Home / Culture and Society / India’s Q1 GDP Growth Results are Impressive, But Inflation is Still a Concern

India’s Q1 GDP Growth Results are Impressive, But Inflation is Still a Concern

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Indian Economy

It is widely believed that the Asian emerging economies are leading the world economy to recover from the crisis of 2007, the worst since the Great Depression of the 1930s. After observing the GDP growth figure of 8.8% in the first quarter of FY 2010-11 (April 2010 to March 2011), it is understood that the expectations for India are not misplaced. The Planning Commission released the data for Q1 last Tuesday, showing GDP growth of 8.8%, surpassing the 8.6% of the previous quarter, despite partial withdrawal of stimulus measures. It is the highest growth rate since last quarter of 2006-07. The GDP growth of Asia’s 3rd largest economy after China and Japan is particularly notable because of the slow pace at which the GDPs of the developed economies like the US, Japan and the EU have grown in the same period.

As per the data released, the robust overall growth is driven by growth of 12.4% against 3.8% in the  manufacturing sector. Agriculture and allied activities also fared well, expanding by 2.8% against 1.9% in Q1 of FY10. India’s Prime Minister Dr. Manmohan Singh has been advocating that the agriculture sector must grow by at least 4% for India’s GDP to reach double digit figures. The Finance Minister, Pranab Mukherjee, expressed confidence that Indian GDP growth would register the targeted figure of 8.5%. The Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, is even more optimistic that GDP growth in the present fiscal year will surpass the targeted figure of 8.5%.

Stimulus withdrawal

India has resorted to a partial rollback of stimulus measures that were taken to prevent the economy from falling as a result of the global meltdown. The Reserve Bank of India (RBI) has increased excise duty from 8% to 10% in February ending. The key lending rate or repo rate at which the  RBI lends money to banks has almost been halved, from 9% to 4.75%, in order to pump cash into the economic system over the period from July 2008 to April 2009. It is again raised to 5.5% in 3 steps as a measure to roll back the stimulus package. Similarly, the Cash Reserve Ratio (CRR), by which banks have to deposit in RBI out of their cash reserves, is reduced from 9% to 5% in 6 steps after which it is hiked to 6% in 3 steps. Reverse Repo rate was also increased on similar lines. These are stimulus withdrawal measures to withdraw excess cash from the country’s economic system so as to prevent the economy from overheating and to prevent excess cash accrued in the economic system through various means from pushing inflation upwards.

Inflation Concerns

As GDP growth is at a fast pace, second only to China’s, it is a common concern there that there would be a high danger of inflation. The same is also happening in India. By the end of last financial year (2009-10), the headline inflation stood at 10.16%. The prices of essential commodities and durables have been very high since the mid-2009. Deputy Chairman of the Planning Commission Mr. Ahluwalia used to tell press people that there were no demand side pressures and only supply side constraints, but efects of the worst monsoon rains for at last 2 decades pushed  inflation into double digits. What is astonishing is this government did not take any single action to curb the inflation, because of which the people bored the brunt of high prices for every commodity. But, when they were pressurized by the national and international analysts and investors through their comments and articles on business and economic magazines Indian lawmakers began to express their vocal worries on stages, with reporters, etc. Inflation was worrisome, not because of common man’s suffering, but because of worries expressed by  billionaire investors. Well, that’s another topic.

So the point here is that India’s inflation began to worry the lawmakers in January 2010 and as GDP growth expectations were growing, the inflation figure of 11.04% by March 2010 attracted center spots on business pages. Mr. Ahluwalia picked up another tune saying “coming summer monsoon would drastically reduce the inflation.” He also began to offer ‘supply constraints’ as the main contributor to the big inflation figure from May 2010 onwards. Monsoon came and almost every region of India received good rainfall as expected by the forecast of the Indian Meteorological Department. Now as at the end of August 2010 the headline inflation stood at 9.6%,  a decrease by mere 1.44% in 5 months since the end of the last financial year. The Prime Minister expressed again his confidence to reduce the figure to 6% by December 2010. A notable point is that inflation figures projected by the Indian government hugely contradict with those projected by international institutions. For example India reported inflation as at the end of June as 10.55% whereas the website tradingeconomics.com, that provides extensive information on economies of nearly 250 countries, put the figure at 13.73% for the 30th of June, depending upon the data provided by Reserve Bank of India itself. These inflation figures are based on wholesale price index where in India, there is huge gap between wholesale and retail prices of commodities. Nobody even dares to try to analyze retail price statistics. It has been untouched part.  

