India's economy grew 6.1 per cent in the June quarter from a year earlier, roughly in line with forecasts, as government stimulus measures helped spur demand, but a poor monsoon threatens to crimp growth later in the year even as it drives prices higher.
Weakness in private consumption combined with looming inflation complicates the Reserve Bank of India's exit from its expansionary monetary policy, with some economists expecting tightening measures to begin only in 2010.
"The RBI's dilemma, between hiking policy rates and hurting growth or staying pat but risking higher inflation expectations, only gets worse," said Nomura economist Sonal Varma.
Consumers' share of spending in the Indian economy shrank to 55.6 per cent in April-June from 58 per cent a year earlier, while the government's share rose to 9.9 per cent from 9.6 per cent on the back of stimulus spending, today's data.
"Government spending has held up demand. This was a period when elections were held, and this also would have supported demand," said DK Joshi, principal economist at ratings agency Crisil, who expects the central bank to hold off on a rate hike until 2010.
Officials expressed optimism on Monday about the economic outlook, despite persistent worries about a monsoon on track to be the worst in four decades. Agriculture accounts for only about 17 per cent of India's economy, but rural consumption makes up more than half of domestic demand.
"The worst may be over," said Montek Singh Ahluwalia, the influential deputy chairman of the government's planning commission, which charts India's five-year growth plans.
Finance Secretary Ashok Chawla predicted growth of above 6.5 per cent in the fiscal year ending March 2010, as strength in manufacturing and services offsets weakness in agriculture.
The economy accelerated from its 5.8 percent rate in the previous quarter on pick-ups in the mining, manufacturing, and electricity and services sectors from the previous quarter.
Growth was just above analysts' median forecast of 6 percent annual expansion, offering little fresh insight to the market on when the central bank was likely to start tightening policy.
"I think by January they would want to send some kind of monetary signal to thwart inflationary expectations," said Abheek Barua, chief economist at HDFC Bank in New Delhi.
"By the April policy meeting, we will see the first rate hike of 25 basis points preceded by a 50 basis point increase in CRR (cash reserve ratio)," he said.
The services sector, which accounts for more than 57 per cent of the economy's output, grew an annual 7.8 per cent in the June quarter, compared with 10.2 per cent in the year-ago period. Manufacturing output expanded 3.4 per cent in the June quarter while farm output was up 2.4 per cent.
Reuters