Farm growth props up GDP, but services flop

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SummaryWith 84% of deficit hit by Oct, lower govt spend to weigh on growth

The Indian economy grew 4.8% in the July-September quarter, recovering from the slowest expansion in four years in the previous quarter at 4.4% and beating analysts’ consensus, thanks to a pick-up in agriculture, electricity and construction. However, as aggregate demand continued to remain tepid and public consumption plunged by 11.7% compared with the three months through June (it could fall further as heavy spending cuts are planned to meet the Budget deficit target), it will probably take till early next fiscal for a turnaround.

Cautious analysts chose to wait for another quarter to gauge if the slowdown has indeed bottomed out. Finance minister P Chidambaram on Friday promised a sustained push to capital market and financial market reforms and “fixing” the price of gas and oil in the weeks ahead to push growth and predicted a GDP growth of 6% for the fiscal. Not in sync with that optimism, Goldman Sachs recently said investment growth this year would 1.2%, lower than 1.7% last year, producing a GDP growth of just 4.3%.

With private consumption having risen just 0.5% sequentially and 2.2% from a year earlier, and the government’s ability to spend remaining tight, much of the second-quarter growth may have been driven by the projects that had been cleared much earlier, analysts said. Gross fixed capital formation — a gauge for investment — rose 2.6% in the second quarter from a year earlier and gained 5% compared with the June quarter. That this uptick has largely come from pipeline investments and not fresh ones by corporate India continued to be a source of worry.

With the April-October fiscal deficit hitting 84.4% of the full-year target, government consumption is sure to decline in the second half, in what could hurt the economy further.

An expected bumper farm production may drive rural demand in the second half of this fiscal and aid economic growth, analysts added. Commission for Agricultural Costs and Prices chairman Ashok Gulati said farm growth would nearly triple from to 5.2-5.7% in FY14 compared with 1.9% in FY13. An annual 6.8% rise in rabi acreage and a good kharif grain output of 129.32 million tonnes bear out the robust farm-sector growth.

In what is seen as a subtle message to the Reserve Bank of India, which has raised its policy repo rate by 50 basis points since September to fight persistently high consumer price inflation, Chidambaram said consumer inflation “is

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