Growth Accelerates to Near-Two-Decade High in India During FY 2006/07
The Indian economy expanded at its fastest rate in 19 years in FY 2006/07, posting ebullient growth of 9.4%.
Global Insight Perspective
Significance
Indian GDP grew by 9.4% in real terms over FY 2006/07 (ending 31 March 2007), after expanding by 9.1% in the final quarter.
Implications
Manufacturing output growth spurred by strong internal and external demand created fresh impetus, while services remained the economy's bedrock.
Outlook
Momentum is expected to moderate stably in the coming fiscal year as efforts by the authorities to curb potential overheating take effect. Global Insight projects growth of 7.9%, but risks remain very much weighted to the upside.
Momentum Sustains
The Indian economy continued its ascent in FY 2006/07 (ending 31 March 2007), expanding at its fastest rate since FY 1998/99. GDP grew by 9.4% in real terms, accelerating from the 9.2% rate recorded in FY 2005/06. The second consecutive year of plus-9.0% growth was achieved after the economy rebounded from a brief lull in the third quarter to grow by 9.1% in the three months through March. Growth rates for previous quarters were also adjusted upwards. Over the past two years, quarterly growth has averaged 8.8%, elevating from the 5.0-5.5% range recorded in the 1990s.
Implications and Outlook
Manufacturing has been the impetus behind India’s accelerated growth path. In the three months through March, the sector expanded by 12.4% and by 12.3% in the full fiscal year. The quarterly rate marked an acceleration on the 11.8% growth rate recorded in the three months through December, which represented a brief dip relative to the year as a whole. Manufacturing output has accelerated in response to strengthening internal and external demand, while capacity has been expanded by surging rates of domestic investment and rapidly increasing foreign investment. The lynchpin service sector, which fuelled the economy's renaissance in the 1990s, continued to record robust growth, fuelled by outsourcing and technology sectors. Trade, hotels, transport and communication expanded by 13.0% in the fourth quarter and by 16.7% on the year in FY 2006/07, while financial and associated services grew by 10.6% in the three months through March and by 16.2% in the full year. Concurrently, construction continued to record robust growth, reflecting the ongoing real estate boom with the sector expanding by 11.2% year-on-year (y/y) in the March quarter and by 10.7% in the full fiscal year. However, the agricultural sector, on which two-thirds of household income depends, continued to record slowing output growth. Agricultural output rose by just 2.0% following a 6.0% gain in FY 2005/06, underscoring current political preoccupations over productivity and profitability as farming communities continue to be crippled by debt.
Demand Diversifies
For the first time, the Central Statistical Organisation (CSO), which produces India's national account data, gave a breakdown of GDP in expenditure terms, providing an overview of demand drivers. In the final quarter of the year, investment rose at a robust rate of 14.1% on the year, slowing just marginally from the 15.5% gain recorded in the previous quarter. In FY 2006/07 as a whole, gross fixed capital formation rose by 14.6%. Stocks also continued to rise, by 10.2% on the year up from a 9.6% increase in the third quarter. Consumer spending, which accounts for around 55% of overall GDP, remained robust, rising by 6.0% on the year in the March quarter and by 6.2% for the full fiscal year. In tandem, exports have also gained traction, growing by 8.7% y/y during the quarter. For FY 2006/07 as a whole, exports grew by 8.6%. Exports are emerging as a primary driver of growth, reducing the economy's former anchoring on domestic demand.
Efforts to Rein in Exuberance
Domestic demand has been bolstered by robust credit growth, fuelled by buoyant levels of liquidity in the financial system. In its January quarterly review of monetary policy, the Reserve Bank of India (RBI) estimated that the liquidity overhang in the system stood at 897 billion rupees (US$20.8 billion) in the three months through December, although levels are still lower than in the previous two years. Money supply growth is currently running at around 19.0-20.0%—well in excess of broad economic growth. Liquidity has been inflated by surging foreign capital inflows generated by net capital inflows and booming service exports and remittances. Non-food credit growth is currently running in excess of 16.0%, and the funnelling of investment into certain sectors—particularly real estate—runs the risk of pockets of overheating emerging in the economy. The borrowing boom also threatens to undermine asset quality in the banking system. Housing, commercial real estate and personal loans are experiencing rapid growth. Private loan growth is currently running in excess of 30.0% y/y, while loans to commercial real estate have recorded annual growth of over 80% y/y.
