The dip in India?s GDP growth by slightly over a percentage point to 8.9% in the second quarter of 2007-08 over the corresponding period of the previous year was not entirely unexpected. One could even say that the figure has exceeded the expectations of analysts who had serious worries about the sharp slump in industrial growth and exports during the period. That, in itself, is reason to cheer up. Moreover, future growth prospects look quite strong, as investment growth continues to accelerate, despite the stagnancy witnessed in private consumption, with gross fixed capital formation rising by more than two percentage points to touch an all-time high of 32.3% of GDP in the latest quarter. Equally reassuring is the pick up in agriculture, where growth has consistently stayed above a 3% clip for three successive quarters. Its lagged impact on rural incomes is sure to have a positive impact on overall growth, especially since agricultural product prices have been steadily going up. However, the direct relevance of the agriculture sector to overall growth continues to decline, as its share in the country?s total economic output has fallen to an all-time low of 14.3% in the latest quarter.
Broad trends in industry and the services sector, meanwhile, are in line with the RBI?s tight monetary policy?even if its efficacy has been in doubt because of the rupee policy?that sought to cool down growth and price levels. The data on GDP deflators shows that price increases of industrial goods have slowed down to the lowest level in five quarters, while those of services have dipped to a 10-quarter low. Yet, a major concern is the sharp deceleration in manufacturing sector growth, down by more than 4 percentage points in the second quarter, which may be difficult to reverse without a sharp pick up in domestic consumption and exports. The dip in electricity generation, despite good monsoons, may also be a pointer to inadequate generation capacity emerging as a growth constraint. While some part of the growth reduction in the services sector can be attributed to the high base year effect, the slowdown in the trade, transport, communications and financial and business service segments can be traced to the deceleration in non-agriculture merchandise production and exports. So, while GDP growth is still nowhere near sputtering, complacency at this crucial stage could prove costly.
