GDP grows 9% in FY08, inflation hits 4-yr high

Written by Economy Bureau | New Delhi, May 30 | Updated: May 31 2008, 05:53am hrs
For the third year in a row, the Indian economy has grown at 9%, surpassing expectations as well as earlier growth estimates of 8.7% in 2007-08, a year of great uncertainty, as finance minister P Chidambaram put it. But the government got little time to dwell on the growth numbers as inflation for the week ended May 17 touched a 45-month high of 8.1%, putting a big question mark on future growth.

Stock markets ignored the higher inflation numbers, while reacting positively to the GDP numbers, the BSE Sensex ending almost 100 points higher.

Even as high domestic interest rates are expected to retard growth this year, prices rising much above RBIs tolerance level of 5.5% may prod the central bank to further tighten money supply. The inflation spurt was driven by a sharp jump in the fuel index (which has a 14% weight in the wholesale price index), up by 7.79% from a year earlier. In the corresponding week ended May 19, 2007, inflation stood at 5.3%.

The manufactured products index jumped 7.84%, dairy products rose by 11%, while fruit & vegetable prices soared 4.2%. Steel and cement fell by 0.6% each (though the FM said there was still scope for cement producers to cut prices) and the record foodgrain production helped wheat and maize prices cool by 1%.

Terming the rise in inflation as worrisome, Chidambaram admitted that there is no sign of (a) decline in inflation. Today, crude oil determined all prices. Movement of virtually every commodity (price) is in sync with the movement of crude oil prices. Food prices are also getting linked to the fuel prices, he said, referring to developed countries moving towards the production of biofuels instead of food. He added the government could neither control crude prices nor persuade developed nations to stop using food to produce biofuels.

The 9% growth follows the all-time high growth of 9.6% in 2006-07 and 9.4% in 2005-06. This marks the longest period--five successive years--in Indias economic history that the countrys GDP has grown at over 8%. The high growth has meant a significant rise in per capita income, which has grown from Rs 11,672 in 2003-04 to Rs 24,321in 2007-08.

Surprisingly, growth was propped up by agricultural and allied sectors expanding by 4.5% in 2007-08, compared to earlier estimates of 2.6%. Though doubtful about the prospect of 4% growth in agriculture being sustained, Chidambaram was confident that the economy would grow at 8.5%-plus in 2008-09.

Saumitra Chaudhuri, economic adviser at Icra Ltd, attributed the high growth in agriculture to a good rabi crop and a better-than-expected kharif crop.

However, he predicted growth to moderate to 7.8% in 2008-09, thanks to the persistently high inflation.

With high inflation, growth tends to fizzle out. I doubt if GDP would grow at 8.5% this fiscal, and I expect it to be closer to my 7.8% forecast. But if after October inflation and other international factors cool down, growth may be better and touch 8.5%, Chaudhuri told FE.