The strong performance, boosted by economic stimulus measures taken by the government, may not be enough to convince the Reserve Bank of India to raise key policy rates to tackle high inflation as the global outlook remains bleak due to Europe’s debt troubles and soaring input prices back home.
In February, India’s statistical office had forecast a lower 7.2% growth for 2009-10. The country’s key policymakers see this as a signal of the economy returning to high growth rates that prevailed before the global economic crisis.
“The growth numbers are pleasant but not really surprising, because we were expecting them to be robust,” said finance secretary Ashok Chawla. “This clearly indicates the momentum... the 8.5% estimation for 2010-11 is going to be a clear possibility,” he said.
The country’s gross domestic output grew by 8.6% in the fourth fiscal quarter as agriculture grew 0.7% and manufacturing cruised at 16.3%, data released on Monday showed. The beginning of natural gas production at Reliance’s KG basin fields also pushed up growth.
On Monday, the benchmark index of the Bombay Stock Exchange ended up 81 points, reflecting the optimism among investors.
The numbers emboldened finance minister Pranab Mukherjee to say the economy would grow by more than 8.5% in the current year. But his optimism is not shared by many others.
“Our GDP estimate for 2010-11 is 7.8%, as we expect some setback from the euro crisis. Also, the service sector growth will slow down,” said NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy. DK Joshi, chief economist at ratings agency Crisil, also pegged the growth lower at 8%.
Private investment holds key
In the three months to March 2010, gross fixed capital formation—a measure of investment activity—grew 34.6% quarter-on-quarter, indicating that investments have begun to pick up. However, analysts suspect that these investments are largely by the government in infrastructure sectors and will like to see private players stepping in.
“In 2010-11, growth will depend on how quick and strong is the turnaround in private investment,” said Jahangir Aziz, chief economist at JP Morgan. The guarded outlook stems from the uncertain global economic outlook due to the crises in Greece and now Spain, which were downgraded by Fitch, igniting fears that Europe’s debt crisis will hurt the global economy. Europe is India’s largest trading partner. Private consumption has not picked up visibly even as the government expenditure that held the economy together through the crisis is on the wane. Private consumption expenditure grew by 2.6% in the fourth quarter of 2009-10, compared with 5.3% in the previous quarter. Growth in government consumption expenditure moderated to 2.1% from 30.5% in Q2.
The uncertain overseas factors that cloud the Indian economy and the modest increase in private expenditure are likely to deter RBI from raising rates for a while. “Hiking interest rates at this point will break the overall growth process,” said Rajan Bharti Mittal, president Ficci. But global financial services firm Barclays Capital said containing inflation is likely to remain the key policy priority of the RBI.
The government has withdrawn the fiscal stimulus that made cars and electronic items cheaper, and the kicker provided by the Sixth Pay Commission award is also not there this year. RBI is on a trajectory towards normalcy of interest rates but it is likely to take into consideration all the uncertainties such as the monsoon and the European debt crisis, said Indranil Pan of Kotak Mahindra Bank in a research note. Exports grew 36.3% in April 2010 from a year ago, but are still below the levels achieved in 2008. And foreign investors have pulled out money in the last few weeks because of the increased risk aversion after the crisis in euro zone. The timely onset of monsoon in Kerala will help improve sentiment and also help curb inflation.
The strong 8.5% growth assumes a 4%-plus growth in agriculture.
“A normal monsoon will help farm sector grow by 5.5% in the current fiscal. Food inflation too will ease,” said Mr Joshi of Crisil.
Prime Minister Manmohan Singh had said last week that India needs a 10%-plus growth to address the problems of poverty and malnutrition. Manufacturing growth is likely to ease, as evidenced by a second-straight monthly decline in the HSBC Markit Purchasing Managers’ Index in April and high inflation continues to be a challenge.
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