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On a robust growth path

The more than expected GDP growth of 9.3 per cent registered in the first quarter of 2007-08 is partly attributed to a modest revival in agriculture. According to CSO statistics released recently, agriculture grew by 3.8 per cent compared to 2.8 per cent a year ago. The South-West monsoon, now drawing to a close, has by and large been normal although the final picture will emerge only after some time. A successful Rabi season will mean an increase in wheat arrivals in the market. With the output of coarse cereals and pulses also going up, one can expect good news on the inflation front as well. The recent increase in inflation has been largely due to the rise in the prices of food items including wheat. It is likely that the country will not have to import wheat, which in any case was proving to be expensive, given the unprecedented global shortages. Electricity, another perennial laggard, has grown by 8.3 per cent over the comparable period last year, when it recorded an increase of 5.8 per cent. However, it will be naïve to conclude, based on their performances in one quarter, that agricultural recovery is finally under way or that some solutions have been found to the serious infrastructure deficiencies in the power sector.

Manufacturing grew by 11.9 per cent during April-June, slightly lower than last year’s figure of 12.8 per cent. It is noteworthy that the momentum has continued well into the second quarter as the Index of Industrial Production numbers show. However, manufacturing, more than other sectors, is bound to feel the impact of recent monetary tightening. Construction, a key driver of growth, might see a moderation if, as reported, banks become more choosy about home loan borrowers. In fact, the effects of the higher interest rates and other liquidity tightening measures will affect the growth numbers after a lag, even though they might have already succeeded in restraining demand side factors driving up inflation. The economy which grew at 9.4 per cent may not be able to sustain that pace in the coming quarters. Global factors such as the turmoil in the U.S. financial markets will take their toll on the domestic economy. Recent corporate results seem to presage a slow down, though the evidence is by no means conclusive. Beyond a point, it is difficult to extrapolate from the quarterly economic data and make, with any degree of confidence, a projection that will hold over the medium term or even over the rest of the year. The latest GDP growth data are no doubt encouraging but they do not by themselves indicate that the economy will grow at the same pace over the next nine months.

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