13 Apr 2009 2:24 PM

GDP to grow by 6.6% in 2009-10

Although agriculture has done much better in the second half of 2008-09 and industry was on a recovery path by January, fiscal 2008-09 would still suffer a lower growth than we had anticipated. This is because the trade and transport sectors continue to suffer steep falls in their growth rates. Trade in agricultural commodities like cotton and sugarcane has declined, foreign trade in general, has declined, freight movement on the railways and cargo movement on the ports have slowed down sharply. The expected recovery in the trade and transport sectors following the recovery in agriculture and industry is not seen in the data for January and February 2009. We therefore, now do not expect to see a recovery in the services sector growth in the January-March 2009 quarter.

We expect real GDP growth to moderate to 6.5 per cent in 2008-09. This would inch up a tad to 6.6 per cent in 2009-10.

Industrial recovery gains traction

Recent production/sales data on cement, steel and automobiles indicate a strong recovery during January and February in the industrial sector. Cement production grew by 8.5 and 8.6 per cent in January and February, respectively. Steel production grew by 1.6 per cent in January. Two-wheelers sales grew by 12.8 per cent and cars sales by a healthy 22.7 per cent in February. CVs reported slower sales fall in February.

The Index of Six Core Industries released by the Department of Industrial Policy & Promotion shows a growth of 2.2 per cent in February 2009, which is the highest growth rate clocked in the last four months.

However, cyclical agro-industries such as sugar and tea are suffering a fall in output. Because of this and because of the usual measurement problems, the IIP continues to show a slow growth. We expect the industrial sector (as measured by the IIP) to have concluded 2008-09 with a 2.7 per cent rise. We have revised our estimate for the construction sector upwards - from 6.5 to 7.5 per cent for 2008-09. As a result, the industrial sector as a whole is expected to record a growth of 4.3 per cent. This is very low compared to the 8.1 per cent growth recorded in 2007-08.

We expect the current recovery seen in cement, steel, automobile and in the core industries index to gather further momentum in the coming months. Two problems that the industry faced in the October-December quarter have been addressed - inventory levels have declined and liquidity has eased.

The continued growth in cement despatches, the quick recovery in the automobile and steel sectors indicate that the Indian industry continues to face strong domestic demand. Low inflation and low interest rates are expected to further strengthen this demand impetus.

The industrial sector continues to repose faith in domestic demand as its investment intentions remain robust. Several new capacities whose commissioning was deferred during October-December 2008 are now being commissioned. And, new capacity expansion plans are being announced.

Thus, we expect the industrial sector to record a higher growth of 6.1 per cent in 2009-10 compared to the expected 4.3 per cent growth of 2008-09.

Sonal Bhatia
bsonal@cmie.com