New Delhi, Nov. 30: The economy fed itself ravenously on the government’s stimulus measures to grow 7.9 per cent in the second quarter as the rest of the world continues to come to terms with the impact of recession.

“The stimulus we invested in has paid dividend. I hope it will be possible to end the year with 7 per cent plus growth,” said finance minister Pranab Mukherjee soon after the GDP growth figures were released by the Central Statistical Organisation today.

However, the rapid growth has sparked a debate on whether the time is ripe for the RBI to raise interest rates and the government to roll back its stimulus measures.

Analysts expect inflation to become more acute only in early 2010, which may prompt the RBI to go in for a rate hike in February.

On rolling back central government reliefs, finance ministry officials said, “Today’s robust figures open up the debate on the timetable for winding down the stimulus. Does that start by chopping off the tax giveaways from the next budget or should they be staggered?”

The second quarter growth indicates that industry may not require crutches. Manufacturing expanded 9.2 per cent in the September quarter as consumers stepped up the purchases of cars and consumer durables.

Car sales grew a massive 31 per cent in July followed by 25 per cent growth in August and over 20 per cent in September. “Consumer goods output and sales increased sequentially for three months in succession,” said A. Prasanna, head of research, at ICICI Securities.

Analysts are divided over the course of growth in the next two quarters.

Planning Commission deputy chairman Montek Singh Ahluwalia said that “this performance does suggest that there may well have to be an upward revision in GDP growth of 6.5 per cent, which has been projected so far”.

RBI deputy governor Subir Gokarn said, “We should not ignore the fact that it (growth) is still currently being driven substantially by public spending.

“A recovery will only be sustained if private sector through consumption, investment and exports starts to stabilise,” he said.

Rupa Rege Nitsure, chief economist of the Bank of Baroda, is worried about agriculture.

“A sharp contraction in agriculture is expected in the third quarter. While there will be a decline in kharif production because of deficient rainfall, this will impact rural consumption which can pull down the overall growth,” she said.

“Unless there is a noticeable improvement in private consumption and investment demand, we cannot say that the GDP growth this year will be around 7 to 8 per cent. My estimate is that it will be 6.5 per cent with a marginal upward bias,” she added.

Abheek Barua, chief economist at HDFC Bank, said he was upbeat as agriculture growth was likely to be stronger than expected.

“Indeed, there could be significant positives by way of a pick-up in rainfall towards September 2009 and this, along with healthy prospects for the winter crop, could mean that we could be looking at a flat agricultural growth figure instead of a decline of 1.5-2 per cent. This should translate to additional support for the industrial sector with rural demand holding out much firmer than expected,” he said in a note.

One compulsion to wind down the stimulus is the high fiscal deficit, which stands at Rs 2.45 lakh crore in April-October against Rs 1.17 lakh crore in the same period a year ago.

During this period, tax collections fell 8.1 per cent to Rs 2.14 lakh crore from Rs 2.32 lakh crore.

“The government could withdraw the stimulus (excise duty cuts) for fast-growing sectors as the Centre’s revenue position does not look too good,” D.K. Joshi, principal economist with rating agency Crisil, said.

Finance ministry officials said the government must continue with the incentives for exporters. The economic recovery in the West is yet to materialise, while the Dubai crisis has induced a fresh round of uncertainty.