Higher consumption pushes Q2 GDP growth at 7.9% YoY

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India's gross domestic product (GDP) growth in the second quarter of this fiscal has come in above economists' expectations. GDP grew 7.9% from a year earlier after rising 6.1% in the previous quarter.

The government's stimulus measures seemed to have a direct impact on manufacturing, mining and services, which posted better-than-expected numbers.

Farm sector growth has come in at 0.9% versus 2.7% YoY. Manufacturing has grown 9.2% as against 5.1% YoY. The mining space has posted the highest growth at 9.5% as compared to 3.7% YoY, while construction has seen degrowth at 6.5% versus 9.6% YoY.

Road ahead for GDP:

Subir Gokarn, Deputy Governor, Reserve Bank, says one needs to recognise the continuing contribution of government spending, which has grown by over 26%. "While the recovery seems to be gaining strength, we should not ignore the fact that it is still currently being driven substantially by public spending. We are seeing some effects of Pay Commission and so on translating into consumer durables."

He feels growth in the October-December quarter may decline due to the recent drought. "One needs to watch out for negative farm growth in Q3." He stated that private consumption needs to pick up for sustained growth.

Even Atsi Sheth of Macro-Sutra advises caution. "This quarter had everything going for it. There was a sharper than expected global recovery, liquidity was very comfortable, and domestic demand also rose through various government measures. This was kind of a goldilocks quarter. While that the numbers will get better, I am not sure we can extrapolate this because there are at least some things like agriculture and global recovery that will be different in the coming two quarters. We do not know whether that momentum will continue or not."

But experts are bullish on the full-year target. Robert Prior-Wandesforde, Senior Asian Economist, HSBC Holdings Plc, says we are looking at further upside surprises in the next 18 months. However, he was quick to add that GDP will perhaps be a bit lower in the next couple of quarters.

Keki Mistry, MD, HDFC Bank, and MD Mallya, CMD, Bank of Baroda, see full year GDP at over 6.5%. Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, too says the government's full-year target of 6.5% is likely to be upped.

Adi Godrej, CMD, Godrej Group, sees it crossing 7% for the entire year. Even Finance Minister Pranab Mukherjee says it is possible to achieve 7% growth in FY10. "The stimulus package has paid dividends. We are hopeful of a higher GDP growth than what was anticipated earlier."

Rajeev Malik of Macquarie Capital Securities expects 8% GDP growth in FY11. Wandesforde sees GDP growth averaging 8.5% next fiscal. "That's based partly on the assumption that agriculture always bounces or in the past has at least bounced back strongly the year after a drought."

Godrej is more optimistic. He expects it to cross the 9% mark.