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Economy: RBI has its way - Views on News from Equitymaster
 
 
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  • Dec 3, 2007

    Economy: RBI has its way

    India's key economic numbers released last week indicated of GDP growth slowing to 8.9% during the second quarter of FY08, from 9.3% YoY growth during the previous quarter (April to June 2007). The growth was largely led by improvement in performance of the mining and construction services.

    What is however disappointing is the fact that the manufacturing sector, which had been pulling the economic growth for so many quarters now, recorded a sluggish performance. It grew by 8.6% during 2QFY08, against 11.9% in 1QFY08 and a more solid 12.7% in 2QFY07. The Reserve Bank of India's (RBI) tight monetary policy in the wake of rising inflationary pressures, as also slowdown in exports owing to the rupee's appreciation against the US dollar, seemingly led to this slowdown in the manufacturing sector, and consequently the overall growth.

    Key economic growth numbers
    Change over previous year (%)
    1QFY07 2QFY07 1QFY08 2QFY08
    Agriculture, forestry & fishing 2.8 2.9 3.8 3.6
    Mining & quarrying 3.7 3.9 3.2 7.7
    Manufacturing 12.3 12.7 11.9 8.6
    Electricity, gas & water supply 5.8 8.1 8.3 7.3
    Construction 10.5 11.1 10.7 11.1
    Trade, hotels, transport & communication 12.4 14.2 12.0 11.4
    Financing, insurance, real estate & business services 10.8 11.1 11.0 10.6
    Community, social & personal services 11.3 8.3 7.6 7.8
    GDP at factor cost 9.6 10.2 9.3 8.9
    Source: CSO

    The construction sector, however, stole the limelight by growing 11.1% during the quarter, against 10.7% YoY growth during 1QFY07. This growth was led by continued spending of the government and private sector towards improving the country's poor road, port and airport infrastructure.

    As far as agriculture is concerned, while growth slowed from 3.8% in 1QFY08 to 3.6% in 2QFY08, it was still better than the 2.9% growth recorded in 2QFY07. As per the Department of Agriculture and Cooperation, a large part of this growth was due to higher production of pulses, which grew by over 16% compared to a zero growth for rice. Among the commercial crops, the production of oilseeds increased by 16%, while that of cotton and sugarcane is estimated to grow at 1% per cent and 0.1% respectively during the agriculture year 2007-08.

    Despite the decline in manufacturing and overall growth, what is however more heartening to note is the increase in investments. As a percentage of GDP, gross fixed capital formation increased from 28.6% and 29.6% in 2QFY07 and 1QFY08 to 30.3% in 2QFY08. Also, the government's final consumption expenditure, which declined from 12.7% in 1QFY08 to 9.7% in 2QFY08, was still higher on a YoY basis. With crude prices on a high and oil marketing companies regulated not to pass on the hike to consumers, there are expectations of the government pumping in more money into the oil pool account, which shall increase the expenditure levels going forward. Upcoming elections are also expected to affect a rise in the government's spending going forward.

    Conclusion
    Overall, in the medium term, the outlook for India's economic growth will depend a lot on the way the world economy behaves. Despite all talks of us decoupling from a US led global economy, the fortunes will still be affected by how the world economy (especially the US) shapes up going forward. This shall not only determine the performance of exports, but also the stance that the architects of the monetary policy at the RBI take.

     

     

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