Thanks to yet another hike in estimates for agriculture growth, taking it to a whopping 6.6%, the CSO has beaten all expectations to come up with a 8.5% GDP growth for 2010-11. This is heartening since it suggests the growth momentum has not been hit by the series of interest rate hikes, but keep in mind the numbers for the full year hide the fact that the growth momentum has been slowing for four quarters now, from 9.4% in Q4 2009-10 to 9.3% in Q1 2010-11 to 8.9% in Q2 to 8.3% in Q3 and finally to 7.8% in Q4.
If the overall GDP number holds in 2011-12, there is reason to be satisfied. But, with inflation still being high, RBI will be focused on interest rate hikes. Industrial growth and investment has proved to be quite resilient to higher interest rates. But, for how much longer will this hold? Manufacturing growth has declined continuously over the four quarters?from 15.2% in Q4 2009-10, it fell to 12.7%, 10%, 6% and finally 5.5% in Q4 2010-11. Agriculture growth could be a saviour, but keep in mind we have never had two successive years of high agricultural growth, which means that getting a number of 5%-plus in FY12 will be a challenge; indeed, FY11?s growth comes on the back of just a 0.4% growth in FY10?the sharp growth in cotton and maize, thanks largely to the introduction of better seeds, is a good sign though.
The government?s budget shows that expenditure will be only marginally higher this year and, therefore, there will not be too much support coming from this sector. This turns the onus on industry (manufacturing and construction) and services (trade, transport and finance) to propel the economy. The financial sector?s growth is linked with that of the rest of the economy and cannot independently grow. The focus will hence be a lot on industry and construction to provide a fillip and this is where interest rates will play a major role. Both manufacturing and construction have grown by a little over 8% in FY11 and will have to grow even faster in FY12.
Going back to the rudimentary textbook formulation of GDP, it comprises consumption, investment, government and trade. High inflation will affect consumption and we will have to look at investment to bridge the gap, given that government expenditure will increase only marginally and the trade balance will be in the negative zone. The coming year will hence be the ultimate test for the relation between interest rates and investment. To borrow an analogy from the tennis court, which is the current flavour, so far it appears to be deuce, with advantage to investment. The serve in FY12 will be for the game and it needs to be seen whether it will be ?game?, or reversion to ?deuce?.