India’s economy grows 8.6 per cent

Under the hot sun in the Mahabubnagar district of Andhra Pradesh, in southern India, the farmers are preparing for the worst.

The smallholders, who till the arid lands east of the state capital Hyderabad, are taking steps to protect their meagre livelihoods from poor monsoon rains. They are sharing groundwater, planting crops that require less water such as groundnuts, rigging up dripwater systems and digging weather-proof compost pits.

With the memory of the worst rains for 30 years last season still fresh in the mind, they are even opting for heat-resistant sheep breeds and, with the help of the World Bank and local non-governmental organisations, insuring against loss.

India, the world’s fastest growing large economy after China, has returned to almost where it was before the global financial crisis struck in October 2008.

On Monday, the Central Statistical Organisation showed the economy was in touching distance of a talismanic 9 per cent growth rate, having expanded 8.6 per cent in the quarter ending in March compared with the same period last year.

For the entire year, India’s economy grew 7.4 per cent. This year, Pranab Mukerjee, the finance minister, expects it to top 8.5 per cent on its way to 10 per cent in years to come.

India has weathered the global downturn well, but for its economic managers really to triumph they need to address the underperforming agricultural sector.

While industrial output has grown in healthy double digits, agricultural output rose only 0.7 per cent in the quarter to the end of March. In the previous quarter, it contracted 1.8 per cent, reflecting the hazards of a sector dependent on seasonal rains.

Most of India’s 1.2bn people still derive their income from the rural economy, although farm output now represents about 20 per cent of GDP. Over the past months, they have been hit by a double blight: rising prices and low output.

A good monsoon, likely to start this month, will bring relief. More abundant farm produce will help cool food prices rising at an alarming 16 per cent.

But neither this nor worries about European sovereign debt are likely to throw the Reserve Bank of India off its course of rising interest rates. Rising growth and “uncomfortably high” inflation are expected to induce the RBI to raise the repo rate – the rate at which the central bank lends to other banks – by 100 basis points over the next six months.

“The impact of euro-area developments and the upcoming monsoon season are the main uncertainties facing policymakers, but we continue to expect further rate increases in the months ahead,” said Brian Jackson, senior strategist at the Royal Bank of Canada.

Manmohan Singh, India’s prime minister, has come under sharp criticism for high prices. The Hindu nationalist opposition Bharatiya Janata party has decided that inflation is his Achilles heel.

“The first and the foremost flaw of the government is that the government has not taken any steps to fight the inflation,” says Arun Jaitley, a BJP leader.

He and his party say that prices have rocketed since polling day in parliamentary elections just over a year ago. They say that Mr Singh’s quest for 10 per cent growth in the “medium term” will punish its poor people most in the short term.

Mr Singh has responded by giving assurances that the government would help pull wholesale price inflation back to 5-6 per cent by December from near double digits.

Some observers warn of complacency in an economy whose fast-paced growth is largely supported by domestic consumption, and public spending is one of India’s biggest challenges. They have called for the speedier adoption of measures to address the inadequacies of education, health and infrastructure.

Senior policymakers have largely shrugged off fears of any fallout from the European sovereign debt crisis in spite of falls in the rupee and local stock markets.

Some analysts believe the confidence is not misplaced.

“Forget talk about drought and global financial jitters,” says Frederic Neuman, co-head of Asian Economics research at HSBC, the banking group. “India’s economy is shaking off such obstacles with apparent ease.”

Pleasing the drought-wary farmers of Andhra Pradesh may yet be easier than calming global jitters.

Montek Singh Ahluwalia, the deputy chairman of the powerful planning commission, describes India’s economic management during the downturn as “excellent”. But he also recognises that without a recovery in the global economy, India’s quest for higher growth will be much more difficult.

“Going from 9 per cent to 10 per cent is not impossible,” he says. “But obviously, it has to be based on what global conditions are like [and] how quickly will the world get back to normal.”