GDP growth 8.8% but risks ahead

The Indian economy grew a robust 8.8 per cent in April-June 2010,its highest in 12 quarters.

The Indian economy grew a robust 8.8 per cent in April-June 2010,its highest in 12 quarters,but a closer study of the CSO data released today reveals worry lines for the next three quarters of the current financial year.

While growth in private consumption expenditure,that makes up almost 58 per cent of the demand-side GDP,is almost flat in Q1 this year over April-June 2009,government consumption expenditure has actually declined. Investment growth too has slowed down to 3.7 per cent against a phenomenal 17.7 per cent in the previous quarter.

Private consumption,that reflects the demand for non-durable consumer goods,grew a marginal 0.3 per cent over an anaemic growth rate of 2.3 per cent in Q1,2009-10. Sequentially seen too,it is much lower than 2.6 per cent registered in the previous quarter. The slowdown in investment is also corroborated by a fall in capital goods production,as measured by the industrial output,to 9 per cent in June from 37 per cent in May.

The GDP growth rate of 8.8 per cent for April-June 2010 is only a shade better than that in the previous quarter or 8.6 per cent in Q4,2009-2010. Though the government said that this years Q1 growth has been bolstered by the manufacturing sector that has growth 12.4 per cent,manufacturing per se is showing signs of powering down compared with a growth rate of 16.3 per cent in the previous quarter.

Some analysts believe,the economys first quarter performance may actually turn out to be the highest quarterly growth rate in the current financial year.

C Rangarajan,Chairman,Prime Ministers Economic Advisory Council agrees. It (8.8 per cent) shows strong growth in Q1. Growth rate may decline in second quarter,but pick up in Q3 and Q4, he said. Industrial growth was strong in Q1,but will be lower in Q2 because of an unfavourable base effect. Rangarajan,however,said the numbers point to a trend towards 8.5 per cent growth rate for the full year.

What is also causing anxiety in the industry is the nature of Reserve Bank of Indias actions in the coming days. Some economists feel it could effect a pause on its tightening stance. There are a couple of issues on the expenditure side. Both consumption and capital formation have been rather weak and that is certainly a cause for concern. As far as the monetary policy is concerned,the data does not give RBI enough reason to hike rates in September. They should go in for one more rate hike in November. That is all they should do, said Abheek Barua,chief economist,HDFC Bank.

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Research reports also highlighted the substantial divergence between the real GDP growth (at factor cost) estimated at 8.8 per cent and real GDP growth (at market prices) estimated at 3.7 per cent.