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Economy thunders on, but slower growth seen

Strong manufacturing and services keep India's economy steaming ahead at a much faster pace than expected in the April-June quarter.

business Updated: Aug 31, 2007 14:51 IST
Unni Krishnan
Unni Krishnan

Strong manufacturing and services kept India's economy steaming ahead at a much faster pace than expected in the April-June quarter, but analysts said on Friday the tempo could slow slightly later in the year.

Tighter monetary policy, seen eroding domestic consumption, and global market turmoil stemming from US subprime lending were expected to check Asia's third-largest economy in coming quarters, with further rate hikes seen unlikely at this stage.

The annual growth rate for India's fiscal first quarter was 9.3 per cent, topping both a median forecast of 8.9 per cent in a Reuters poll and growth of 9.1 per cent the previous quarter.

The stock market extended its strong opening gains after the data, rising as much as 1.5 per cent on the day. The rupee was strengthened slightly to around 41.00 per dollar, while the benchmark 10-year bond edged up 1 basis point to 7.92 per cent.

"We expect growth to slow down to below 9 per cent in the ensuing quarters as the consumption slowdown takes effect and export demand faces headwinds from turmoil in financial markets," said A Prasanna, economist with ICICI Securities in Mumbai.

Analysts said, however, the central bank was likely to remain vigilant about a build-up of price pressures, especially after it said on Thursday that such pressures could persist.

"There is no need to change the monetary stance, but there has to be a close monitoring," said Saumitra Chaudhuri, economic adviser at domestic ratings agency ICRA.

Separate data showed annual wholesale price inflation dropped below 4 per cent for the first time since April 2006, to stand at 3.94 per cent on August 18 -- well below the central bank's target of around 5 per cent for the fiscal year ending in March 2008.

Strong Components

Manufacturing, a key driver in four years of rapid GDP expansion, grew an annual 11.9 per cent in the April-June quarter, slightly slower than 12.4 per cent in the previous three months.

Services grew at an annual pace of 10.6 per cent, while farming, which the government is trying to revive, expanded more than expected at 3.8 per cent, matching the previous quarter.

India's gross domestic product (GDP) grew 9.4 per cent in the fiscal year that ended March 2007, its fastest pace in 18 years and second only to China among major economies, and the central bank expects expansion of 8.5 per cent this fiscal year.

India is now a $1 trillion economy, and this has given it increasing muscle in world trade talks and seen it invited to meetings of the world's leading industrialised economies.

The central bank said on Thursday the country was on the verge of a step-up in its growth trajectory but only if accompanied by vigilance on price and financial stability.

The central bank raised interest rates five times between June 2006 and March and increased banks' reserve requirements to cool the property market and calm inflation and loan demand.

Finance Minister Palaniappan Chidambaram said that despite tighter monetary policy, authorities would ensure that credit flow to "productive sectors" remained strong.

No longer so insulated

Greater global integration has boosted exports and attracted billions in investment, but the central bank warned there could be some adverse impact from external influences, especially from financial markets.

"Further deterioration in subprime delinquencies could lead to reassessment of risk by investors across products and markets and retrenchment of capital from the emerging market economies," its annual report said.

However, economists see expansion averaging 7-8 per cent for the next few years due to private sector growth and spending by India's swelling middle classes, which should help buttress the economy in the event of a slowdown in demand around the world.

The scorching pace has generated jobs but it has also put pressure on roads, ports and other infrastructure, and increased wage and price pressures.

First Published: Aug 31, 2007 14:44 IST