Indian economy grows by 6.7 pc in 2008-09

New Delhi: India's economy grew a faster than expected 5.8 per cent in the March quarter from a year earlier, as a still strong services sector offset a decline in manufacturing.

The manufacturing sector contracted 1.4 per cent in the January-March quarter from a year earlier, while farm output grew an annual 2.7 per cent, government data showed on Friday.

For the full year, India's economy grew 6.7 per cent in 2008/09, sharply slower than the 9.0 or more in the previous three years.

The annual growth for India's fiscal fourth quarter was above a median forecast of 5.2 per cent in a Reuters poll, but sharply lower than the year-ago quarter's 8.6 per cent expansion.

Key Points

• Farm output in the March quarter grew 2.7 per cent from a year earlier vs a decline of 0.8 per cent in Oct-Dec quarter.
• Manufacturing fell an annual 1.4 per cent in Jan-March vs a 0.9 per cent rise in the October-December period.
• Construction grew an annual 6.8 per cent in Jan-March vs growth of 4.2 per cent in October-December.
• Trade, hotels, transport and communication grew 6.3 per cent in Jan-March from a year earlier vs 5.9 per cent in October-December.
• Financing, insurance, real estate and business services grew an annual 9.5 per cent in Jan-March vs 8.3 per cent in October-December.

Commentary:

ICICI Securities primary dealership Chief Economist A Prasanna: "This just confirms that after Q3 there was a sudden slowdown but things stabilised and improved in the fourth quarter. If this continues what we could see is in the first half probably the economy will continue to grow at a pace slightly below 6 per cent and in the second half it will grow closer to 7 per cent."

"There is a likelihood that the the second half growth could exceed 7 per cent so there is an upside to RBIs estimate of 6 per cent growth for the full year."

"I think policy rates have bottomed out so the next move for the policy rate is upwards, probably that will take some time. The central bank would prefer to pause and wait for concrete evidence of recovery before it starts hiking rates. We are looking at a 6-9 month period, where liquidity withdrawal will come first and possibly early next year rate hikes could start."

Macquarie Capital Economist Rajeev Mailk: "I think the GDP upgrade cycle has just started. We are past the eye of the storm. "There are two aspects. One is purely more stable political setting, along with improvement as far as capital markets and financing. Both mean that investment revival can come out earlier, with an additional push on infrastructure."

Bank of Baroda Chief Economist Rupa Rege Nitsure: "GDP growth of 6.7 per cent for 2008/09 is line with the RBI's projection, and way above the pessimistic forecasts given by the global think-tank. The GDP growth number for FY09 justifies the claim that India is dealing with the global crisis from a position of strength. "Fourth quarter is generally a better quarter than the earlier quarters, and 5.8 per cent in Q4 despite a severe industrial and export contraction shows that agriculture as well as certain components of the services sector are supportive of growth. This means that growth has bottomed out, or at least the deceleration has stopped. We may even see IIP (industrial output) in the positive territory from April onwards. But the only thing is that it will not be strongly positive to begin with, and we will see firmer signs of recovery only towards the end of the second quarter.

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Nomura economist Sonal Varma: "It has come in as expected, The pick-up in agriculture was expected, the big surprise has been on the financing, insurance, real estate component where GDP growth rate has come in at 9.5 per cent, unchanged from the last quarter. This is the sector which has seen a lot of stress during this period but GDP growth rate there remains very high. "Overall, a good set of numbers. We will be looking at reviewing our GDP forecast of 5.3 per cent for FY10. "On the rate side, we expect the RBI rate cycle is nearing an end."

Barclays Capital Senior Regional Economist Sailesh Jha: "Looking forward, we are maintaining our view that we are going to get 7 per cent growth in 09/10 and 7.5 per cent 10/11. We think basically that in terms of monetary policy, the central bank moves to neutral from loose stance from late Q3/early Q4 this calendar year. "We think that we have got a lot more currency appreciation to go. 45 per dollar for December, 44 for March (2010) and 47 for September."

Australia and New Zealand Banking Group Currency and Rates Strategist Han-sia Yeo: "The economy has clearly performed better than expectations despite the very challenging credit conditions. While the primary sector contributed to the higher headline, stabilisation in the services sectors are encouraging signs of a bottom in growth."

Anand Rathi Securities Chief Economist Sujan Hajra: "The number is broadly as expected. The major change between Q3 and Q4 has been agriculture, and so there has not been much of a surprise as agriculture has not been touched by the global meltdown. "So this is not a green shoot number, and it indicates that the economic recovery in India will not happen in FY10 and FY11. "Barring one-off events, like huge capacity increase in oil and gas sector and hike in salary of government servants, which might take the number to 6.5-7 per cent, the core component of the number will remain subdued at around 5.5 per cent in FY10 and FY11."

Yes Bank Chief Economist Shubhada Rao: "GDP at 5.8 per cent for Q4 FY09 has marginally surpassed our expectations. Q3 GDP was at 5.3 per cent. This probably marks the beginning of recovery, with Q3 being the lowest point in the trough. "Given this number we can expect limited or no action with respect to policy rate cuts."

Market reaction:

• The partially convertible rupee was at 47.34/35 per dollar, stronger than 47.45/46 before the data.
• The 10-year bond yield rose to 6.70 per cent from 6.68 per cent earlier.
• The 30-share BSE index extended gains to 2 per cent from 1.25 per cent earlier.

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Background:

• India's economy, Asia's third-largest is largely driven by domestic demand, and strong growth of 9 per cent or more in the past few fiscal years has attracted global attention.
• The global financial crisis has slashed demand and hurt key sectors such exports, manufacturing and real estate.
• Authorities have rolled out a slew of steps to tackle the slowdown, including aggressive interest rate cuts, tax and duty cuts and extra spending.
• Policy makers say there is a need for additional fiscal stimulus this year, but analysts say there is little fiscal space.
• The ruling coalition, which was re-elected with more seats in parliament earlier this month, is expected to announce fresh measures in the federal budget for 2009/10 in July.