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Economy grows as expected; Pranab ups FY11 hopes

business Updated: May 31, 2010 14:07 IST

The economy grew at its fastest pace in six months in the quarter through March 2010, fuelled mainly by government and consumer spending, which is expescted to allow policymakers to focus on anchoring inflation that is hovering near 10 per cent.

The 8.6 per cent expansion in the fourth quarter of the fiscal year 2009/10 was broadly in line with a median forecast of 8.7 per cent in a Reuters poll and lifted the annual average growth rate for the full fiscal year to a slightly better-than-expected 7.4 per cent.

India's economy had grown 6.7 per cent in 2008/09, and the Jan-March 2009/10 growth rate matches the revised data for the second quarter of 2009/10.

The data is unlikely to evoke any immediate and aggressive policy response from the central bank, as concerns on Europe's debt crisis are expected to keep its policy on hold for now.

"It would be important to note that this release is a backward looking number and our sense is that policy makers would remain considerate of the external developments and any associated downside risk to overall growth," said
Anubhuti Sahay, an economist with Standard Chartered Bank in Mumbai.

The BSE Sensex and the rupee strengthened immediately after the data, while the benchmark bond yield rose 2 basis points from before the release.

The expansion in the March quarter was driven by government spending, manufacturing and services. Revival of growth in farm output after a contraction in the quarter ago underscored the broad-based recovery in Asia's third-largest economy.

Manufacturing output grew 16.3 per cent on year in the quarter as consumers bought more cars and other goods, while farm output grew an annual 0.7 per cent helped by a good winter harvest.

The government expects the economy to grow 8.5 per cent in the current fiscal year that started on April 1 on the prospects of a better farm output and a global recovery, and Finance Minister Pranab Mukherjee on Monday said growth would top this estimate.

The farm sector, which forms nearly 17 per cent of the economy but is dependent on monsoon rains, is expected to do well in 2011 as the weather office has predicted a nortmal monsoon for the country.

Prime Minister Manmohan Singh last week said an annual economic growth rate of 10 per cent is needed in the medium term to address the problems of poverty and malnutrition.

Even as Singh aims for high economic growth, inflation has come to haunt his government and appears to be undermining its support base.

Wholesale prices, the most closely watched inflation gauge in India, rose 9.59 per cent in April from a year earlier amid the government officials cliam that headline inflation had peaked.

Headline inflation numbers have been consistently higher than the official forecasts. The wholesale price inflation vaulted above the RBI's end-March 2010 inflation forecast of 8.5 per cent in January and crossed the 10-per cent mark in February.

Although food price inflation has eased from its peak of 20 per cent in December, it is still above 16 per cent.

Rising cost pressures are also dragging down the pace of manufacturing growth, as evidenced by a second-straight monthly decline in the HSBC Markit Purchasing Managers' Index in April.

The rapid acceleration in the world's second-fastest growing major economy after China is boosting consumer demand far ahead of what can be met by existing supply capacity.

Analysts expect monetary policy tightening along the year, as the RBI moves to cool demand through rate hikes until firms crank up their potential output.

The central bank has already lifted rates twice by a total of 50 basis points since March and has not ruled out an off-cyle rate rise either.