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India's Q2 GDP grows 7.9%

Belying predictions, the Indian economy grew by a significant 7.9% in the second quarter of this fiscal, up from 6.1% in the previous quarter, essentially due to a good showing by the industry and the services sector. The growth compares favourably to the figure of 7.7% recorded in the July-September quarter in the previous year.

 Consequently, the economy rose by 7% in the first half ending 30th September of the current fiscal on the back of stimulus packages and revival of domestic demand, giving hopes that final figures for the year could be much higher.
 
"While loan growth remains anaemic, strong GDP numbers and rising WPI will likely result in a tightening of policy rates in January. However, as mentioned in our earlier notes, with liquidity remaining in surplus, liquidity tightening measures will likely precede rate hikes. We maintain our call of 125bps tightening in 2010 as inflation is primarily supply side drive and excess tightening would have implications for the Indian rupee," said Rohini Malkani, Economist, Citi India.
 
The government, including finance minister Pranab Mukherjee, the RBI and the Planning Commission had predicted a growth of about 6%-7%, while global agencies and analysts forecast it to be even lower. The prime minister's economic advisory panel had pegged the economy to grow by around 6.1% in the second quarter due to the impact of a weak monsoon on agriculture.
 
Tushar Poddar, Vice President & Chief Economist, Goldman Sachs India said, “Although the growth momentum is strong, we believe the impact of the drought on agricultural growth would be seen in the next quarter. Looking ahead to 2010, we would expect the role of the private sector to start increasing more rapidly while that of the government to ease gradually. There are upside risks to our FY10 GDP growth forecast of 5.8%. For FY11, we expect GDP to grow near-trend at 7.8%. We believe the recovery in activity will drive the INR stronger and expect the Reserve Bank of India to start hiking rates in January. We also continue to recommend short US dollar and Indian rupee positions".
 
During the quarter to end-September, financing, agriculture and real-estate growth stood at 7.7%. The surge in GDP numbers was helped by the manufacturing sector, which grew 9.2% in the second quarter vis-a-vis 5.1% a year earlier.
 
Analysts were expecting a growth rate of 6.1%-6.6% in the second quarter. The economic growth of close to 8% in the second quarter is also remarkable in the context of just 0.9% expansion in farm production due to a weak monsoon and continued contraction in exports due to slackening demand overseas.
 
However, the manufacturing sector grew by 9.2% in the July-September period compared to 5.1% in the corresponding period of the last fiscal and mining and quarrying grew by 9.5% versus 3.7% recorded in FY09.
 
Community, social and personal services expanded by double digits at 12.7% against 9%. Despite being affected by the international slowdown, trade, hotels, transport and the communications sector grew by 8.5%, which is lower than 12.1% a year ago.
 
Financing, insurance, real-estate, and business services rose by 7.7% against 6.4%. Electricity, gas and water supply were up 7.4% compared to 3.8%. Construction rose by 6.5%, down over 9.6% a year ago.
 
It was after September, that growth declined to 5.8% in the subsequent two quarters last year. So, if the trend continues, the growth rate is expected to be much higher in the second half of this fiscal.
 

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