The first-half growth rate at 7.8% is a satisfactory and healthy rate of growth with regard to the global slowdown, finance minister P Chidambaram said. Prime Ministers Economic Advisory Council member Govinda Rao said at this rate, the GDP growth rate for 2008-09 would be about 7%.
The warning signs are the halving of the manufacturing sector growth to 5% in the second quarter, from 9.2%, and the slowdown in agriculture growth to 2.7% from 4.7%, year-on-year. On the positive side, the investment rate has held up at 35.3%, higher than 33.4% in the same quarter last year.
The combination of slowing growth and declining inflation has therefore increased the chances of a further rate cut and more relaxations in the monetary policy. RBI governor D Subbarao met the chairmen of banks in Mumbai on Friday to develop inputs for the monetary policy stance.
Chidambaram said last week in the Economic Editors conference that the tilt was now clearly in favour of growth. Inflation stood at 8.84% for the week ended November 15. We are going to see aggressive rate cutting, going forward, Rupa Rege Nitsure, chief economist at Bank of Baroda, said, adding, Interest rates have developed a southward bias, (but) it has not come down sufficiently for small and medium enterprises, which contribute to nearly 40% of the overall GDP and are also generating major employment.
To push growth, Chidambaram said, the government would also look into the specific problems faced by sectors like textiles, gems & jewellery, marine products, hotel, financing and real estate. The minister also said he expected growth rates of agriculture and allied sectors to do well in the second half of the fiscal.
Although the second quarter growth fared above many estimates, analysts are worried that growth would slow down in the wake of the global financial crisis, recession in many economies and the tight credit situation in the local economy. Despite the high investment figures, the next quarter could be tight when high interest rates bite into capex plans of companies and the overall slowdown hits fresh projects. As per the CSO data, savings accounted for 35.4% of GDP in the second quarter of this fiscal, higher than 33.9% in the same quarter last year.
At a disaggregated level, among services, trade, hotels, transport and communications grew by 10.8% in second quarter, against 11%, financing, insurance, real estate and business services grew by 9.2% against 12.4%, and community, social and personal services grew by 7.6% against 7.7%. All major segments in the services sector recorded high growth, but still slower than in the second quarter of the fiscal 2007-08.