As inflation strengthened, sparking fears that the economy could be overheating, the RBI acted to contain credit growth and temper domestic demand. The benchmark interest rate has been raised by seven times in the past 18 months. The repurchase (repo) rate now stands at a four-and-a-half-year high of 7.75%. The reverse repo and medium-term bank rate stand at 6.0%. Banks have also been instructed to curb loan growth, while reserve deposit ratios have also been increased. The RBI has also allowed the rupee to drift upwards, stepping back from interventions that have further inflated domestic liquidity. Although the RBI is likely to pause in raising interest rates to allow recent increases to work through the economy, it maintains a tightening bias. Inflation is still running at around 5.7% in excess of the central bank's 4.0-4.5% target for the calendar year.
Stable Moderation Expected
Growth is subsequently expected to moderate under these influences as domestic demand tempers and export competitiveness is dented slightly by exchange rate appreciation. Reinforcing that trend investment and consumption decelerated in the final quarter compared with previous quarters, while exports—despite rebounding from the contraction recorded in the previous quarter—remained down on the 18.0%-20.0% growth rate recorded formerly. Auto sales, a key indicator of household spending, have slowed to a two-year low in the past two months. Global Insight forecasts growth of 7.9% in FY 2007/08. However, the risks to that forecast remain weighted very much to the upside. Disposable incomes continue to rise at a rapid rate, particularly in urban areas, while foreign investment is accelerating, albeit from a low base. The external outlook also remains stable as accelerating growth in Japan and the European Union (EU) offsets an expected moderation of demand in lead U.S. markets as the correction in the housing market there unfolds. Growth may slow, but a soft landing will boost its sustainability over the medium term.
The Indian economy expanded at its fastest rate in 19 years in FY 2006/07, posting ebullient growth of 9.4%.
Global Insight Perspective
Significance
Indian GDP grew by 9.4% in real terms over FY 2006/07 (ending 31 March 2007), after expanding by 9.1% in the final quarter.
Implications
Manufacturing output growth spurred by strong internal and external demand created fresh impetus, while services remained the economy's bedrock.
Outlook
Momentum is expected to moderate stably in the coming fiscal year as efforts by the authorities to curb potential overheating take effect. Global Insight projects growth of 7.9%, but risks remain very much weighted to the upside.
Momentum Sustains
The Indian economy continued its ascent in FY 2006/07 (ending 31 March 2007), expanding at its fastest rate since FY 1998/99. GDP grew by 9.4% in real terms, accelerating from the 9.2% rate recorded in FY 2005/06. The second consecutive year of plus-9.0% growth was achieved after the economy rebounded from a brief lull in the third quarter to grow by 9.1% in the three months through March. Growth rates for previous quarters were also adjusted upwards. Over the past two years, quarterly growth has averaged 8.8%, elevating from the 5.0-5.5% range recorded in the 1990s.
Implications and Outlook
Manufacturing has been the impetus behind India’s accelerated growth path. In the three months through March, the sector expanded by 12.4% and by 12.3% in the full fiscal year. The quarterly rate marked an acceleration on the 11.8% growth rate recorded in the three months through December, which represented a brief dip relative to the year as a whole. Manufacturing output has accelerated in response to strengthening internal and external demand, while capacity has been expanded by surging rates of domestic investment and rapidly increasing foreign investment. The lynchpin service sector, which fuelled the economy's renaissance in the 1990s, continued to record robust growth, fuelled by outsourcing and technology sectors. Trade, hotels, transport and communication expanded by 13.0% in the fourth quarter and by 16.7% on the year in FY 2006/07, while financial and associated services grew by 10.6% in the three months through March and by 16.2% in the full year. Concurrently, construction continued to record robust growth, reflecting the ongoing real estate boom with the sector expanding by 11.2% year-on-year (y/y) in the March quarter and by 10.7% in the full fiscal year. However, the agricultural sector, on which two-thirds of household income depends, continued to record slowing output growth. Agricultural output rose by just 2.0% following a 6.0% gain in FY 2005/06, underscoring current political preoccupations over productivity and profitability as farming communities continue to be crippled by debt.
