Stimulus drives growth to 6.7%

Written by Economy Bureau | New Delhi | Updated: May 30 2009, 06:47am hrs
Gdp growth
Butterssing hopes of a quick recovery in the second half of 2009-10, the countrys GDP grew above expectations at 6.7% in 2008-09, according to data released by the Central Statistical Organisation (CSO). Growth in agriculture and manufacturing slumped while the services sector pushed expansion in GDP, a gauge of overall domestic income. What is also comforting is that investment as a proportion of GDP grew to 35.7% in 2008-09 from 32.9% the previous year, indicating that companies did not halt expansion plans last year.

Extra spending by the government also helped boost growth. As a result, the fiscal deficit widened to Rs 3,30,114 crore in 2008-09, or 6.6% of GDP, higher than governments target of Rs 3,26,515 crore, or 6% of GDP, the controller general of accounts (CGA) said in separate data released on Friday. The governments revenue stood at Rs 5,44,651 crore in 2008-09, 3.1% lower than the revised target of Rs 5,62,173 crore. Tax revenue at Rs 4,47,726 crore was 3.9% lower than the revised projection of Rs 4,65,970 crore.

RBI and the finance ministry are meeting on Saturday to revise the amount of borrowings the government would need to meet its deficit. The government would articulate its borrowing requirement for 2009-10 in the Union Budget to be presented in the first week of July. The interim Budget has projected borrowings of Rs 3.62 lakh crore, assuming a fiscal deficit of 5.5%, which finance minister Pranab Mukherjee on Monday hoped the government would adhere to.

Although 6.7% is the weakest GDP growth in the last six years, and way below the 9% recorded in 2007-08, it is still seen as healthy in light of the global crisis that has crimped exports as also domestic demand.

On a quarter-on-quarter basis, GDP grew at 5.8% in the last quarter of 2008-09, which was widely expected to register a sharp slowdown. The data raised hopes the Indian economy could be already on the uptick, with fears of further contraction in the global economy fading and domestic demand showing resilience. Economists still believe RBI may cut policy rates by another 50 basis points.

Commerce & industry minister Anand Sharma said on Friday that there are signs of industrial revival. (GDP growth) will be between 6-7% this fiscal. I am confident that with the measures that we have taken and with the measures that the Prime Minister and finance minister are considering, hopefully we will be able to take it again to 7%, Sharma said.

RBI has pegged this years growth at 6%. After the release of Fridays data, three banksMorgan Stanley, Nomura and Kotak Mahindra Bankrevised upwards their GDP forecasts for 2009-10 from below 5% to 6% or more.

Annual per capita income, or the average income per person, grew at 4.9% to Rs 25,494 in 2008-09 from Rs 24,295 in 2007-08 in constant prices. This is lower than 7.8% growth registered last year.

At current prices, however, the increase was higher: Rs 37,490 in 2008-09 from Rs 33,283 in 2007-08.

Private spending as a percentage of GDP fell marginally to 54.7% in 2008-09 from 55% in the previous year, while government consumption rose to 11.6% in 2008-09 from 10.1%. This took place as the government boosted spending in the last two quarters of 2008-09 to protect growth hit by the global slowdown. Fiscal stimulus is driving growth. The higher-than-expected activity levels suggest greater resilience in domestic demand, Goldman Sachs said in a note on Friday.

Economists believe India would benefit substantially in terms of capital inflows as the pace of contraction in the world economy slows and investors look for returns.

Going forward, the problem for India is not going to be too little capital inflows, but too much of it, said Arvind Subramanian, senior fellow at Peterson Institute for International Economics said at a seminar on Thursday.