So far so good
Industrial growth will moderate but the economic recovery will now be driven by agriculture and services.
It has been a season of despair for the financial markets globally. Good news certainly seems to be in short supply these days. Indeed, with global markets reeling under the pressure of a lingering debt crisis in Europe and the likelihood of a prolonged subtrend growth path in the US, pleasant surprises such as the Q2 FY 2010-11 GDP growth estimates are certainly most welcome.
At 8.9 per cent, the growth was significantly higher than the market expectations of just over eight per cent. It was even unchanged from the upwardly revised reading of 8.9 per cent for the first quarter. While industrial growth came in at about nine per cent and was more or less in line with our estimate, the real kick in growth, undoubtedly, has come from a higher than anticipated growth in agriculture and services. The agricultural sector grew by 4.4 per cent while services grew by a strong 9.8 per cent.
Given the buoyancy in both services and agriculture, we are revising our growth estimates for the fiscal year to 8.8 per cent from 8.5 per cent. But industrial growth is likely to moderate significantly in the second half of the fiscal. I would put it at about seven per cent from 10 per cent in the first half. However, agriculture and services are likely to prop-up the economy going ahead. Let me explain. Agricultural growth could actually double in H2 FY '11 to about 6.6 per cent while services growth is likely to remain robust at 9.7 per cent.
My estimates for agriculture are based on the longer monsoon season which has meant that sowing conditions for the winter crop have been good. The Q2 FY '11 growth reading does not fully reflect the kharif harvest and this is likely to be visible only in Q3 FY '11. This, along with a strong rabi output, is likely to mean that agricultural growth would gain traction. The buoyancy in services growth, I feel, would be on account of two reasons - government spending on social services which has failed to level off despite the unwinding of last year's fiscal measures and a good showing by private sector services such as trade, transport and communication driven by favourable demographics and low penetration.
But is the tapering off of industrial growth a cause for concern? True, growth has eased considerably from 11.3 per cent last quarter and is likely to enter a consolidation phase for the remainder of the year. However, notwithstanding my estimate of a moderation in industrial growth going ahead, we continue to remain sanguine about the underlying momentum in the sector.
My comfort primarily comes from a particularly impressive set of demand side growth numbers. Further, despite the buildup of inflationary pressures over the last year, domestic private consumption remains strong and has successfully taken over from fiscal stimulus measures and government spending in driving broader economic growth. So, my sense is that while industrial growth is likely to moderate from H1 FY '11, it is likely to settle at a level higher than that indicated by the alarmingly feeble growth in the index of industrial production in September (4.4 per cent).
The GDP growth estimate is unlikely to change the course of monetary policy action in the near term. While the Q2 FY '11 data implies that growth conditions remain strong, food inflation has been easing steadily and global commodity prices have cooled amidst a fresh round of risk aversion.
The author is Chief Economist, HDFC Bank
Abheek Barua
Given the buoyancy in both services and agriculture, we are revising our growth estimates for the fiscal year to 8.8 per cent from 8.5 per cent. But industrial growth is likely to moderate significantly in the second half of the fiscal. I would put it at about seven per cent from 10 per cent in the first half. However, agriculture and services are likely to prop-up the economy going ahead. Let me explain. Agricultural growth could actually double in H2 FY '11 to about 6.6 per cent while services growth is likely to remain robust at 9.7 per cent.
My estimates for agriculture are based on the longer monsoon season which has meant that sowing conditions for the winter crop have been good. The Q2 FY '11 growth reading does not fully reflect the kharif harvest and this is likely to be visible only in Q3 FY '11. This, along with a strong rabi output, is likely to mean that agricultural growth would gain traction. The buoyancy in services growth, I feel, would be on account of two reasons - government spending on social services which has failed to level off despite the unwinding of last year's fiscal measures and a good showing by private sector services such as trade, transport and communication driven by favourable demographics and low penetration.
My comfort primarily comes from a particularly impressive set of demand side growth numbers. Further, despite the buildup of inflationary pressures over the last year, domestic private consumption remains strong and has successfully taken over from fiscal stimulus measures and government spending in driving broader economic growth. So, my sense is that while industrial growth is likely to moderate from H1 FY '11, it is likely to settle at a level higher than that indicated by the alarmingly feeble growth in the index of industrial production in September (4.4 per cent).
The GDP growth estimate is unlikely to change the course of monetary policy action in the near term. While the Q2 FY '11 data implies that growth conditions remain strong, food inflation has been easing steadily and global commodity prices have cooled amidst a fresh round of risk aversion.
The author is Chief Economist, HDFC Bank
