Global Insight Perspective | |
Significance | Gross domestic product (GDP) in real terms accelerated to growth of 9.3% in the three months through March. Full-year growth was subsequently revised up to 8.4%, from an initial estimate of 8.1%. |
Implications | Manufacturing and trade sectors drove growth, with additional impetus provided by robust expansion in construction and recovery in agriculture. However, the strength of domestic demand combined with high global oil prices to force the trade balance into record deficit for the fiscal year as a whole. |
Outlook | The near-term outlook remains buoyant, as all sectors of the economy record robust growth. Deterioration in the net export position, attendant on accelerated development, will be offset by the marked consolidation of external balances, affected since the early-1990s. |
Outperforming Even the Bulls
The Indian economy gained further momentum during the final quarter of fiscal year (FY) 2005, buoying full-year growth to unexpected highs. In the three months through March, gross domestic product (GDP) in real terms expanded by 9.3%. The rate stood as a marked acceleration from the revised 7.5% growth recorded in the December quarter, and represented the fastest annual gain for a quarter since the third quarter of 2003. Growth for the whole fiscal year is now estimated at 8.4%, up from an initial government projection of 8.1% and just shy of the two-decade-high rate of 8.5% set in 2003.
Momentum from Diversification
Dynamism during the March quarter came from the broad-based nature of growth, with all sectors gaining traction. Manufacturing output growth remained steady at 8.9%, strengthening from the 8.3% annual gain recorded in the previous quarter. For the year as a whole, the sector expanded by 9.0% year-on-year (y/y), building on growth of 8.1% in the previous fiscal year. Manufacturing activity continues to be stimulated by robust domestic demand and maturing export sectors. An upturn in agricultural production in the three months through March, following good monsoon rains, will have lent support to consumption, with two-thirds of households still dependent on the sector for income. Agriculture expanded by 5.5% y/y over the quarter, strengthening from 2.9% growth in the three months through December. Growth in the sector for the whole fiscal year stood at 3.9%, following a nominal 0.7% gain in FY2004.
In tandem, growth in the construction sector remains robust, reflecting in large part rising investment levels. The sector expanded by 12.0% y/y in the final quarter of the year, following growth of 11.5% in the previous three months, and by 12.1% in FY2005 as a whole, slowing just marginally from the 12.5% gain recorded in the previous fiscal year. Activity in the broad category of trade, hotels, transport and communications also proved buoyant, standing at 12.9% in annual terms in the three months through March, following a 10.2% annual gain in the previous quarter. For the fiscal year, the sector expanded by 11.5%, up from the 10.6% growth generated in FY2004. Finally, financial and real estate services also recorded strong growth, driven by heated activity in portfolio capital and asset markets, with the sector expanding by 12.9% in the March quarter and by 9.7% for the year as a whole.
Outlook and Implications
Market Volatility Unlikely to Affect Overall Growth
Domestic activity has been boosted by the relatively accommodative monetary stance, which remains broadly stimulatory despite recent interest rate increases by the Reserve Bank of India (RBI), with liquidity further amplified by surging inflows of foreign portfolio capital into equity markets. However, such flows remain volatile. Benchmark stock indices were hit by the global tide of negative sentiment towards emerging markets, as expectations of further increases in U.S. interest rates firmed. Despite today's strongly positive growth figures, the leading BSE Sensex shed around 5.0% following the publication of data showing that the trade balance incurred a record deficit of US$39.6 billion. Although export growth continues to gain traction, imports have been inflated by high global oil prices and boosted by intakes of capital and intermediate goods, as firms seek to expand capacity and the manufacturing base broadens. Market jitters reflect concerns over the capacity of the sovereign to finance a widening deficit on the current-account balance as the net export position deteriorates, if portfolio inflows weaken.
However, such fears are largely unfounded. India's balance-of-payments position has been transformed since its near-crisis in the early-1990s. External debt stocks have been paid down, while the country's foreign exchange reserves now rank as the fourth largest in the world. Moreover, the deterioration in the trade position is a function of the economy's robust growth and the development of manufacturing sectors geared to export - essential for a proliferation of growth from high-end service sectors. While the prospects of a further rate increase by the RBI have increased, in the context of the fourth-quarter outturn, the near-term outlook remains for vigorous growth. Manufacturing and service sectors continue to gain momentum, while export growth has accelerated steadily since early-2002, industrial production is improving and domestic demand is strengthening. Forecasts for rainfall to meet average levels in the current monsoon season lend further support to the growth outlook. Over the long term, political consensus is coalescing around the need for continued market reforms, the reinvigoration of which (from 2001) began to unlock the economy's potential, creating a sustainable policy platform for continued deregulation. Growth in FY2005 exceeded even bullish expectations - a pattern that may entrench over the medium term.