Yet again, official forecasts are set to be the last to be revised, lagging behind those of international and private agencies. This time, it is for growth in the gross domestic product (GDP) in 2011-12. The chief economic advisor, Kaushik Basu, stated this week that growth will be in the 7.5% to 8% range. And the Reserve Bank of India (RBI), which earlier acknowledged downside risks to growth from global conditions and the moderation in domestic demand in its 16 September inter-quarter review, will have to revise its growth projections in its mid-term review of monetary policy next week. Here’s why.
August’s industrial output data further confirmed that the Indian economy is cooling fast. Industrial production grew 6.3% year-on-year on a seasonally adjusted, three-month moving average basis. The weakening is distributed across components. Similar numbers for capital goods were 10.5%, down from 17% in July. Consumer goods growth was less affected, rising slightly to 5.5% from 4% in July; sequential momentum showed a 2% upturn too. But growth in consumer goods production remains well below the pre-crisis trough of 8.6% in June 2006, looking more like the last quarter of 2008.
An employee assembling new Mahindra XUV 500 at Chakan plant in Pune. File photo PTI.
From a forward-looking perspective, the most disturbing statistic is the rapid tumble in capital goods growth from its post-crisis peak of 41% in May 2010. This figure is keenly watched to see if it augurs well for investment revival that in turn will power future growth. Dismally though, growth in this variable too matches January 2009 rates. The news ahead is not too promising, either. The manufacturing Purchasing Managers’ Index (Markit) for September dropped to 50.4, the lowest since early 2009; new orders fell 1.8 percentage points while new export orders remained in contraction territory (46.4) even as they rose over August levels. And the OECD’s composite leading index (annual percentage change), which has a six-month lead over similar industrial production data (3-month moving average), predicts overall industrial growth is set to decelerate sharply ahead; sequentially, the index indicates the pace of contraction will moderate December onwards.
These trends are buttressed by the financial sector data, which suggests that sustained business spending is yet to resume. Although real credit growth has remained stable at 12% to 13% (after seasonal adjustment) for twelve successive months now, reports from bankers reveal that much of the 21% to 22% year-on-year nominal credit growth represents borrowings to finance working capital while term financing and other long-term credit for new projects actually show a decline. According to Citigroup research, there is a sharp rise in the number of stalled and binned projects whereas completion rates are slowing too; new private projects in the September quarter were one-fourth the values in June while shelved private projects doubled in value in the same period.
These trends will be reflected in overall GDP, currently projected to grow at 8% for 2011-12 by the RBI. For an outturn of that buoyancy, economic growth would have to average between 7.9% and 8.1% for the rest of the year (it grew 7.7% in April-June, 2011). This is unlikely. The economy grew 7.75% in the first half of this year, which has seen significant monetary tightening (1.75% rise in policy rates) and an adverse global environment with unparalleled volatility in prices and exchange rates, much of it concentrated in the second half. The full impact of these developments will be felt in the forthcoming quarters. There is no option but to peg growth lower in 2011-12.
Renu Kohli is a macroeconomist and a former staff member of the International Monetary Fund and the Reserve Bank of India.