cash conditions in the coming months, with some predicting a hike in policy rates as early as in January.

July-September growth over the year earlier is also the fastest rise in the last six quarters, and much above the 6.3% market forecast, data released by the Central Statistical Organisation showed on Monday.

This takes first-half GDP growth to 7%, brightening the prospects of a stronger and quicker recovery. The government and RBI on Monday indicated that an upward revision of the entire year’s growth projections might be warranted. RBI projected 6% growth this year; the Planning Commission pegged it at 6.3%, while the Prime Minister’s Economic Advisory Council anticipated 6.5%.

“Taken together—the two quarters—I do hope it will be possible for us to achieve 7%. But it is still too early to predict. I will wait for the third-quarter figures,” finance minister Pranab Mukherjee said. Mukherjee could articulate his fiscal policy exit plan in the upcoming Union Budget, with a renewed focus on expenditure cuts, analysts said.

“This performance does suggest that there may well have to be an upward revision in GDP growth from the 6.5% projected so far,” Planning Commission deputy chairman Montek Singh Ahluwalia said.

Equity markets reacted positively to the GDP data. The BSE Sensex ended 1.77% up at 16,926.22 points in a broad rally that saw Asian indices gaining over 3% on Monday, rebounding from the impact of the Dubai debt crisis.

“Clearly, this is better than we could have expected and we will have to review the forecast for the year as a whole,” RBI deputy governor Subir Gokarn said of the Q2 growth figures. He, however, hastened to add, “We shouldn't ignore that it is still being driven substantially by public spending. A recovery will only be sustained if private sector investment and exports start to stabilise,” he said.

EAC chairman C Rangarajan projected the fiscal policy stance to continue in the current fiscal, while RBI would turn its focus on inflation. WPI-based inflation stood at 1.34% in October, even as food inflation crossed 15% in the second week of November.
A significant factor in the Q2 growth figures is the smart pick-up in consumption and investment growth. Consumption in Q2 FY10 grew at 8.4%, up from 2.8% the previous quarter, with private consumption growing at 5.6% from 1.6%. Public consumption was up 27%, as the government continued its large spending. Growth in fixed capital formation--a proxy for investment growth--rose to 7.3% in Q2 FY10 from 4.2% in the previous quarter.

This corroborates the fact that the stimulus measures are actually translating into consumption and investment growth--the two main drivers that pushed India’s growth to above 9% in the three years ended March 2008. However, it also highlights a danger that an early rollback of expansionary policies could potentially derail the recovery.

The services sectors lead the chart with second-quarter growth of 9.3%, followed by industry at 8.3% and agriculture & allied activities at 0.9%. Within industry, manufacturing was up 9.2%, mining & quarrying up 9.5%, electricity up 7.4% and construction up 6.5%. The mining and electricity components jumped mainly due to the commencement of the Cairn India facilities, as well as Reliance Industries’ K-G gas basin, Citi India economist Rohini Malkani said. “The most encouraging data point is the 9% rise in non-farm GDP,” Malkani said.

Among services, trade, transport & communications was up 8.5%, while community services was up 12.7%, largely on account of the pay arrears. Financing & insurance was the only component that posted moderate growth in the current quarter.

The stronger growth numbers raised concerns RBI could hike policy rates, even as industry expects continuation of the benign interest rate regime. “We believe the recovery in activity will make the rupee stronger and expect RBI to start hiking rates in January,” said Goldman Sachs India VP & chief economist Tushar Poddar.

“It would be important for RBI to maintain policy rates at the current levels in order to prevent the growth momentum from slackening,” said CII director-general Chandrajit Banerjee.