To the surprise of most analysts, India’s economy grew at 8.1% in the first quarter despite lagging reforms and high oil prices. GDP growth is being powered yet again by the manufacturing sector, which grew at 11.3%, and by higher than expected growth in the services sector, which accounts for over 50% of the economy. This is what the breakdown looks like across sectors.
The agriculture sector output can be expected to increase in the next quarter, thanks to a normal monsoon. So, I am guessing growth will in fact exceed the 7% mark for the year, which is the government’s target. Nonetheless, it might be advisable to watch out for inflation and higher interest rates, not to mention the growing current-account deficit given high oil prices.
“Inflation will likely accelerate and the central bank may be forced to raise interest rates by a quarter point next month,” said D. H. Pai Panandiker, director general at RPG Foundation, an economic policy group in New Delhi. A separate government report today showed the inflation rate accelerated to a seven-week high of 3.75 percent in the week ended Sept. 17, after the government raised fuel prices. The Reserve Bank of India on July 26 held its benchmark lending rate at 6 percent, where it has stood since April 2003. That’s the lowest since May 1973. The bank also left its overnight borrowing rate at 5 percent and said inflation probably won’t exceed its target of 5.5 percent for the fiscal year. The central bank’s next policy statement is due Oct. 25.
India will be able to keep inflation “within tolerable limits,” Finance Minister Palaniappan Chidambaram told reporters in New Delhi today. India needs to persist with economic changes to increase industrial growth and generate surpluses, he said.
I certainly hope the central government will not use these growth rates to delay much-needed reforms. If this is the sort of growth that can be pulled off minus any significant reform (not rocking the boat is not reform), I think 10% GDP growth is well within reach, if crucial reforms (labour laws, power sector reform etc) can be undertaken. Hopefully, that’s how the PM and the FM will frame the issue as well.