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Economy may be poised for slower growth

Economy may be poised for slower growth
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First Published: Wed, Jun 01 2011. 12 10 AM IST
Updated: Wed, Jun 01 2011. 12 10 AM IST
New Delhi: The Indian economy may be poised for slower expansion than the projected rate of 9% in the current fiscal if current trends in the economy are any indication.
The latest data released by the Central Statistics Office (CSO) shows?that?the economy, dragged down by slowing investment levels, grew at its slowest pace in the last five quarters at 7.8% in the last quarter of 2010-11.
Consequently, CSO revised marginally downward gross domestic product (GDP) growth for 2010-11 to 8.5%, from its February estimate of 8.6%. The size of the economy is estimated at $1.75 trillion (Rs 80 trillion).
Rising inflation has prompted the Reserve Bank of India (RBI) to raise its policy rates, making bank loans costlier. Since March 2010, RBI has hiked its policy rate by 400 basis points to 7.25% in nine tranches. This has not only dampened investment sentiments, but also led to a squeeze on consumer spending.
Reacting to the latest data, finance minister Pranab Mukherjee said: “Growth (in the current fiscal) will suffer if inflation continues to remain high...there may be little less (growth) if inflationary pressure continues.”
Headline inflation based on wholesale prices stood at 8.66% in April. The All India Consumer Price Index Number for Industrial Workers released on Tuesday showed that inflation, based on consumer prices, accelerated to 9.41% in April compared with 8.82% in March.
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Growth in investment as represented by gross fixed capital formation slowed to 0.37% during the fourth quarter, the lowest in six quarters, compared with 19.48% a year ago. Private consumption held on to its robust growth at 8% during the January-March period compared with 7.23% during the same quarter a year ago, but slowed compared with the preceding quarter ended December when it grew by 8.6%. The government has already signalled that it will revisit the growth projection it made earlier this year.
Pronab Sen, principal adviser in the Planning Commission, said the deceleration in investment rate was obvious from the factory output of capital goods, which has been falling. “Unless the economy enters a new investment cycle, it may lead to a supply-side constraint in the second half of the year,” he added.
In 2010-11, agriculture grew by 6.6% (compared with 0.4%), industry by 7.8% (8%) and services by 9.4% (10%).
Rohini Malkani and Anushka Shah of Citigroup India said in a note that their projection of 8.1% growth for the current fiscal is based on the assumption of normal monsoon, pickup in investments in second half of 2011-12, continued buoyancy in private consumption and relatively strong exports. They said a less-than-favourable monsoon, resulting in a flat farm output growth, and lack of recovery in investments in the second half of the fiscal may result in bringing down GDP growth to the 7.2-7.6% range. So far the meteorological department has predicted a normal monsoon, which formally commenced on 29 May.
D.K. Joshi, chief economist at Crisil Ltd, said that in the overall global context, the current growth rate was not bad. “Current economic growth is nowhere near a disaster. It is only a moderation, which is expected, as RBI has taken many steps towards this end. The moderation is also good for the economy as it prevents transmission of fuel price hikes in the economy,” he added.
During the fourth quarter, agriculture posted strong growth of 7.5% owing to a low base in the previous year and a good harvest. Growth in mining and manufacturing slumped to 1.7% and 5.5%, respectively, signalling overall slowdown in industrial activities. In the services sector, growth declined in trade, hotels, transport and communications as well as in community services. Financing, insurance and real estate grew faster at 9% compared with 6.3% a year ago.
Kotak Mahindra Bank Ltd’s chief economist Indranil Pan said higher commodity prices, sticky inflation and slower global economic recovery would be a drag on the economy. “Economic growth will be weakest in the second half while growth and investment will pick up in the second half of the fiscal,” he added.
Deutsche Bank AG economists Taimur Baig and Kaushik Das maintained that the economy had sufficient momentum to grow at 8%. “We, therefore, see today’s data not getting in the way from the RBI hiking its policy rate by 25 bps (0.25 percentage point) during the 16 June monetary policy meeting,” they said in an advisory. RBI is scheduled to undertake its mid-quarter monetary policy review on that day. Rajeev Malik, senior economist with CLSA Singapore Pte Ltd, said he expects the policy rate to peak at 8.0% later in the year.
Graphic by Ahmed Raza Khan/Mint
Prashant Nanda and PTI contributed to this story.
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First Published: Wed, Jun 01 2011. 12 10 AM IST
More Topics: Economy | GDP | Agriculture | Farm | Manufacturing |