Economy’s on Cloud 9.2, inflation remains the irritant

Second-quarter GDP growth at 9.2%, first-half growth of 9.1%  equals 15-year record

NEW DELHI: India’s economic growth unexpectedly accelerated to 9.2% in the quarter ended September 30, 2006, driven by government and consumer spending that may force the Reserve Bank of India to raise its key interest rate a fourth time in a year to curb inflation.

The growth, which equalled a 15-year-high in the first half, reflects rising incomes and near-record bank loans that have made India the world’s fastest-growing major economy after China.

That encouraged finance minister P Chidambaram to predict that the current year would be “one of the best for growth”.

The flipside to this is that such hectic expansion raises anticipations of higher interest rates and inflation.

“Accelerating inflation is a real threat now,” Shuchita Mehta, an economist at Standard Chartered Bank in Mumbai, told Bloomberg. “Demand pressures are strong and we see the central bank increasing rates by at least 50 basis points by March 31.”

Reserve Bank of India governor Yaga Venugopal Reddy in his monetary policy statement on October 31 said demand pressures exist in the economy and that production capacity must match economic expansion to prevent inflation flaring up.

Chidambaram on Thursday conceded that inflation was a concern, though he dismissed interest rates worries saying there was enough liquidity in the monetary system.

Bibek Debroy, economist and PHDCCI secretary-general, said the numbers were as per his expectations. “I have always projected a 9% plus GDP growth for the year as a whole.”

The hardening of interest rates, Debroy said, could be one of the downside risks, but at the same time, he did not see any real possibility of interest rates going up this year.

Rajiv Kumar, economist and ICRIER director, believes the country is in a “sweet spot”, pointing to the current high consumption and investment demand that is spurring the engines. He felt inflationary pressure was not enough to prod the RBI into going for a rate hike.

Chidambaram said “this is a moment to savour”, speaking to reporters soon after the Central Statistical Organisation put out that the GDP estimates for the second quarter of 2006-07.

He sought to drive home the point that “9.1% growth in the first half this year is the highest since economic reforms began in 1991”. This growth was not “accidental,” he said, claiming all economic parameters were in fine fettle.  Only twice in the past has the quarterly figure of 9.2% been bettered. GDP grew by 9.3% in the fourth quarter of 2005-06 and 11.3% in the third quarter of 2003-04.

CII president R Seshasayee said the 9.2% second quarter growth, based on the sustained robust performance of the manufacturing and services sectors, is even more impressive as it builds on the high base of 8.4% GDP growth in the second quarter of 2005-06. There were, however, dark clouds around as concerns regarding agriculture remain, he said.  The agriculture sector did not perform well at 1.7% growth in the second quarter this year on a base of 4% in the same quarter last year.