NEW DELHI: India’s economy gave yet another indication of its rapidly improving health, prompting greater ambition from policymakers still chary of withdrawing the stimulus medicine responsible for the recovery.

Gross domestic product (GDP) expanded by a surprisingly strong 7.9% during the July-September second quarter, its fastest pace in a year- and-a-half. The growth was driven largely by a pickup in manufacturing, increased government expenditure, robust investments and modest growth in farm output despite the drought, data released on Monday show.
“I am hopeful that if this trend continues, we will have higher GDP growth than anticipated. I hope it will be around 7%,” finance minister Pranab Mukherjee said here.

The economy had expanded 6.1% in the first quarter. The growth in the first half of the year is now a respectable 7% as against 7.8% during the same period a year ago. In the fiscal year ended March 2009, the economy grew 6.7%, its weakest in six years and way below rates of 9% or more in the previous three years.

While the stock market cheered the news with a 294-point rise in BSE’s benchmark index Sensex, yields firmed up in the bond market on heightened expectations of the Reserve Bank of India (RBI) hiking rates sooner than expected.

But Montek Singh Ahluwalia, deputy chairman of the Planning Commission, was of the view that troubles that could be induced by high inflation were not a worry now.

“I don’t believe there are serious worries on inflation, except food prices. Food prices are a matter of concern, but I don’t think conventional monetary policy will take care of that problem,” he said.

The central bank, too, was guarded in its opinion. Subir Gokarn, RBI’s deputy governor, said he would not be surprised if growth slowed in the December quarter.

“While it is a recovery and it seems to be gaining strength, we should not ignore the fact that it is still being driven substantially by public spending,” he told reporters.

In late October, RBI began its exit from an expansionary monetary policy by withdrawing some liquidity support measures and restoring the proportion of deposits that banks should invest in government bonds to 25% from 24%.
“Surprises in agriculture and industrial output, and our view that the services industry will gradually benefit from the industrial recovery suggests a more broadbased expansion in the current financial year,” said Sonal Varma of Nomura Financial Services, which raised growth projection by one percentage point to 7% after the second-quarter numbers were unveiled.

C Rangarajan, chairman of the Prime Minister's Economic Advisory Council that has forecast growth of 6.5% for 2009-10, said the second-quarter performance was much more positive than expected. “Overall growth of 6.5% may have to be revised upward,” he said.

The strong growth may put pressure on RBI to hike policy rates sooner than March 2010, as worries about inflation grow. Bond yields firmed up to 7.25%, six basis points up, as traders see a 25-basis-point hike in key policy rates by January 2010.

There will also be pressure on the government to cut expenditure and roll back stimulus measures such as the cut in indirect rates. The fiscal deficit between April and October 2009 was 61% of the target for the year, but slower-than-expected tax collections suggest the government could overshoot the target of 6.8% of GDP for the year.

Tanvee Gupta of Morgan Stanley pointed out in a note that “this potential rate hike is unlikely to derail the recovery, as we see this increase in policy rates as a move toward normalisation rather than tightening that hurts growth”.

Industry agreed that the recovery was driven in large measure by government expenditure and wanted the stimulus to continue. “It would be important for RBI to maintain policy rates at current levels in order to prevent the growth momentum from slackening,” industry body CII said.

Maruti Udyog, which makes every second car sold in India, said it managed to sell the highest number of cars this year. “A buoyant economy with higher growth will increase consumption and induce demand. It is expected to bring consistent double-digit growth in the auto industry in future,” it said.

Nikhilesh Bhattacharya, associate economist at Moody’s Economy.com, does not see the government moving to withdraw the stimulus immediately.

“Policymakers are unlikely to engage in any immediate action with regard to withdrawing stimulus, and will most probably review economic conditions early next year, when the effects of weak monsoon rains and drought on the broader economy will be more visible,” he said.

Source : Economictimes.indiatimes.com