The GDP (gross domestic product) numbers for the third quarter (Q3) of 2010-11 were announced on Monday, but were lost in the faux excitement of the Union budget. At 8.2%, it signals a significant slowing of growth from the 8.9% notched up in the first two quarters. Note that growth in Q3 of the previous year (2009-10) was 7.3%, lower than the 8.6% growth in Q2 of that year. So we can’t attribute the slowdown to the base effect.
•Consumption, External Sector Drive Growth (PDF)
•HSBC Manufacturing PMI(PDF)
Growth in manufacturing fell to a dismal 5.6% in Q3, but that is largely the result of a singularly large base. Growth in services, however, has been robust, in spite of high growth in the year-ago period.
More interesting perhaps are the numbers from the expenditure side. Here, it’s a tale of contrasts. While the rate of growth of private consumption continues to accelerate, undeterred by inflation, the rate of growth of capital expenditure (capex) is slowing. Private final consumption expenditure grew 9% year-on-year in Q3, compared with 8.6% in Q2 and 7% in Q1. In sharp contrast, growth in gross fixed capital formation slowed to 6% in Q3, from 17.8% in Q2 and 25.7% in Q1 of the current fiscal.
The slowdown in capex is corroborated by the results of capital goods companies in Q3. While consumption is able to shrug off the impact of higher prices, investment is being affected due to higher interest rates.
But one of the most important sources of growth in Q3 has come from an unlikely place. Apart from the domestic sources of growth, exports are added to the GDP figure and imports are subtracted to arrive at the external contribution to GDP. In Q3, imports actually fell by 7.3% compared with the same period last year—this could be due to lower capital goods imports as investment demand fell. Exports, on the other hand, were up 16.2%. The contribution of the external sector to growth in Q3, therefore, shot up.
With the recovery in the West, export growth will accelerate, as seen from the rise in the new export orders index in the HSBC Manufacturing Purchasing Managers’ Index for February.
The chart shows the contribution to growth in Q3, after adjusting for “discrepancies” in the GDP numbers. Notice that while consumption continues to be the most important driver of growth, the rise in exports and the compression in imports is the second highest contributing factor. Investment demand lags far behind.
Graphic by Yogesh Kumar and Sandeep Bhatnagar of Mint
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