Manufacturing & agriculture disappoint in Q1 GDP data

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New Delhi, Aug 29: Despite high inflation and a tight monetary policy, gross domestic product (GDP) rose 7.9% in the first quarter of 2008-09, down from 9.2% in the same quarter last year. While this is the slowest pace of growth in three years, the rate is almost in line with the trend rate of 8% logged by the economy for the past five years.

The Q1 rate is also marginally higher than the 7.7% projected for the 2008-09 financial year by the Prime Minister’s economic advisory council. “I am confident that this year, too, we will be more or less correct in our assessment of GDP growth, and the economy will grow at close to 8%,” said finance minister P Chidambaram in Mumbai after the figures were released by the Central Statistical Organisation on Friday.

The savings and investment rates emerging from the GDP data will please investors. Investment, or gross capital formation, was higher at 36.5% in the April-June quarter than the 36% recorded a year earlier. The savings rate at 35% also compared favourably with last year’s 34.5%. The finance minister said the high savings and investment rates would help the government meet its growth targets.

The stock market responded buoyantly, with the BSE Sensex rising 3.63% on Friday, reading the GDP data with the 23-basis point drop in inflation to 12.40%. The 30-share bellwether index climbed 509.53 points. The figures also calmed the outlook for interest rates. The yield on ten-year government bonds fell by 7 bps to 8.70% on Friday.

However, stress points have emerged in the economy. Manufacturing output growth at 5.6% was almost half last year’s 10.9%, while agriculture, which was expected to show a much better performance, slowed to 3% from 4.4%.

In the services sector, the critical electricity, gas & water sector slowed to 2.6% from 7.9%, but this weakness is in line with first quarter trends every year. Riding the sharp credit growth in the real estate sector, construction grew at 11.4% from 7.7% a year earlier. Growth in trade, hotels, transport & communications was 11.2%, short of last year’s 13.1%, while community, social & personal services grew to 8.4% from 5.2%. Growth in the mining & quarrying sector increased to 4.8% from 1.7%.