India’s GDP growth rate shows an up-move in Q1
Sep 01, 2010

Author: PersonalFN Content & Research Team

GDP growth rate shows an up-move in Q1

(Source: CSO)

The Indian economy expanded at 8.8% in Q1 (April 2010 to June 2010) of FY 2010-11 , thereby inching-up from 8.6% growth posted in the previous quarter (January 2010 to March 2010). The Gross Domestic Product (GDP) (for Q1 of FY 2010-11) at the constant prices of 2004-05 is estimated at Rs 11,32,778 crore, as against Rs. 10,40,949 crore in Q1 of 2009-10.

This upward move was despite the concerns of inflation in the domestic economy and double-dip recession in the global economy; and was fuelled by robust manufacturing growth. The manufacturing activity grew at 12.4% (in Q1 of FY 2009-10 it was 3.8%) during the Q1 of 2010-11, while agriculture and construction activity grew at 2.8% (in Q1 of FY 2009-10 it was 1.9%) and 7.5% (in Q1 of FY 2009-10 it was 4.6%) respectively.

Even trade, hotels, and communication services rose by a handsome 12.2% (in Q1 of FY 2009-10 it was 5.5%). However financial, insurance and real estate services restrained the growth in the economy by expanding by just 8%, against a growth of 11.8% in the same period a year ago.

Commenting on the Q1 GDP number, Finance Minister – Mr. Pranab Mukherjee said, “The numbers are quite encouraging, more encouraging point is 12.4% growth which has been registered in the manufacturing sector. I think the highest growth rate in the last 11 quarters. I do hope it will be possible to maintain this level of growth”. He also exuded confidence and expressed that the economy will grow by not less than 8.50% - 8.75% this fiscal year, but mentioned that the economy will have to reach a 4.00% growth in the agriculture sector, to have sustainable growth.

While the GDP data looks impressive, what does it mean?

Creation of jobs:
As the economic growth takes place, the demand for goods will rise on account of consumer spending; however if high prices persist, then consumption will be compressed. For individuals it also lead to creation of jobs and increase in disposable income.

Rise in policy rates:
The central bank may take a clue from the economic growth rate data and increases policy rates (repo and reverse repo rates), making them more relevant to the current growth rate and also make an attempt to contain inflation, as the money supply increases. In our opinion, the Reserve Bank of India (RBI) may continue to adopt its calibrated exit path by raising policy rates by 25 basis points in its mid-policy review meeting (scheduled for September 16, 2010). Hence taking that view we may see interest rates on fixed income instruments such as FDs, CPs, CDs etc becoming luring, but that will also lead to your borrowing rates inching up.

Confidence in India Inc.:
The higher GDP growth rate may exude confidence in corporate India, which may lead to their capacity expansion (to meet rising demand). However, profits may remain under pressure of rising input cost (raw material cost) and cost of funds; which may have to be passed on to consumers – which would mean costlier goods and inflationary situation creeping in going forward.