GDP grows by 8.9%, FY11 outlook rosy

Agriculture and services sectors prove buoyant.

The economy grew at its fastest pace in ten months, clocking a growth of 8.9 per cent in the second quarter ended September. The numbers bettered industry and government expectations that GDP growth would run out of steam in the period. Growth was buoyed by a healthy increase in service sector and farm output.

The Central Statistical Organisation (CSO), in data released today, also revised the first-quarter growth figures from 8.8 per cent to 8.9 per cent on account of the new base year adopted in the calculation of inflation and industrial output. The growth numbers in the first half have revived hopes of a 9-per-cent-or-thereabouts growth for the whole financial year — higher than the government’s estimate of 8.5 per cent.

“We may be confident that at the end of this year, GDP growth will not be less than 8.7-8.75 per cent. It may be more,” said Finance Minister Pranab Mukherjee. He added that projections of over 9 per cent growth by the International Monetary Fund could be correct this time.

A growth of 9 per cent in 2010-11 will be significantly higher than the 7.4 per cent growth recorded in 2009-10 and 6.7 per cent in 2008-09. The government had projected 9 per cent growth in 2011-12. The last time GDP grew faster than 9 per cent was in October-December 2007-08 (9.3 per cent).

Asked whether the economy could achieve 9 per cent growth in the current fiscal, Finance Ministry Chief Economic Advisor Kaushik Basu said, “It is not impossible any more. We are very close to that.”

In the second quarter, the farm sector recorded a growth rate of 4.4 per cent, a significant improvement over the 0.9 per cent in the same period last year. It was also higher than the 2.5 per cent recorded in April-June.

“The recovery in agriculture is likely to have a positive impact on rural demand in the coming quarters and maintain the positive momentum in the economy,” said Chandrajit Banerjee, director-general, Confederation of Indian Industries.

The trade, hotels, transport and communications sector grew by 12.1 per cent, up from 8.2 per cent in the corresponding period last year and 10.9 per cent in the last quarter.

Manufacturing sector growth, however, fell to 9.8 per cent from 13 per cent in the first quarter this year. However, it was higher than the 8.4 per cent in the second quarter last year. The quarter-on-quarter fall was mainly because of a drop in industrial output to 4.4 per cent in September.

Mining and quarrying (8 per cent) and construction (8.8 per cent), financing, insurance, real estate & business services (8.3 per cent), and community, social and personal services (7.3 per cent) also showed a healthy rise.

Growth in some core infrastructural activities such as electricity, gas and water supply, however, was lower at 3.4 per cent.

Experts believe GDP growth in the next two quarters may be little lower than that of the first two.

Planning Commission Principal Advisor Pronab Sen stuck to the original forecast of 8.5 per cent growth. He said the 8.9 per cent growth registered in the first half of 2010-11 came on the back of a low base in the previous year and sustaining it in the second half would be difficult. He also indicated that the numbers may not prompt any monetary policy action.

The Reserve Bank of India has increased the repo rate by 150 basis points since April to control inflation, which eased to 8.58 percent in October from 11 per cent in April.

“We would be a bit cautious on second half growth, as monetary tightness and slow progress on infrastructure creation have by now started pinching all sectors of the economy,” said Navneet Munot, CIO, SBI Mutual Fund.

He added, “The recent global developments have again shown the vulnerability of the global economy. In our opinion, further monetary tightness may be an impediment to sustain this high growth, a declining trend in inflation may just allow RBI to ease a bit on the policy front,” said Navneet Munot, CIO, SBI Mutual Fund.

Today’s data showed a revival in both consumption and investment in the first half of 2010-11, compared with the previous year when these indicators were subdued due to the global crisis. On the demand side, private consumption expenditure clocked a growth of 9.28 per cent on top of the upwardly revised 7.84 per cent in the first quarter.

“While we expected private consumption demand to improve, primarily backed by robust growth in the agriculture sector, such high growth has come as a positive surprise. However, this has also raised some concerns regarding the numbers and we expect to see some corrections in the demand side of GDP,” said Arun Singh, senior economist, Dun & Bradstreet India.