GDP numbers propel SENSEX

Defying expectation the stock market rose yesterday backed by, above expectations GDP numbers. The GDP registered a growth rate of 5.8% in the last quarter of FY’09 much lower than the previous year’s growth rate of 8.6% in the same quarter. The real GDP grew at 6.7% which was on the higher end of the 6.5%-6.7% growth projection given by the RBI in its monetary policy for the year 2009-10. The effect was felt in the stock market which saw the Sensex climb up 329 points to end up at 14,625, Nifty was up 111 points to close at 4448.

The very evident good sign from the GDP numbers is that the Government spending as a percentage contribution to the GDP has increased considerably over the last year. The government expenditure as a percentage to the GDP for the Q3 and Q4 stood at 13.1% and 14.3% for the FY’09 whereas it was 8.7% and 12% for the same period in FY’08.
The overall spending of the government stood at 11.6% of the GDP for the FY’09 compared to 10.1% for FY’08. These are clearly good signs as the Keynesian model points out that in case of a depression the Government should increase its consumption to give a boost to the manufacturing sector. Although there was a contraction in the manufacturing output by 1.4% but things would have been worse if the government spending had subsided. Another encouraging factor seems to be the rate of gross capital formation which showed an increase to 34.8% from last year’s figure of 34%.

There are clear signs signaling an economic recovery and a GDP growth rate between 5.5-6% for FY’10 is clearly on the cards, but let’s sits back with our fingers crossed and the hope that the economy still has some more pleasant surprises up its sleeves.