7.9%! Economy is in zoom mode again

If the government’s numbers are to be believed, the Indian economy is back in spanking form. In the July-September quarter, the country’s gross domestic product (GDP) grew at 7.9%, its fastest in 18 months and just 1% slower than China’s 8.9%. The figures for April-June, 2009, were just 6.1%.

The markets cheered, with the Sensex rising 294 points to 16,926. The rupee did a high-five, rising 13 paise against the US dollar. Everywhere, bearish forecasts are being revised.

The unexpected burst of growth, driven by the government’s Rs1,86,000 crore stimulus package and reviving consumer demand, especially in automobiles, has sent the babus scurrying for their calculators. All the official predictions have so far been cautious, with the Reserve Bank of India (RBI) predicting 6% growth in 2009-10, the Planning Commission 6.3% and the prime minister’s economic advisory council (PMEAC) 6.5%.
Now, 7% is in sight once again. “We will have to review the forecast for the year as a whole,” RBI deputy governor Subir Gokarn said. Planning Commission deputy chairman Montek Singh Ahluwalia agreed. As did the chairman of the PM’s economic advisory council, C Rangarajan. “The overall growth (projection) of 6.5% may have to be revised upward,” he said. Global rating agency Moody’s has, in fact, predicted a “quicker” return of the Indian economy to its trend growth rate of “around 9% that had earlier been anticipated”.

But every silver lining has a cloud. The faster-than-expected growth suggests that the government can now think of withdrawing its fiscal and monetary stimulus packages sooner than later, given the sharp rise in its budget deficits. At the end of the first seven months of 2009-10, the fiscal deficit — the gap between government revenues and expenditure before borrowings — was a whopping Rs2,45,000 crore. A high fiscal deficit is like an open invitation to inflation, which is already showing up in high food prices.

“This (7.9% growth) has turned out to be more positive than one has expected...the RBI’s monetary policy would now be more focused on inflation,” Rangarajan said. What he means is that interest rates may be raised earlier than the first quarter of next year.

“This data could be a green light for the RBI to hike rates, and there are greater chances of this by the end of the calendar year,” said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore. “The exit from the fiscal stimulus by the government may also be earlier post the GDP data,” he said. Sonal Varma of Nomura Securities expects rate hikes to begin no later than January.

But Ahluwalia of the Planning Commission dismissed any sudden withdrawal of the excise cuts that form the bulk of the stimulus package. He said any reduction or removal of the stimulus should be considered closer to February, which means the next budget.

Finance minister Pranab Mukherjee is also advising caution. “Taken together - the two quarters -  I do hope it would be possible to achieve 7% plus (growth rate), but it is still too early to predict. I will wait for the third quarter figures,” he said.

There are good reasons to worry about the next quarter. The bulk of the recovery was led by a 9.2% growth in manufacturing, while mining and construction activities expanded by 9.5% and 6.5%, respectively. But the agriculture sector continued to be a major drag with a mere 0.9% growth. Thanks to the failure of the monsoon in large parts of the country, growth in the October-December quarter could be dragged down by negative agriculture growth. Raveev Malik of Macquarie Securities believes that the next quarters figures could be as low as 5-5.5% “owing to a sizable drag in agriculture.”

But for now, industry is ecstatic. “It (the GDP data) only shows the resilience of the Indian economy,” said Swati Piramal, president of the Associated Chambers of Commerce and Industry (Assocham).

According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the latest GDP figures “are a further confirmation of the Indian economy’s recovery”. “At this rate, we feel we can look to a near 7% growth for the whole year,” Ficci president Harshpati Singhania said. “This spurt in GDP growth is remarkable because it comes despite the poor performance in the agriculture sector.”