GDP falls to 7.9%

Indian economy grew at 7.9 per cent in the first quarter ended June 2008, the slowest growth rate in three years, as effect of increase in prices and monetary tightening by the central bank has slowed down the pace.

The numbers, released by the Central Statistical Organisation (CSO), were along what economists had projected. The markets reacted positively to the news with BSE Sensex increasing by more than 500 points or 3.63 per cent to close at 14,564 points in today’s trade.

“The numbers were entirely expected,” said Subir Gokarn, chief economist with Standard & Poor’s Asia-Pacific. “We are in the middle of business cycle and the impact of monetary policy in the last few quarters is showing up.”

The growth rate of 7.9 per cent in the first quarter ended June 2008 is much lower than 9.2 per cent recorded in corresponding quarter last year, and also below 8.8 per cent.

Of the eight industry segments reported, only three (mining and quarrying, construction and community, social and personal services) grew at faster rate in the three months up to June 2008, as compared to growth rates in corresponding quarter a year ago. Services sector, especially financial ones, slowed down considerably in the reporting quarter.

Agriculture, which constitutes around 15 per cent of Gross Domestic Product (GDP) — a measure of goods and services produced in the country, grew at a much slower pace of 3 per cent mainly because of decline in production of pulses and sugarcane in the Rabi season, which ended in June 2008.

However, the surprise element is the 11.4 per cent growth recorded by the construction sector, which is seen as interest rate sensitive. Two reasons being offered: first, infrastructure construction might be growing at faster rate to offset slowdown in residential and commercial buildings. Second, the effect of increase in interest rate is yet to affect this sector.
 

WHAT’S SLOWING THE ECONOMY?
Manufacturing growth almost halves Quarterly estimate of GDP in Q1 2008-09
	(% change over previous year Q1)
	2007-08	2008-09
Agri, forestry & fishing	4.4	3.0
Mining & Quarrying	1.7	4.8
Manufacturing	10.9	5.6
Electricity, gas & water supply	7.9	2.6
Construction	7.7	11.4
Trade, hotels, transport & communication	13.1	11.2
Financing, real estate & business services	12.6	9.3
Community, social & personal services	5.2	8.4
GDP at factor cost	9.2	7.9
(In Rs/cr)	7,24,949	7,82,357

The Reserve Bank of India (RBI), India’s central bank, began increasing the interest rate at which it lends to commercial banks from 2006, and the most recent increase of 125 basis points (one basis point is one-hundredth of a percentage point) took the key interest rate to 9 per cent. It also increased the cash-reserve ratio to control inflation, which has reached 13-year high.

Reacting to the latest GDP numbers, Union Finance Minister P Chidambaram said, “I am confident that this year too, we will be more or less correct on our assessment of GDP growth, and the economy will grow close to 8 per cent.”

The Gross Fixed Capital Formation (GFCF) in the first quarter of current fiscal reflects high level of savings and investment, he added.

GFCF is a measure of net new investments in the country to create assets that will produce goods. It was estimated at 32.3 per cent in the first quarter of 2008-09, as against 32 per cent in the year-ago quarter.

In the remaining quarters of current fiscal, Saumitra Chaudhary, member of prime minister’s Economic Advisory Council (EAC), said, “There is a positive upside to the growth as we have seen good monsoon. The Rabi harvest is expected to be strong in second half (of current financial year)”.

EAC, in a report released earlier this month, pegged the growth rate of Indian economy at 7.7 per cent.

He said the focus should be on price stability and added that, “further monetary tightening by RBI cannot be ruled out”. Export oriented industries and segments of Indian economy which is not directly impacted by interest rate hike might be the growth drivers, Chaudhary who is also chief economist with rating agency ICRA Ltd.

Gokarn, however, said, “The inflation numbers are still high and there might be further monetary tightening in the next six months. Indian economy will recovery in the second half of 2009 and 2010.”