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GDP at 8.8% but odds of slowdown still prevail: Experts

Published on Fri, May 30, 2008 at 10:57 | Source : CNBC-TV18

Updated at Sat, May 31, 2008 at 20:51

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India's economy grew 8.8 percent in the March quarter from a year earlier, led by strong expansion in the services sector, and the pace of growth was faster than market expectations.

FY08 farm sector growth is at 4.5% versus 3.8% (YoY). The Fourth quarter farm sector growth is at 2.9% versus 4.9% (YoY), while construction growth is at 12.6% versus12.2% (YoY). Q4 manufacturing growth is at 5.9% versus 12.8% (YoY).

The Q3FY08 (Oct-Dec) GDP has been revised to 8.8% from 8.4% earlier.

Finance Minister, P Chidambaram is confident that India will maintain the growth rate, reports CNBC-TV18. He believes that the country will achieve a growth rate of 8.5% by end of year. He sees the FY09 growth close to 9%.

Chidambaram said that the gross fixed capital formation is up from 2.5% to 3.1%. He said that the FY08 industry growth of 8.5% is indeed a slowdown. However Chidambaram said that there is no widespread slowdown in the economy. The FM has promised to take corrective steps to stimulate manufacturing. The government will find solutions to current pressing problems, he said.

The interest rates have to be carefully calibrated, Chidambaram said.

"There were doubts whether we will achieve 9% growth. That improves the average for the UPA government marginally. The average for the four years is 8.9%. The important aspect of growth is that in 2007-08, per capita income at constant prices increased by 7.8%. More money is available in the hands of people and per capita incomes are rising, which is a very good sign," said Chidambaram.

"The second important aspect is the gross fixed capital formation, or GGFCF, at current prices. As against 32.5% in 2006-07, it is 33.9% in 2007-08. What does that mean for the investment in GDP ratio? In 2003-04, it was 28.2%, in 2004-05 it was 32.2%, in 2005-06 it was 35.5%, in 2006-07 it was 35.9%, and now the revised estimates for 2007-08 is 37.5%. Now, if you add GFCF of 33.9% to the change in stocks valuables of 3.6, it gives you 37.5%. So, in the four years of UPA government rule, investment has increased as a proportion of GDP from 28.2%, which we inherited, to 37.5%," he added.

Reacting to the inflation number, the Finance Minister is singing a familiar tune. He is once again asking industry to chip in with price cuts to help control inflation. He also warns that the government may have to resort to steps that may appear regressive in the short-term.

"It is a matter of great satisfaction that 2007-08 has returned the growth rate of 9%. Industry's is 8.5%. That is indeed a slowdown from last year's 11.0%. The reasons are well known; we would have to ensure that industrial growth does not flatten. The current financial year appears to be even more difficult than the year that has come to an end but I am confident that we will maintain the growth rate. We have taken into account the dampening effect of crude oil prices in estimating the growth this year will still be around 8.5%," he said.

Expert view on the FY08 Q3 GDP numbers at 8.8%:

Manoj Pradhan , Analyst at Morgan Stanley said they were expecting a slightly lower GDP number than 8.8% and said that this was an absolutely fantastic number for the Indian economy. He said the Mridul Sagar , Chief Economist at Kotak Securities endorses a similar view. He believes that, both the revised Gross Domestic Product (GDP) as well as the quarterly GDP numbers certainly were higher than most expectations. He had expected GDP to be at 8.2%.

Sagar also said that these numbers confirm that the economy might not slowdown very much. He said that a lot depends on how macroeconomics is calibrated in terms of the fiscal gaps and the current accounts gap. He said that fiscal gap could translate into higher interest rates and that could slow down growth. He expects the fiscal deficit to GDP touch 12% of GDP for the centre. He added that there were some concerns on the fiscal side coming over the last one month or so and the government needs to fix that upfront and return to the later end spirit of the fiscal responsibility and Budget Management Act in order to sustain the growth.

Sucheta Mehta , Economist, Standard Chartered Bank also feels the FY08 numbers were a positive surprise. She said that this is largely because of higher than expected agricultural sector output.

She said if one looks at the trend, one will see that the industrial activity is slowing down and hence the overall GDP is also slowing down on a YoY basis. This clearly suggests that the momentum of slowdown could continue into FY09.

Mehta said that the interest rates are high, and this is hurting the interest rate sensitive segment. Inflation is still running above 8% and eventually inflation would also eat into growth, she said. So, overall she still believes that growth would be below 7.5%. She estimates it at 7.4% and believes that could still be an optimistic number.

Menwhile the full fiscal year growth was at 9.0 percent, showing growth is still robust despite the tightening of monetary policy and strengthening of the currency in 2007.The government had earlier estimated annual growth of 8.7 percent for the whole of 2007/08.

Saumitra Chaudhuri , Economic Advisor of ICRA said, given that the investment GDP ratio come in at a very strong 37.5% or thereabouts, the GDP at 8.5% for FY09 looks possible. He said the reason why the final revised estimates are higher than advanced estimates is the fact agriculture has grown by more than 4% compared to it is 2%-2.5% in the advanced estimates. He added that a high agricultural growth has given us the good food procurement for wheat and rice, which is allowing us to keep grain prices under control. I think this is a very positive development. Going forward, there are lots of pressures.

Chaudhuri believes the fuel price issue is somewhat separate from the overall growth number. He said if the government sensibly starts passing on some of the price increases to the consumer, it will be good as it will reduce the fiscal burden. He is of the view that GDP is driven more by investment than by consumption and the investment numbers that have been reported. He is confident the Indian growth story still looks good and Indian businesses are still robust.