News Room - Business/Economics

Posted on 02 Sep 2009

India’s economy grows 6.1% in June quarter

India's economy grew 6.1% in the June quarter from a year earlier, roughly in line with forecasts, as government stimulus measures helped spur demand, but a poor monsoon threatens to crimp growth later in the year even as it drives prices higher.

Weakness in private consumption combined with looming inflation complicates the Reserve Bank of India's exit from its expansionary monetary policy, with some economists expecting tightening measures to begin only in 2010.

"The RBI's dilemma, between hiking policy rates and hurting growth or staying pat but risking higher inflation expectations, only gets worse," said Nomura economist Sonal Varma.

Consumers' share of spending in the Indian economy shrank to 55.6% in April–June from 58% a year earlier, while the government's share rose to 9.9% from 9.6% on the back of stimulus spending, yesterday's data showed.

"Government spending has held up demand. This was a period when elections were held, and this also would have supported demand," said D.K. Joshi, principal economist at ratings agency Crisil, who expects the central bank to hold off on a rate hike until 2010.

Officials expressed optimism yesterday about the economic outlook, despite persistent worries about a monsoon on track to be the worst in four decades. Agriculture accounts for only about 17% of India's economy, but rural consumption makes up more than half of domestic demand.

Finance Secretary Ashok Chawla predicted growth of above 6.5% in the fiscal year ending March 2010, as strength in manufacturing and services offsets weakness in agriculture.

The economy accelerated from its 5.8% rate in the previous quarter on pick-ups in the mining, manufacturing, and electricity and services sectors from the previous quarter.

Growth was just above analysts' median forecast of 6% annual expansion, offering little fresh insight to the market on when the central bank was likely to start tightening policy.

"I think by January they would want to send some kind of monetary signal to thwart inflationary expectations," said Abheek Barua, chief economist at HDFC Bank in New Delhi.

The services sector, which accounts for more than 57% of the economy's output, grew an annual 7.8% in the June quarter, versus 10.2% in the year-earlier period.

Manufacturing output expanded 3.4% in the June quarter while farm output was up 2.4%.

In the 2008/09 fiscal year, India's economy grew 6.7%, its weakest in six years and well below rates of 9% or more in the previous three years. — Reuters

Just as early signs of recovery were visible with rising sales of cars and homes, the economy was jolted by the worst rainfall since 1972, with drought-like conditions engulfing 40% of the country's districts.

However, last week the Reserve Bank of India warned the poor monsoon was more likely to drive inflation than to curb growth. The index of food prices jumped 13.3% in the year through Aug 15, even as the wholesale price index fell for an 11th week.

The central bank cut its key lending rate by 425 basis points between October and April, while the government has slashed duty rates and stepped up spending to pump prime the economy and prevent massive job losses.