Growth story just got better

GDP at 19-year high of 9.4%.

Consistent double-digit growth in manufacturing, services and sizeable upward revisions saw the country record a 19-year high in gross domestic product (GDP) growth at 9.4 per cent for 2006-07.

This is the highest growth rate after 10.5 per cent recorded in 1988-89, according to data released by the Central Statistical Organisation today, prompting Finance Minister P Chidambaram to estimate growth at over 9 per cent in the current financial year as well.

GDP at current prices stood at Rs 37,43,472 crore, making India an $826 billion economy in 2006-07 (at an average exchange rate of Rs 45.29 to the US dollar for the year).

The underlying feature of the growth story is that manufacturing saw sustained double-digit growth, at levels almost similar to services. Agricultural growth decelerated to 2.77 per cent, a development chiefly attributed to a high base effect.

“On the production side, the story is manufacturing, which has suddenly come alive and is now growing about as fast as services,” said Joshua Felman, senior resident representative of the International Monetary Fund.

However, fourth-quarter GDP growth at 9.1 per cent was slower than over 10 per cent in the same period a year ago. This was chiefly on account of slower growth in agriculture, construction, financial and social services, suggesting a deceleration of the growth momentum.

Economists expect the deceleration to continue. M Govinda Rao, director, National Institute of Public Finance and Policy, (NIPFP) predicted that growth for the current fiscal (2007-08) would be “somewhere between 8.5 and 9 per cent”.

Added Robert Prior-Wandesforde, from HSBC’s Asian economics team, “The economy is not yet responding in any meaningful way to the monetary medicine administered by the Reserve Bank of India (RBI). The interest rate changes will take at least a year to impact fully.” He, however, said the economy would expand at an impressive rate.

The latest data show that India continues to be the world’s second-fastest growing economy, behind China. In the first three quarters of 2006, China recorded an average GDP growth rate of 10.7 per cent.

In terms of the average growth rate target for the Tenth Plan (2002-07), the actual average growth rate stood at 7.64 per cent, slightly short of the targeted 8 per cent growth rate.

There is other good news hidden in the data. Per capita income in 2006-07, at current prices (that is, including inflation), grew faster than the previous two years, at 14.3 per cent to Rs 29,382 against 10.65 per cent (Rs 25,716) in 2005-06.

The growth prompted comments that money supply may be tightened further. “I expect the RBI to increase the cash reserve ratio since growth has not slowed to its comfort level and inflation pressure remains high,” Crisil’s DK Joshi said.

Cash reserve ratio refers to the amount of money banks have to keep with the RBI.

Prior-Wandesforde added that he would be surprised if the CRR was not raised by 50 basis points, from the present 6.5 per cent.

NIPFP’s Rao disagreed. “I do not think the RBI is going to tighten interest rates further. If it does, it will create more trouble for interest rate-sensitive sectors like construction,” he said.

Business Standard