Growing Pressures

The center-of-left Congress Party has made an objective for itself of controlling prices amid growing protests against rising prices. The Congress Party came to power for a 2nd time consecutively with popular support from mostly villages. Deregulation of petroleum prices, growing pressures to deregulate diesel prices also and increasing discontent among the toiling masses are contributing to the government’s dilemma in enacting highly awaited liberalization laws. It  somehow  passed the ‘Civil Nuclear Damage Liability Bill’ with the timely support of the main opposition party the BJP. (The BJP, of course, received messages from their imperialist bosses to support the bill otherwise of which the bill might have struck in the lower house.)  Though, financial ministry officials claim that the inflation reached its peak and RBI governor acknowledged that the headline inflation was easing, underlying prices still not reachable to common masses. With the summer monsoon delivering rainfall almost normal so far, demand for agricultural inputs has begun to increase. Longer queues in front of fertilizer and sees selling outlets became regular items for media coverage. Demands for agricultural inputs would contribute further to the headline inflation in coming two to three months. All these factors indicate inflation is definitely going to be a problem for policy makers who want to maintain growth momentum.

International Factors

There are also international factors that contribute to India’s inflation. The major economies of the world — the US, Japan and the European Union — have slowed down in terms of GDP growth in second quarter. Many analysts are expecting those economies to slow further in the second half of 2010. Actually there is an unanimity of forecasting slowdown in the US and the EU. On Monday, IMF chief economist Olivier Blanchard told a French newspaper that despite encouraging growth figures posted by the US (annualized rate of 3.7% for Q1 but 1.6% for Q2) and the EU, particularly Germany (Q2), both regions are expected to remain in slow pace of economic growth as per Reuters’ report. Apart from advising the regions on plans to be made to satisfy the financial markets he acknowledged that a slowdown in the US would have automatic impact on growth in short term on Asia. So, global slowdown is not a happy sign for India also when it comes to the balance between curbing inflation and maintaining growth momentum.

RBI Dilemma

The factors discussed so far, point out the fact that India is not poised to increase its interest rates aggressively, as a measure to curb inflation. On the other hand, the growth figure suggests that the RBI may carry on with its tightening of fiscal policy amid high inflation, a top concern for Indian regulator.  However as inflation is still in double digit figure some analysts are maintaining that the RBI may resort to hike interest rate by 50 basis points at least by the end of this year. The Reserve Bank of India has raised interest rates four times since March 2010. Policy makers are suggesting capacity constraints and supply side reasons are responsible for the stubborn headline inflation that stood at 9.97% in July and 9.6% at August end. As per wholesale price index, prices are still at levels of concern though it rose rather slowly last month in August. Now, the RBI is at cross roads where it has to maintain balance between curbing high inflation rate and maintaining growth momentum of 2nd highest rate after China. European countries are struck between fiscal tightening measures, something which is repeatedly being articulated by the IMF, and Obama’s warnings of not to be too aggressive in fiscal tightening that may affect the global growth. Here in India, RBI is in a similar situation, performing a tight rope walk amid growing requirements of inflation curbing and fiscal tightening. One has to wait and see what signs the RBI is going to offer at its next policy review meet on 16th September.

Confidence on growth

The Indian government is very confident of reaching targeted 8.5% GDP growth for the present financial year starting from April 2010 and ending with March 2011. While Manmohan Singh is very optimistic of curbing inflation rate to below targeted rate of 6% the Deputy Chairman of Planning Commission Montek Singh Ahluwalia is equally optimistic of reaching above the target of GDP growth. But the numbers are suggesting observing some caution as Industrial output in June grew at its slowest rate 13% over the past 13 months. Bloomberg has quoted the emailed statement of HSBC Holdings Plc as stating the index of new factory orders declined to 62 in August from 62.8 in July and exports slipped to 55.5 from 57.4 of July. They also reported that India’s manufacturing expansion also cooled  marginally in August.

India may be optimistic because of good monsoon rains so far and growing consumer demand for cars. Car sales in India rose at an annualized rate of 38% in July.  If monsoon rains provide a good harvest for farmers it would push up GDP growth rate to a great extent. A good harvest increases consumer demand, business activities and factory output also drive further inflation. Still, the poor delivery system for agriculture inputs like fertilizers and seeds may become a tough hurdle for farming sector production as happens every year. Corruption at all levels of lawmakers as well as bureaucracy is detrimental for achieving economic targets in India. India’s farm sector rose 2.8% last year and high figure is being expected for FY11 due to good monsoon rains. Some people are even expecting India may outperform China in coming years as slow growth for China for the next year also is seen. But it is unusually high level of optimistic estimation for India. Ultimately, India’s prospects are majorly dependent on the performance of agricultural sector as above 70% of the population lives in rural India and is dependent on the agricultural sector.

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  • kranti Sharma

    The figures of Economic Growth are doctored and therefore the country is being taken to brankruptcy by the clique in power. In India there are no correct ststistics of sowing available then how the department of statistics is estimating agri income? In the rainy months all MLAs demand compensation to farmers for excess rains and devastation of crops and in March same areas are claimed as having bumper crops. In the field of industry all factories are running on electricity. When India is having gaping shortfall of electricity generation (only 440kwh against Singapore 14000 kwh, Saudi Arabia 24000 kwh) USA 30000kwh), how factories run without electricity ? There is load shedding in every town how services can be given ? The laundry men have reveted to coal comsuming iron and poor people have reverted to lantern. In fact nation is going back to 18th century.