The Indian economy clocked a reasonably high growth in the March quarter on the back of a low-base effect and a robust performance by the manufacturing sector. But there is no reason for euphoria as the weak private consumption and relatively weaker share of gross fixed capital formation in gross domestic product are serious concerns. Looking at the data flow that went into the compilation of the figures, there is not much room for an upward revision when final figures are released.This data makes the case for a complete withdrawal of stimulus measures (both fiscal and monetary) weak.
A clearer picture on India?s growth trajectory will be available only by the third quarter of the current financial year. It is too early to project an 8.5% growth for the year with any reasonable level of certainty as the soverign default crisis in euro zone has emerged as the wild card in the pack. We have not been able to assess the impact of this crisis on India and the world economy as a whole.
While this crisis is triggering panic in the financial markets and could have an impact on India?s exports, it is also keeping the commodity prices low. Softening commodity prices will give the central bank more head room to normalise the monetary policy at a moderate phase. This will offset some of the damaging effects of the crisis.
India economy may expand by close to 8.5% in the current quarter. Next quarter?s growth may not be that high as it is coming on a high base and temporal and spatial distribution of monsoon rains will also play a role. With private consumption already weak, another season of truant monsoons can play havoc in the economy. From the third quarter onwards, the crisis in euro zone is going to be the key in deciding the trajectory of the economy.
Manufacturing growth is obviously driven by investments. But there is no data in place to show how much of this is due to bunching up of investments and how much is due to new investments coming online. Overall, the GDP figures released on Monday make it clear that we are not yet out of woods and make a case for a cautious approach while treading on the path of normalisation of policy measures to the pre-crisis period.