CRISIL Pegs India's GDP Growth at 7 Per Cent
Uneven monsoons and oil prices fail to dent growth prospects for FY06

September 28, 2005, Mumbai

CRISIL projects an overall GDP growth rate of 7 per cent in FY06, a tad higher than last year's 6.9 per cent. Agriculture, industry and services are projected to grow at 2.5, 7.4 and 8.5 per cent respectively in FY06.

India's growth performance has been quite impressive since FY04. After surging at 8.5 per cent in FY04, albeit over a low base, growth was a little lower at 6.9 per cent in FY05. The highlight of the recent growth surge has been the resilience of the non-agricultural sector, which recorded an average growth of 8.1 per cent between FY03 and FY05. Within non-agriculture, the resilience of the industry is evident from the fact that it has consistently improved its growth performance since FY03 despite poor monsoons and high crude prices. Buoyed by 9.2 per cent growth in the manufacturing sector, the overall industrial GDP grew at 7.7 per cent in FY05.

CRISIL's view is that if the economy continues with its growth momentum during FY06, then India's GDP growth average will exceed 7 per cent for a continuous three-year period (FY04-FY06), a feat achieved before only during FY95 to FY97.

Table 1: Real GDP Growth Forecast For FY06: CRISIL

	GDP Growth (%)
Agriculture	2.5
Industry	7.4
Services	8.5
Total	7.0

CRISIL expects that deficient rainfall during the month of August will further accentuate the adverse impact as August and early September rains are also vital for crop development. Our analysis of the past data shows that, from an agricultural production perspective, the rainfall in July is the most critical followed by August. The skewed pattern of southwest monsoons has therefore introduced some uncertainty with regards to kharif agriculture.

According to Dr. Subir Gokarn, Executive Director & Chief Economist, CRISIL, "One saving grace of the distorted pattern of rainfall has been that the poor rainfall during the month of August was primarily confined to the Northern States, which are comparatively well irrigated. Also, the kharif crop constitutes just above 50 per cent of the total agricultural production. And if it rains sufficiently during September as is expected, it would provide sufficient subsoil moisture to the land and improve the rabi crop prospects. For 2005-06 we expect agricultural GDP to grow at 2.5 per cent."

Industry, particularly the manufacturing sector has consistently improved its performance since FY03. What is notable is that high oil prices and volatility in agriculture have failed to mute the buoyancy in the manufacturing sector. In the first four months of this fiscal the overall industry registered a growth of 9.4 per cent with the manufacturing sector growing at a healthy 10.4 per cent. The growth has been supported by healthy demand from both the domestic and external sectors.

Dr. Gokarn added, "The threat of some downside risks from the demand side persists. The expected global slowdown in 2005 will tend to dampen the export demand. The expenditure compression by the government in the face of fiscal pressures can reduce the fiscal stimuli to growth. Rising interest rates in US, together with higher borrowing program of the government imply increased pressure on domestic interest rates. Oil prices remain a critical supply side worry, as its continuation at high levels will hurt the manufacturing and transport sectors."

Against this backdrop, we project Industry to grow at 7.4 per cent during FY06. The industry forecast corresponds to crude prices at around 55-60 US$/barrel. If oil prices continue to surge, it will tend to put downward pressure on the manufacturing sector and the transport sector.

Finally, the service sector is expected to retain its momentum of FY05. Apart from its own growth momentum, the healthy industrial performance will support services sector. GDP in services is expected to grow by 8.5 per cent in FY06.

Concluded.

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