INDIA BUSINESS WORLD - MAY - JUNE 2007
The Month that was ...

GDP BEATS FORECAST WITH 9.4% GROWTH

The economy grew a whopping 9.4% in 2006-07, beating the advance estimate of 9.2% and pushing its absolute size to forty lakh crore rupees or $1 trillion at current market prices. And savings and investment touched record levels at 32.4% and 33.8% of GDP, respectively.

The only time the economy grew at a faster clip was in 1988-89, when the growth rate touched 10.5%, recovering from a crippling drought in the previous . In contrast the growth in 2006-07 comes on top of a 9% growth in 2005-06, 7.5% in 2004-05 and 8.5% in 2003-04.

Moreover, per capita income registered a growth of 8.4% in 2006-07, which is historic by Indian as well as world standards. Manufacturing and services were the main growth drivers while farm growth slackened compared to the previous year.

Finance minister P Chidambaram said the results reinstate the belief that the "Indian economy has shifted to a higher growth trajectory". He emphasised the criticality of growth saying "high growth generates its own momentum. With high growth comes high investment, which in turn, reinforces growth itself".

Mr Chidambaram drew attention to the linkage between high growth and high prices, saying "high growth leads to high demand, which puts pressure on prices until supplies catch up". Asked if the growth rates in the current fiscal would be higher, he said, "We have capacity to grow at the same high rate of growth but whether objective conditions will be able to deliver a growth rate higher than 9.4%, I can't say."

The aim is to keep the growth rate at a level higher than 9%," the minister said. According to data on revised estimates of annual national income, re-leased by the Central Statistical Organisation (CSO), the manufacturing and services sector grew 12.3% and 11%, respectively, in 2006-07. While the estimates for manufacturing are now higher than 11.3% projected earlier, the growth of services was estimated higher at 11.2% previously.

"Both consumption and investment have driven growth. The 9.4% growth is a step-up from the previous estimate of 9.2% owing to the robust manufacturing growth," economic advisory council member Saumitra Chaudhary said. Real per capital income, which reflects the average income of each individual in the population, also clocked in a higher growth of 8.4% in 2006-07 compared to 7.4% in 2005-06 and 5.7% in 2004-05.

DK Joshi, principal economist, Crisil, said, "The growth is mainly powered by non-agricultural sectors such as manufacturing and services, especially telecom, trade and construction." This also shows that monetary tightening measures taken by RBI are yet to impact growth, he added.

Mr Chidambaram said, "The time has come to shed lingering doubts about the sustainability of high growth and scepticism about the shift to a high growth trajectory. I would argue that the high growth that we have witnessed in the three years of the UPA government needs to be sustained with utmost care because that is the way forward to eradicate poverty, generate quality jobs and improve the human development indicators." The need for inclusive growth was also reiterated.

Releasing the audited figures for fiscal and revenue deficit, the minister said while fiscal deficit was at 3.5% of GDP, revenue deficit, as reported by the Controller General of Accounts, stood at 2% compared to the Budget estimate of 2.1%.

Allaying fears about the adverse impact of the rising rupee on certain sectors, Mr Chidambaram said the government has taken note of concerns of one or two sectors that have been affected and their problems would be addressed. "I have received representations regarding textile exports," he said. The rupee has been strengthening against the dollar for the last couple of months, touching a nine-year high of Rs 40.28 per dollar early this week.

Financing, insurance, real estate and business services clocked in a high growth of 10.6% in 2006-07, down from the earlier estimate of 11.1% and a little higher than 10.9% achieved in 2005-06. Mining and quarrying grew 5.1% (3.6% last year) while electricity, gas and water supply grew at 7.4% in 2006-07 against 5.3% last fiscal.

Referring to excessive foreign fund inflows on account of borrowings by Indian companies in the last fiscal, the minister said, "It reflects the ability of Indian industry to attract capital at very competitive rates. However, the other side is that it increases money supply and puts pressure on managing the supply. This involves a tight balancing act between RBI and the government. We've been fairly successful in balancing the need for capital and to maintain price stability. We need to continue to do the balancing act, we cannot turn away capital."

Inflows through the external commercial borrowings window crossed $25 billion in the last fiscal, way above the government's internal cap of $22 billion.