GDP growth on track but hope hangs low,drought looms large

A slow but steady industrial recovery coupled with increased government spending pulled the economic growth rate to 6.1 per cent in the first quarter of this fiscal.

A slow but steady industrial recovery coupled with increased government spending pulled the economic growth rate to 6.1 per cent in the first quarter of this fiscal. Inching up for the second straight quarter,the gross domestic product (GDP) for the previous quarter (January-March) stood at 5.8 per cent and 5.3 per cent for the October-December 2008 quarter. It was 7.8 per cent during the first quarter of 2008-09.

While the first-quarter performance of the economy does inspire confidence,economists were concerned with the farm sector prospects marred by a drought-like situation.

The other BRIC economies too are feeling the heat of the global slowdown. China,however,continues to lead the pack with its GDP rising 7.1 per cent in April-June. Brazil,however,slowed down considerably to 3.11 per cent while the Russia economy actually contracted 10.9 per cent in the quarter ending June.

The 6.1 per cent growth estimate for April-June is unlikely to sustain through the year. The GDP growth for FY10 should be 5.8 per cent,down from last fiscals growth of 6.7 per cent. Emerging signs of recovery in the industrial and services sectors,however,provide some comfort, said Abheek Barua,chief economist at HDFC Bank. But the government is optimistic and hopeful that GDP growth rate would cross 6 per cent this year. The worst may be over, said Montek Singh Ahluwalia,deputy chairman,Planning Commission. He is likely to project a growth rate of 6.3 per cent for the full financial year despite assuming a 2.5 per cent decline in farm sector growth in the meeting of the full Planning Commission tomorrow.

The industrial sector showed the sharpest turnaround in the first quarter rising 5 per cent compared with 1.4 per cent in the last quarter of the previous fiscal. It is,however,still below the high of 6 per cent witnessed during the same quarter last fiscal. We expect the industrial sector to perform well next quarter as well. But the sector is unlikely to revisit the highs it witnessed in 2006 and 2007, said DK Joshi,chief economist,Crisil.

The services sector,which accounts for more than 57 per cent of the total output,grew at 7.8 per cent in the June quarter compared with 10.2 per cent in the same period a year ago.

Drought has hit the economy just when incipient signs of recovery were becoming visible. Agriculture in the first quarter witnessed a growth of 2.4 per cent compared with 2.7 per cent in March quarter. A drought in close to 50 per cent of the districts under agricultural production is likely to pull down the agricultural growth of 2.4 per cent in April-June to a decline of 3-5 per cent, said Barua.

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Consumers share of spending in the economy shrank to 55.6 per cent in April-June from 58 per cent a year earlier,while the governments share inched up to 9.9 per cent from 9.6 per cent on the back of stimulus spending.

The growth is mainly on account of increased government spending. This quarter saw weakness in private consumption. From here on,we will see effects of the Sixth Pay Commission wearing off. The economy might look down in the coming months, said Rajiv Kumar,chief executive,ICRIER.