On November 30, the Central Statistical Organisation released estimates of GDP (gross domestic product) for the second quarter (July-September 2009) of the current fiscal. The most striking feature of the estimates is the 7.9 per cent growth over the same quarter last year.

During the first quarter, the economy grew by 6.1 per cent which by itself was considered commendable, given that almost every country was still mired in recession then and posting negative growth. During 2008-09, the growth rate for the same quarter was 6.7 per cent. The full impact of the global financial crisis was felt only in the second half. The last two quarters of 2008-09 recorded 5.8 per cent growth each.

Above expectations

There are significant messages for policymakers, the markets and global financial institutions from the impressive growth data of the second quarter, which were far above expectations. For the stock market that was feeling the impact of the Dubai debt crisis, the national income data became a rallying point, lifting the Sensex and the Nifty above 17000 and 5000, respectively. These are the levels around which the more optimistic of the market watchers expect the benchmark stock indices to stabilise.

For the IMF, the World Bank and a few other institutions, there is a vindication of their earlier forecasts which saw India, China and a few other developing countries being in the forefront of a global recovery.

Policymakers see in this robust growth numbers the continuing beneficial effects of the stimulus packages. The soft monetary policy has also helped certain sectors, notably manufacturing, post a particularly strong performance.

Professional forecasters in an RBI survey released on the eve of the quarterly review in July had lowered their expectations of growth during the current year. Indeed, the RBI’s own estimation in July remained at a conservative 6 per cent with an upward bias. That was practically the same forecast made in its annual credit policy statement. The Prime Minister’s Economic Advisory Council was however more optimistic with its 6.5 per cent growth projection. The economy has now averaged 7 per cent growth over the first two quarters. It is highly likely that all official and non-official forecasts for the whole year will be revised upwards.

Industry, services up

Strong performances of manufacturing (9.2 per cent) and mining and quarrying (9.5 per cent) underpinned the second quarter growth. Over the same quarter last year, these had posted growth rates of 5.1 per cent and 3.7 per cent, respectively. Community, social and personal services were up by 12.7 per cent against 9 per cent. It is here most analysts see the continuing beneficial impact of the pay commission award.

Trade, hotels, transport and communication sector grew by 8.5 per cent which, though lower than last year’s 12.1 per cent, is still impressive considering that this sector is particularly susceptible to the recessionary conditions. Financing, insurance, real estate and business services rose by 7.7 per cent against 6.4 per cent. Electricity, gas and water supply was higher at 7.4 per cent, almost double the 3.8 per cent growth of last year. Construction was up by 6.5 per cent, lower than the 9.6. per cent a year ago.

All these data do indicate an allround robust performance in industry and services but two crucial questions arise. These are: (a) Will the second quarter performance be sustained? (b) What are the weak spots? and (c) Finally conceding that fiscal stimulus and monetary policy measures have played their part, is it time for the authorities to plan an exit?

The performance of agriculture during the second quarter should temper any exuberance on economic growth. Agriculture and allied activities grew by just 0.9 per cent, down from 2.7 per cent a year ago and 2.4 per cent during the first quarter of the current year. Agriculture’s performance would have been worse if the CSO data had included the estimated fall in production of rice, pulses and oilseeds during the kharif season. There is a consensus that agriculture will fare worse in the third quarter. How far the other two sectors will make up the decline in agriculture remains to be seen.

Worrisome fiscal deficit

The revival in private consumption expenditure and robust performance of the community, social and personal sub-segment of services are partly due to the stimulus packages which included cuts in indirect taxes. Yet for the Finance Minister the growing fiscal deficit is a matter of concern and he has already hinted at a return to the path of fiscal consolidation.

The strong economic growth in the second quarter may not be the trigger for the RBI to signal higher interest rates. Inflation has become the central bank’s major concern but the supply side factors that are driving up food and fuel prices are not amenable to interest rate changes. Hence, for the government and the RBI, apart from the second quarter GDP data, there are several other economic factors to be watched while planning their exit strategies.