Ourviews | A structural slowdown

The gross domestic product (GDP) data for the fourth quarter of 2011-12 is to be released this week and the question is whether growth will be even lower than the third quarter’s 6.1%. The numbers are important because there was an expectation that growth had bottomed out in the December quarter. The composite Purchasing Managers’ Index (PMI) numbers showed that the month-on-month deceleration in growth had reversed in December and growth in the first two months of the current year was robust. The situation in Europe had improved and it was hoped that the worst was behind us there. This was also reflected in the return of risk appetite, a rebound in the rupee and in the stock market rally. There was a growing belief that we had seen the worst of inflation and that it would start to ebb soon, allowing the Reserve Bank of India to start reducing interest rates, which would trigger investment in fresh capacity by firms.

Those hopes have long been dashed. There are several reasons why growth in the fourth quarter may be lower than in the third quarter. The Index of Industrial Production growth numbers were, on average, weaker during the fourth quarter than in the third. The March quarter financials of the corporate sector show that sales growth has been faltering in contrast to previous quarters. Short-term interest rates remain very high, in spite of the 50 basis points cut in the repo rate. The composite PMIs show a deceleration in month-on-month growth starting from March 2012, which suggests that the services sector too is not doing so well. And, perhaps most importantly, the problems in Greece have deepened, with many analysts now putting the probability of a Greek exit from the euro at 75%. Risk aversion is back with a vengeance, the balance of payments is under pressure and the rupee has depreciated sharply. And finally, although the OECD leading indicator for India is still signalling a turnaround, the number for March indicates a slowing of momentum.

To be sure, growth in the fourth quarter of 2010-11 was lower than in the third quarter, which means that the base effect will be favourable. And month-on-month deceleration in PMIs may not translate into year-on-year slowdown in GDP. But it’s worth remembering that non-agricultural growth in Q3, 2011-12, was even lower than in the quarter in which the Lehman crisis occurred. That suggests the slowdown is not just cyclical, but structural in nature, a conclusion supported by the fact that, in spite of low growth, inflation continues to remain very high. It is no surprise therefore, given the government’s inability to carry out structural reform, that economists are busy derating the country’s growth estimates for the current year.

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