At first blush, economic growth in India appears to be moderating gently. According to data on Tuesday for April-June, the first quarter of the fiscal year 2011-12, GDP growth was 7.7% - compared to 7.8% and 8.3% in the previous two quarters - and just a little above the expected consensus of 7.6% of a Bloomberg poll. The growth momentum – a better indicator of short-term dynamics - is a bit difficult to judge as data for this quarter are computed with the new industrial production series (base 2004-05) released in June this year. Nevertheless, with that caveat in mind, the seasonally-adjusted quarterly momentum was 1.4% against 2.1% the previous quarter; going by past trends, the actual deceleration may be more pronounced once comparable data for the previous quarters are released.
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Demand is slowing visibly. Private consumption growth was much feebler at 6.5% on an annual basis, compared to an average of 8.5% in the previous three quarters, reflecting the collective impact of rising prices and interest rates. More worryingly, investment recovery continues to elude, raising concerns about future growth drivers. Gross fixed capital formation growth, at 7.9% year-on-year, was visibly lower than the 11.9% a year ago (this itself was scaled down from the 17.4% measured on the old IIP series a year ago). Overall demand is evenly distributed between consumer and business spending, both of which added 3.9 and 3.6 percentage points respectively to the 8.5% real GDP growth at market prices; net exports subtracted 1.7 percentage points after a positive contribution in two successive quarters previously.
Unsurprisingly, in the light of rising input costs, the pace of industrial growth slowed to 5.1% year-on-year from 6.1% the previous quarter, with construction barely growing at 1.2%. Likewise, agricultural GDP slowed to 3.9%, the slowest in a year. But this was offset by the buoyant 10% year-on-year growth in services, led by a 13% growth in the trade, hotels, transport and communication segment.
Looking ahead, the slowing momentum will accelerate in all likelihood as the lagged impact of interest rate hikes, bulk of which was delivered in June-July, takes effect. The 8% growth forecast by the Reserve Bank for the year 2011-12 therefore, is unlikely to be met in the light of these dynamics.
Does this keep up the pressure on the central bank to continue with its rate hikes when it meets again on September 16? More recent information on industrial production and prices, expected in the second week of September, will make a material difference. With global economic prospects deteriorating significantly and the impact of past rate increases yet to be fully felt across the economy, a ‘wait and watch’ action on the part of the RBI cannot be ruled out either.
Renu Kohli is Consultant Professor, ICRIER, and a former staff member of the International Monetary Fund and the Reserve Bank of India.