These pages have argued for long that paralysis in policymaking and a worsening fiscal and monetary policy mix would have a detrimental effect on growth. The evidence—for any remaining optimist—came on Wednesday. The growth numbers for the second quarter (Q2) of FY12 showed a contraction in investment for the first time since 2009. Growth is now based largely on consumption growth. And even those numbers are not anything to cheer about. Overall, the economy grew by 6.9% in the second quarter this year. The number in the same period last year was 8.4%.
In Q2 FY12, investment —gross fixed capital formation—contracted by 0.6% (year-on-year, or y-o-y). It grew 10.3% during the same period last year. Total consumption grew 5.6% (y-o-y) compared with 8.5% during the same period last year. Sequentially, consumption growth has been virtually flat: in the first quarter of FY12, consumption rose 5.7% (y-o-y). While expenditure data is often marked with inaccuracies, the broad picture these numbers portray tallies well with reality. Consumers are buying fewer automobiles, homes and other items. The only expenditure item that remains robust—unsurprisingly—is public consumption (government spending) that grew by 4% (y-o-y).
One big reason for this state of affairs is the adverse fiscal and monetary policy mix that prevails now. The government has been busy spending while the central bank has been tightening its fist. High interest rates have not only raised the cost of borrowing for private companies, but have also hit their appetite for investment.
Getting out of this hole will not be easy. To do that, the government has to clear the path for private companies to secure land, power and coal. Then, to revive investment, it needs to attract foreign investors. Finally, it needs to do its bit to control inflation. Given the current political climate in the country, all these issues look more like dreams. It is not clear if the government has the required willpower.
There is, however, one bright spot in this scenario of doom and gloom. Given the relentless monetary tightening by the Reserve Bank of India (RBI), the growth in gross domestic product (GDP) has fallen below the potential growth rate, estimated at 7.5-8%. This will result in disinflationary pressures and make it possible for RBI to hold fire. But this is merely an enabling condition: the meat has to be delivered by the government.
What will it take to revive growth? Tell us at email@example.com