High-growth optimism returns, but rains & rates crucial
Government leaders, business barons and economists concur that the current fiscal will see the economy growing at well over 8%.delhi Updated: Jun 01, 2010 00:36 IST
While robust demand and growth optimism reign over economy, inflation, interest rates and monsoon worries signal Speedbreakers ahead
Monsoon — will the rain gods oblige?
The better-than-expected growth in the drought-hit agriculture sector has come as a pleasant surprise to analysts, but uncertainties continue to hover above the country’s farms as peasants keep their fingers crossed in hopes of a normal monsoon year.
Agriculture, which grew by 0.2 per cent in 2009-10 against earlier estimates of a contraction of 0.2 per cent, contributes about 18 per cent to the country’s GDP (gross domestic product).
The Indian Meteorological Department has forecast a normal monsoon this year.
The southwest monsoon between June and September accounts for about 80 per cent of the country’s total rainfall.
“Fortunately, the agriculture sector, which contracted by 1.8 percent in the third quarter of 2009-10, has turned out a surprise positive performance, though only marginal, in the fourth quarter of 2009-10,” said Rajan Bharti Mittal, president, Federation of Indian Chambers of Commerce and Industry.
“Hopefully with a normal monsoon this year, this trend will be held up strongly.”
Inflation — still a worry
The 7.4-per cent GDP (gross domestic product) growth in 2009-10 has revived hopes of an early return to the heady days of growth, but high prices of food and manufactured products remain a key concern.
Inflation in April was estimated at 9.6 per cent, as food prices continued to remain at elevated levels, pummelled by a supply crunch in staple items.
But inflation in manufactured products, which has reached nearly 7 per cent, has emerged as the latest worry for policy makers, mirroring signs that the spectre of price rise have lengthened across the economy.
Chief Statistician Pronab Sen said inflation should start coming down in the next few months.
However, economists said the prices of industrial products would trek upwards. “We believe today’s strong growth, especially in the manufacturing sector, will continue to spill over into manufacturing inflation,” said Rahul Bajoria, regional economist, Barclays Capital.
“Containing inflation is likely to remain the key policy priority in the near term.”
Interest rates — cautious mood
Even as the GDP number has come as a positive surprise on the back of a strong growth in agriculture, economists fear that a rise in manufacturing inflation may result in a consequent increase in interest rates, which in turn could spoil the growth party.
“That is the risk going forward,” said Rajiv Kumar, director and chief executive at Indian Council for Research on International Economic Relations. “If the inflation spreads across the manufacturing sector (which will as a result of the rise in demand and capacity utilisation) then the Reserve Bank of India (RBI) may have to raise the interest rates more than it had planned for.”
Experts feel that a rise in interest rates may lead to a drop in the investment demand.
“That is the bigger concern as a rise in interest rate will dampen the investment demand,” said Kumar. Both credit and monsoon rains are critical in fuelling demand in the Indian economy. With a crisis in Europe hurting Western economic prospects, a lot depends on domestic demand.