New Delhi: A Confederation of Indian Industry (CII) study has said that high growth of the agriculture and industrial sectors are expected to catapult GDP growth to 7.2 per cent during 2005-06.

The study also said that the forecast for a normal southwest monsoon and strong growth in commercial bank credit to the farm sector could push agriculture growth to around 3 per cent during 2005-06 as against 1 per cent during the last fiscal year.

"Factors likely to yield higher growth in agriculture are projection of normal southwest monsoon, an improvement in distribution of quality certified seeds, higher than targeted growth in commercial bank credit to agriculture and a favourable trend reversal in the gross capital formation in agriculture," the study said.

The CII, however, cautioned about some downside risks for industrial growth for the current fiscal even while forecasting a 8.1 per cent growth for the sector during 2005-06. It said a further slow down of infrastructure sectors whose growth fell to 4.4 per cent in 2004-05 from 6.2 per cent in 2003-04 will impose a real constraint on industrial performance.

Secondly, the RBI projection for growth of non-food credit is 19 per cent for 2005-06, which is significantly lower than 26.5 per cent growth in 2004-05 and may result in lower investment demand by the private sector, the CII study said.

According to the report, the year 2004-05 witnessed strong industrial growth, with the index of industrial production rising by eight per cent in 2004-05, compared with 7 per cent in 2003-04.

This was based on robust capacity expansion, as evident by an increase of 12.6 per cent in the index of industrial production for capital goods, in conjunction with a near 24 per cent rise in imports of machinery and equipment.

The corporate sector, according to the CII report, had clocked a topline growth of about 21 per cent for the quarter January-March 2005. This is four per cent higher compared with the same period last year. Corporate profitability also remained strong, with operating profits growing by almost 30 per cent and post-tax profits by an even stronger 53 per cent.

Construction activity had grown by 5.7 per cent in 2004-05, and was likely to retain this momentum with further liberalisation of foreign direct investment in real estate. Based on strong growth sentiments, reported by members surveyed by the CII and a majority of sector associations reporting positive outlook, CII has forecast industrial growth at 8.1 per cent for 2005-06.

CII's report observed that the services sector had maintained its buoyancy in 2004-05, for the third year in a row. The report, however, states that the services sector has witnessed some decline in the growth of net sales and profits in the fourth quarter of 2004-05. Despite this, the report expects services sector firms to show a strong topline growth, as net sales have increased at almost 32 per cent from April to December 2004, compared with 19.2 per cent for the same period in 2003.

Tele-density had increased from 7.17 at the end of 2003-04 to 9.08 at the end of 2004-05 with mobile subscriptions growing by 55 per cent.

Software and IT services are estimated to grow by 28.9 per cent for the year 2004-05, with exports expected to record a growth of 32.3 per cent. The report predicts a strong services sector performance with a forecast of 8.3 per cent growth in 2005-06.

The report adds that while the economy has the support of growing momentum in the industrial and services sectors, a positive outlook for agriculture, and broad-based and strong exports growth, it also faces certain challenges.

These arise mainly from continuing firmness in international oil prices, rising US interest rates, management of burgeoning forex reserves and maintaining the much-needed fiscal discipline.
On the external front, the report states that in 2004-05, exports grew by a remarkable 24 per cent, with imports growing even more strongly by 36 per cent.

According to the report, exports to China and Hong Kong are increasing at a consistently high rate. This has resulted in China and Hong Kong together accounting for 9.7 per cent of India total exports, displacing UAE (8.7 per cent), and second only to the US, which has a share of 17.5 per cent in India's exports. However, the heavy concentration of primary commodities, specially iron ore, points to a degree of vulnerability in India's exports to China.