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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 entrenched due to high food and fuel prices, and monetary policy has little impact in curbing these prices”.
“The GDP growth is being driven primarily by agriculture and construction. Manufacturing is a tad better but to have a growth of 5% for the full year, growth in the second half of the fiscal has to be in the band of 5.5-5.8%, and that depends on how the winter-sown crops pan out and with what speed the government further clears stalled projects,” said Rupa Rege Nitsure, chief economist at Bank Of Baroda. “We also need to see after the clearance with how much lag the activity actually starts at the ground level. I don’t expect the RBI to loosen monetary policy in any way, and today’s data is in a way supportive of a tighter monetary stance and gives the RBI some cushion to continue with its anti-inflationary stance.”
While a pick-up in the global economy augurs well for the Indian economy (share of exports to GDP rose to 27.8% in Q2 from 25.4% in the previous quarter), the external risk to the economy from the uncertainty over the phasing out of the US’ easy monetary policy remains.
Meanwhile, policymakers were quick to pronounce a steady recovery. "I have been saying that growth will come back slowly in third and fourth quarter. But I am glad that it is better than the first quarter," economic affairs secretary Arvind Mayaram said after the Central Statistics Organisation released the data on Friday. "There were many people who were predicting that it will be less. So I believe that going forward in third and fourth quarters, you would see a pick-up... (Growth in this) fiscal would be upwards of 5%."
After the release of the June quarter growth data in August, Mayaram had said the government had given approvals to projects having investment potential of $27 billion between January and April, which would have a mobilisation time of six to seven months.
"We see robust agriculture output in the third quarter, given the cues from Q2. So as such, it will lend support to consumption revival and recovery in the third and fourth quarters. We continue to maintain 4.9% for the full year. The RBI rate decision will be contingent on incoming inflation data, though we anticipate incremental softening of food prices month-on-month, but the headline inflation both CPI and WPI may range around 10% and 7% respectively," said Shubhada Rao, chief economist at Yes Bank.
Industry bodies, however, were less optimistic of a strong recovery and pressed for a rate cut to boost expansion. "The two drivers of growth this year · a good monsoon and exports · are insufficient to pull the economy out of the present slowdown, as mining, manufacturing and service sector output remains subdued. The problems accruing from low investment and consumption demand together with high food inflation are holding back the economy," said Chandrajit Banerjee, director-general of CII.
“No doubt the improved performance in agriculture, electricity, construction and exports as well as the modest recovery in manufacturing are positives which could augur well for the economy for the current fiscal, but the need is for an even better growth in these sectors. The data for October and November 2013 could reflect a pick-up in demand owing to the festive season and this could be reflected in the third-quarter GDP figures but at the current pace of growth, a firm rebound may not be expected before the end of the fiscal, when the impact of the monsoon would be felt on rural demand and the impact of project clearance by CCI might become visible," Banerjee added.
The farm sector contributed in a big way to economic growth in the September quarter and expanded 4.6%, compared with 1.7% a year before and 2.7% in the previous quarter. Construction grew 4.3% from 3.1% a year ago and 2.8% in the June quarter. Similarly, power sector growth jumped to 7.7% from 3.2% a year earlier and 3.7% in the first quarter of this fiscal.
The mining sector, which reported a 2.8% decline in output in the first quarter of 2013-14, contracted by 0.4% in the second quarter as well. With the utilities sectors also faring badly, key inputs remained expensive and in short supply. Manufacturing, however, has picked up a bit since the June quarter and registered a 1% expansion in the last quarter compared with 0.1% expansion a year before. Trade, hotels, transport and communications sector grew slightly to 4% from 3.9% in the June quarter while financial services growth rose to 10% last quarter from 8.9% in the April-June period. However, community, social and personal services growth rate dropped to 4.2% from 9.4% in the previous quarter.