Hard landing of Indian economy

So the December quarter was not the bottom after all. March quarter GDP growth coming in at an appalling 5.3% is not only far below the December quarter’s growth, but also much below the 5.8% growth notched up in the third quarter of 2008-09, at the time of the Lehman Brothers collapse. No wonder India’s growth story has been de-rated.

GDP growth for 2011-12 stands at 6.5%, lower than the 6.8% growth in 2008-09, the year of the Lehman crisis. The surprise is that while world GDP growth in 2011 was much higher than during the year of the Lehman collapse, growth in India and China is now lower. One reason is because high inflation has led to monetary tightening. Another is that at the time of the crisis, both India and China went in for a fiscal stimulus, which has since been withdrawn. Also, the developed economies had contracted much more sharply, so some rebound is in order. Chart 1 shows that growth in the United States and other developed countries has improved since the year of the Lehman collapse, but growth in India and China has slowed. A look at Chart 2 shows that many countries now have growth rates higher than India’s.

The GDP data show that the bottom has dropped out of manufacturing, with the sector contracting in the March quarter, well below its growth rate even during the post-Lehman period. The growth rate in three sectors----“mining & quarrying”, “financing, insurance, real estate and business services” and “community, social and personal services” has increased compared to the previous quarter. That industrial growth was slowing down was clear from the monthly numbers for the Index of Industrial Production. The March quarter GDP numbers now show that growth in the services sector, although still strong, is decelerating. Growth in services fell to 7.9% in Q4 from 8.9% in the previous quarter (Chart 3). Nevertheless, the services sector accounted for 86% of the GDP growth during the March quarter.

The expenditure side GDP data show a slight fall in year-on-year growth in consumption. Private final consumption expenditure went up 6.1% in the March quarter, compared to 6.4% in the December quarter. There was a dip in the growth of government consumption as well. Rather surprisingly, gross fixed capital formation growth was at 3.6% against a contraction of 0.3% in the December quarter. The data also show strong growth in exports, while import growth was muted. As a result, there was a massive increase in net exports (exports minus imports), which accounted for as much as 45% of the growth in real GDP at market prices for the March quarter , after adjusting for “discrepancies”. How far this is credible is anybody’s guess.

The question is: is this the bottom? We already have some data for the current quarter. The HSBC Composite Purchasing Managers’ index for April, which takes into account seasonally adjusted month-on-month growth for both manufacturing and services, was at more or less the same level as in March. But the external environment has deteriorated compared to the first quarter of the year. This should affect exports. Also, while international commodity and oil prices have fallen, rupee depreciation has limited the fall and capital inflows have suffered. One reason for a possible better showing in the June quarter lies in the base effect---GDP growth in the June quarter of FY12 was 8%, compared to 9.2% in the fourth quarter of FY11. However, much depends on whether that 8% is revised---the very low growth in the March 2012 quarter was partly because the GDP growth for the March 2011 base was revised up from 7.8% to 9.2%.

It is very likely that, faced with the dismal data, the Reserve Bank of India will cut rates. But the impact of that will only come with a lag. Also, on the other hand, lower growth could lead to a higher fiscal deficit. Economists are already revising their growth forecasts downward. Gaurav Kapur, economist with Royal Bank of Scotland at Mumbai, sums it up neatly when he says, “GDP growth in the FY2012-13 is likely to be around the same level as FY2011-12, as compared to earlier expectations of marginal improvement. In fact with downside risks getting stronger, growth in the coming quarters can continue to remain subdued.”

Graphic by Ahmed Raza Khan/Mint

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