If the Central Statistical Organisation’s (CSO) advance estimates for GDP growth in 2011-12 are correct, investment demand is in for a substantial slowdown in the current half of the year. For instance, year-on-year growth in gross fixed capital formation (GFCF) has been estimated to slow from 14.9% in the first half of the year to 2.6% in the second half.
Also See | Growth Slows In Most Sectors of The Economy(PDF)
True, part of the reason for the low growth is simply a higher base—growth in capital expenditure (capex) was much higher in the second half of 2009-10 than in the first half. But the fact remains that growth in GFCF in the second half of 2010-11 is estimated to be a mere 0.9% more than GFCF in the first half.
Low demand for capital expansion seems to be reflected in the import figures. CSO predicts import growth will slow to 4.3% in the second half of the fiscal year from 8.6% in the first half. Since a lot of machinery used for capital expansion is imported, that may be a reason why import growth is expected to decline.
Imports during the second half of 2010-11 are projected to be just 1.6% more than in the first half. A slowdown in capex not only hurts growth later on, but also means more inflationary pressures, as supply will not expand to meet demand.
GDP growth at factor cost (at 2004-05 prices) is expected to slow from 8.9% in the first half to 8.3% in the second. But as the chart shows, sectors such as agriculture, finance, insurance and real estate are estimated to grow more strongly in the second half than in the first. Export growth, too, is higher, thanks to a stronger global economy.
The manufacturing sector shows a loss of momentum, though again a large part of this is due to the base effect. But the output from construction during the second half is just 2.8% more than in the first half, which is a depressed period for the sector on account of the monsoon. The contribution of the government sector has also declined considerably, with state consumption falling in the second half.
The data does seem to show that business investment is suffering from a lack of confidence and perhaps from high interest rates.
Graphics by Yogesh Kumar/Mint
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