The Indian economy would grow by 8.6% in the current fiscal, up from the 8% last year and 6.7% the year before, on the back of a smart recovery in farm output and a pick-up in services, as per advance estimates released on Monday. Economists, however, warned about a likely moderation in private consumption and investment resulting from high interest rates, which could slow the growth momentum a bit in the coming quarters.
In fact, given that the Gross Domestic Product (GDP) at factor cost grew at 8.9% in the first half of this fiscal, Monday?s estimate signals a decline in fourth quarter growth to about 8%.
Finance minister Pranab Mukherjee said he was happy with the projected 8.6% growth for 2010-11, but was concerned about the high inflation and wide trade gap. Headline inflation stood at 8.4% in December driven mainly by relentless food inflation and, according to commerce secretary Rahul Khullar, the trade gap which came down from $13 billion in August to $2.6 billion in December, could widen again in the last quarter of the fiscal, if the global crude and commodity prices rise further.
Mukherjee in a statement issued later in the day, said the projected 9.7% growth in GDP at market prices for 2010-11 reflects buoyancy in tax collections and could ensure that fiscal and revenue deficits could be reduced beyond the budget targets. GDP at market prices is GDP at factor cost plus indirect taxes net of subsidies.
The minister said that ?on the supply side, strong agriculture performance aided by growth in manufacturing and services has helped in restoring high overall growth in GDP for the fiscal year 2010-11.? Construction activity was also showing improved growth momentum, Mukherjee added.
Agriculture and allied activities are likely to grow at a healthy 5.4% in 2010-11 compared with just 0.2% in 2009-10, said the Central Statistical Organisation (CSO). The GDP growth projection by CSO is marginally higher than the 8.5% growth forecast by the finance ministry and the Reserve Bank earlier. The central bank has raised interest rates seven times since March, despite the doubts over the utility of monetary policy to fight inflation caused by supply-side constraints.
“The 8.6% growth projection for this fiscal is in line with our forecast. What we are seeing now is a moderation in investments and private consumption due to the high interest rates. Gross fixed capital formation–an indicator of investments in the economy–inched down to 31.6% in the advance estimate for this fiscal compared to 32% last fiscal,? Crisil director and principal economist D K Joshi told FE. The higher GDP growth in current fiscal also owes substantially to the robustness of certain service industries like trade, hotel, transport and communications. The services sector as a whole improved to 11% from 9.7% in the year ago period. In the manufacturing sector, the growth is expected to remain at last year’s level (8.8%) indicating the hike in interest rates has not yet crunched industrial output and investments. But ?mining and quarrying? segment is expected to witness slowdown and likely to grow by 6.2% compared to 6.9% in previous fiscal and electricity, gas and water production would grow by just 5.1% as against 6.4% in the previous fiscal.
?Going forward, we will see a further moderation in investments, which could slow down growth next fiscal. Our estimate for economic growth in 2011-12 is 8.3%. This year, economic growth as well as inflation is high and in such a scenario, the RBI is likely to further tighten monetary policy to check inflation.” Joshi said. ?We expect that a 25 bps increase in policy rates by RBI may not be ruled out in the next monetary policy review,? said rating firm Care. The concern for the next fiscal stems from the fact that country’s overall inflation has remained way above the comfort zone of 5-6%. In December, inflation rose to 8.43%, from 7.48% in the previous month. Food inflation for the week ended January 22 stood at a worrisome 17.05%. The chief economic advisor Kaushik Basu, however, believes that inflation is unlikely to stem India’s growth story.