Demand Diversifies
For the first time, the Central Statistical Organisation (CSO), which produces India's national account data, gave a breakdown of GDP in expenditure terms, providing an overview of demand drivers. In the final quarter of the year, investment rose at a robust rate of 14.1% on the year, slowing just marginally from the 15.5% gain recorded in the previous quarter. In FY 2006/07 as a whole, gross fixed capital formation rose by 14.6%. Stocks also continued to rise, by 10.2% on the year up from a 9.6% increase in the third quarter. Consumer spending, which accounts for around 55% of overall GDP, remained robust, rising by 6.0% on the year in the March quarter and by 6.2% for the full fiscal year. In tandem, exports have also gained traction, growing by 8.7% y/y during the quarter. For FY 2006/07 as a whole, exports grew by 8.6%. Exports are emerging as a primary driver of growth, reducing the economy's former anchoring on domestic demand.
Efforts to Rein in Exuberance
Domestic demand has been bolstered by robust credit growth, fuelled by buoyant levels of liquidity in the financial system. In its January quarterly review of monetary policy, the Reserve Bank of India (RBI) estimated that the liquidity overhang in the system stood at 897 billion rupees (US$20.8 billion) in the three months through December, although levels are still lower than in the previous two years. Money supply growth is currently running at around 19.0-20.0%—well in excess of broad economic growth. Liquidity has been inflated by surging foreign capital inflows generated by net capital inflows and booming service exports and remittances. Non-food credit growth is currently running in excess of 16.0%, and the funnelling of investment into certain sectors—particularly real estate—runs the risk of pockets of overheating emerging in the economy. The borrowing boom also threatens to undermine asset quality in the banking system. Housing, commercial real estate and personal loans are experiencing rapid growth. Private loan growth is currently running in excess of 30.0% y/y, while loans to commercial real estate have recorded annual growth of over 80% y/y.
As inflation strengthened, sparking fears that the economy could be overheating, the RBI acted to contain credit growth and temper domestic demand. The benchmark interest rate has been raised by seven times in the past 18 months. The repurchase (repo) rate now stands at a four-and-a-half-year high of 7.75%. The reverse repo and medium-term bank rate stand at 6.0%. Banks have also been instructed to curb loan growth, while reserve deposit ratios have also been increased. The RBI has also allowed the rupee to drift upwards, stepping back from interventions that have further inflated domestic liquidity. Although the RBI is likely to pause in raising interest rates to allow recent increases to work through the economy, it maintains a tightening bias. Inflation is still running at around 5.7% in excess of the central bank's 4.0-4.5% target for the calendar year.
Stable Moderation Expected
Growth is subsequently expected to moderate under these influences as domestic demand tempers and export competitiveness is dented slightly by exchange rate appreciation. Reinforcing that trend investment and consumption decelerated in the final quarter compared with previous quarters, while exports—despite rebounding from the contraction recorded in the previous quarter—remained down on the 18.0%-20.0% growth rate recorded formerly. Auto sales, a key indicator of household spending, have slowed to a two-year low in the past two months. Global Insight forecasts growth of 7.9% in FY 2007/08. However, the risks to that forecast remain weighted very much to the upside. Disposable incomes continue to rise at a rapid rate, particularly in urban areas, while foreign investment is accelerating, albeit from a low base. The external outlook also remains stable as accelerating growth in Japan and the European Union (EU) offsets an expected moderation of demand in lead U.S. markets as the correction in the housing market there unfolds. Growth may slow, but a soft landing will boost its sustainability over the medium term.