If every cloud comes with a silver lining, then surely the slower inflation embedded in the GDP data released on 30 November would qualify for one? Implicit inflation derived from the GDP deflator confirmed a steady fall for two consecutive quarters; on a year-on-year basis, this lay in the 8.3-8.4% range, a full 5 percentage points below the January-March 2010 peak of 13.5%. This is just about the only cause for cheer. Otherwise, the 6.9% GDP growth (6.7% at market costs) is an unimaginable slide for the shining star that was India six quarters ago when post-crisis growth recovered to 10.1% in January-March 2010.
Clearly, inflation has taken its toll on the India growth story. On the demand side, every component of aggregate demand looked downwards except exports, which contributed 5.8 percentage points. The supply-side growth dynamics revealed the services sector as the only supporting segment, although slowing too. What lies ahead?
A man works at a textile factory in Ahmadabad. (AP/ File photo)
Monthly trade data released subsequently shows a sharp contraction in export growth to 10.6% in October - from a robust 38% in September – suggesting little support from external demand in the near-term. Indeed, practically all forward-looking gauges of economic activity indicate a slowdown ahead. The seasonally-adjusted HSBC Purchasing Managers’ Index shows that the health of the manufacturing sector deteriorated to 51.0 in November relative to 52 in October, even as the composite manufacturing and services sector index rose to a three-month high. The Organisation for Economic Cooperation and Development’s (OECD) Composite Leading Index for September, which has a good six-month lead over industrial activity, fell sharply. According to a recent research note by Nomura, this index has fallen the most for India (along with Thailand and Singapore) since June, indicating that the economy is “…losing growth momentum most rapidly”; worse, the report points out that the OECD’s CLI level in September is already below its December 2008 level.
These are disturbing signs and there is little in the output data to suggest future growth drivers. Fixed assets creation contracted 0.6% in the July-September quarter, which also showed that the investment share in GDP has dropped to 36.8% from the 39.8% peak in January-March 2010. Amidst falling exports and an investment standstill, how private consumption demand – this slowed for the fifth consecutive quarter - unfolds over the forthcoming two quarters is of critical importance. On this, more disaggregate data is showing mixed signs: Sales of nearly all consumer firms have exceeded expectations in the second quarter of 2011-12, growing by both volume and value; and consumer firms are launching new premium products. On the other hand, producers of consumer goods are seeing a drop in rural demand over the past six months, which is perfectly coincident with declining consumer goods production observed from the Index of Industrial Production.
There’s little doubt that inflation has weakened consumption, the income-sensitive component of aggregate demand being far larger than the interest-sensitive component. Near-term growth will thus depend heavily depend upon a brake on prices, for which the GDP numbers show a falling trend. But the October-December output growth might well be singed by currency depreciation.
Renu Kohli is a New Delhi based macroeconomist and former staff member of the International Monetary Fund and the Reserve Bank of India