Growth robust at 8.6%,but markets fear inflation

The CSO’s advance estimate is higher than the 8.5 per cent projection by both the government and the Reserve Bank of India for the current fiscal. This also came as a relief to policymakers who were worried by spiraling inflation and volatile factory output. “An 8.6 per cent (growth) is quite encouraging despite all these difficulties. Now the other issue is inflation,trade balance… these are to be addressed,” finance minister Pranab Mukherjee said,adding that despite challenges “it is quite encouraging that it (GDP) is not deteriorating.”

The high growth prospects,however could not cheer markets. The BSE benchmark Sensex closed almost flat at 18,037.19 points on concerns of inflation and rising interest rates. Kaushik Basu,chief economic advisor,ministry of finance,said a 9 per cent growth is well within reach in the next financial year. “The prospects for the world as a whole are looking better but still there are uncertain clouds. In that scenario,growth of 8.6 per cent is absolutely remarkable. So the 9 per cent which we are aiming for next year is now looking well within target,” he said. While the growth rate for the next two quarters was looking encouraging,Basu said fluctuating industrial output remained a concern.

The country’s chief statistician TCA Anant was,however,a tad cautious and said the provisional estimate of 8.9 per cent GDP growth rate in the first half of the current fiscal year may be revised down.

“The CSO estimate is pretty much in line with our forecast of 8.7 per cent. There could be some upside revision in the figure later on,” said Deepali Bhargava,economist at ING Vysya Bank. The high growth estimate would have a tremendous impact on Budget decisions relating to fiscal deficit and tax,she added.

But the biggest concern continues to be high inflation. “There’s no big surprise in the growth forecast but we expect growth to moderate to about 8.3 per cent in 2011-12. High growth combined with the high inflation will give the RBI comfort to hike rates further,” said DK Joshi,chief economist at rating agency Crisil adding that this would also slow down private consumption and investments.

The gross fixed capital formation is projected to moderate marginally in 2010-11 to 31.6 per cent of the GDP from 32 per cent in 2009-10,marking a 9 per cent growth in investments YoY. Similarly,the private final consumption expenditure is likely to slow down to 57.6 per cent of the GDP from 58.5 per cent in 2009-10.