New Delhi: India’s economic growth prospects suffered a setback after government data showed Asia’s third largest economy expanded at the slowest pace in nine quarters in the July-September period.
More worrying is that private consumption has been the growth driver, while investment levels in the economy contracted for the first time in two years. Consequently, private economists are now projecting growth of nearly 7% for 2011-12, compared with the initial government projection of 9%.
Second quarter GDP growth has slowed down to just 6.9%. So where is India’s economy headed? Executive editor Niranjan Rajadhyaksha analyzes
According to official data released by the Central Statistics Office, India’s gross domestic product (GDP) grew at 6.9% in the second quarter of 2011-12. During the first half of the fiscal year, GDP growth averaged 7.3% compared with 8.6% a year ago.
The statistics office also revised the GDP growth of the corresponding quarter last year from 8.9% to 8.4%, following the introduction of the new series of the Index of Industrial Production with a 2004-05 base in June this year. It caused the overall economic growth of 2010-11 to be revised downwards to 8.3% from 8.5% estimated earlier.
Finance minister Pranab Mukherjee sought to talk up sentiment even while he acknowledged the slowdown. “Considering the current global context and the slowdown in the domestic industrial sector, the growth performance is not all that disappointing,” he said.
Though Mukherjee expressed confidence that the economy would recover, economists differed.
“Going forward, due to a combination of both domestic issues (inflation, rates and policy inaction) and worsening global prospects, we expect GDP growth to slow further and average 6.8% in the second half of the fiscal,” Citi India economists Rohini Malkani and Anushka Shah said in an analysis. Citi India pared its growth forecast for the country to 7.1% for the current fiscal year this week, from its earlier projection of 7.6%.
Economists also expect the slowdown to worsen in 2012-13.
HDFC Bank Ltd chief economist Abheek Barua projects 7% GDP growth next fiscal year with a “downward bias”. “India’s growth story is temporarily on hold. If you speak to foreign investors, they are doing serious reassessment of both the Indian and Chinese economies,” he said.
However, Kotak Mahindra Bank Ltd chief economist Indranil Pan maintained that given the current global circumstances, even 7% growth was a “big positive”. He projects the economy to grow at 6.9% in the next fiscal year.
In the second half of the fiscal year, a slowdown in consumption expenditure may also kick in, coupled with the lower contribution of net exports to GDP, Barua said.
Ahmed Raza Khan/Mint
“These will intensify in the next fiscal. Fairly major supply bottlenecks will crop up in terms of power supply. Fiscal overstretch and global uncertainties will further add to the woes,” he added.
The Reserve Bank of India (RBI), in its macroeconomic policy review last month, had warned that the buoyant export growth observed in the first half of the current fiscal year may not hold on account of sluggish growth in the advanced economies and the further deepening of global uncertainties.
RBI said growth risks have increased on global headwinds, while inflation continues to be sticky, adding to the complexity for monetary policy. However, it added that growth may moderate slowly and not fall to the levels seen during the post-Lehman crisis.
The origin of the current slowdown is home-grown to a large extent, Pan said.
“The inability (of the government) to push through reforms is puncturing the overall (growth) story of India,” he said. “The view of foreign investors at present is not very sympathetic toward India. We should consider ourselves very lucky that not much outflow of funds has happened from the domestic economy.”
The contraction in investments was not on account of the rise in interest rates, he said. “If demand is firm, then companies expand capacity. In the current uncertain environment, taking ruthless business decisions is very difficult,” Pan added.
RBI has raised policy rates 13 times since March 2010 to curb inflation. Headline inflation stood at 9.7% in October.
In the second quarter, growth in investment contracted to 0.6% from a 7.9% expansion in the first quarter. However, private consumption growth held up, growing at 5.9% compared with 6.3% in the previous quarter.
Barua maintained that growth in consumption could get reversed going forward. “Usually, consumption responds with a lag to slowdown in investment,” he said.
During the July-September quarter, manufacturing growth slumped to 2.7%, while mining production contracted by 2.9%. The construction sector improved its performance to 4.3% from 1.2%. While the agriculture sector grew at 3.2%, the electricity sector registered a robust growth of 9.8%.
While industrial growth slumped to 3.2% in the same period, growth in services held up at 9.3% against 10% growth in the previous quarter, mostly due to a robust growth in the financial services sector.
Economists, however, fear that growth in services will slow down. “Though the services sector is relatively holding up, one has to remember that the PMI (purchasing managers’ index) is in the contraction zone. There needs to be some amount of caution as well on this front,” Pan said.
Both Barua and Pan expect RBI not to cut policy rates before the second half of the next calendar year given the prevailing concern over high inflation. “Before any rate cut, RBI may consider a cut in cash reserve ratio to boost liquidity in the domestic economy,” Barua said.