If you also believed, like many commentators, that growth in economic activity bottomed out in the third quarter of the last fiscal, fourth quarter gross domestic product (GDP) numbers would shatter all hopes of any revival. The fourth quarter GDP numbers came as a shocker even for people with conservative estimates. The Indian economy, in the last quarter of the last fiscal, expanded at a modest pace of 5.3%, bringing down the full-year growth to 6.5% compared with advanced estimate of 6.9%. The main culprits, as expected, were mining, which contracted by 0.9%, and expansion in manufacturing, which was at just 2.5%, for the full year.
The bad news is that the coming quarters may be worse off. There is absolutely no evidence that things will improve in the next couple of quarters or that the first quarter numbers for the current fiscal will be better than last quarter’s numbers.
The government of India seems to have no firepower in terms of any kind of fiscal help to the economy. If fact, in the present circumstances, it would do well by not even trying to boost demand and creating further problems as a consequence. All eyes, therefore, will now be on the central bank to cut rates in order to support growth. However, it may not be easy for the Reserve Bank of India (RBI) to cut rates as inflation continues to remain above comfort levels and any cut may have a negative impact on inflationary expectation. Therefore, there is a fair chance that RBI may choose to restrain itself from cutting rates in the near term. In fact, a rate cut at this stage may not help as the last 50 basis points cut in the repo rate failed to materially change the investment climate and growth outlook in the country. One basis point is one-hundredth of a percentage point and repo rate is the rate at which RBI lends to commercial banks in the short term. With uncertainty around interest rates, companies and investors would be more comfortable with inflation coming down rather than a small rate cut.
The most disheartening takeaway from the GDP numbers is that we have hit the rock at a time when things are still holding up in Europe, the biggest perceived threat to the global economy and financial markets. This means it can get a lot worse in India if Europe was to hit a roadblock.
What it means for you?
While the macro picture makes commentators and economists raise their brows, the pertinent question for us is what do these numbers mean for individuals? A sharp slowdown in the economic growth at a time when inflation continues to remain high could lead to serious dislocation—both at the macroeconomic and individual level. A higher-than-real-growth inflation simply means that the real income in the country is declining. This will have implications on consumption, savings and investment patterns.
At the macro level, the numbers have started reflecting that private consumption has begun to come off and saving and investment is also showing signs of deceleration. A lower savings and capital formation means that growth will continue to suffer in the short to medium term. Lower growth would again mean lower income growth. At the individual level, declining real income will make choices more and more difficult for individuals, both in terms of consumption and savings. Lower savings, combined with volatile market conditions will make future planning seriously difficult for households.
Things are not going to improve in the stock market anytime soon either. Falling growth, falling currency, rising government expenditure and sustained high inflation is not something that markets would find comfort in. That’s not all. Markets will continue to live under the constant threat of a possible shake up in Europe. If you are an equity investor, be very careful of what you are buying at this stage and avoid any short-term bets unless you are a professional trader.
What to expect?
There is a fair chance that things can get worse from here even if things don’t get ugly in the euro region. However, all may not be lost and the situation can improve if the government of India stops living in denial and accepts reality. It will have to move very quickly and send some convincing signals to the market—by way of reforms—that it is serious about improving the business environment in the country as this slowdown does not have all its roots in Europe.
From the market point of view, apart from government action, the most important indicator will be inflation. If inflation starts coming down, it will be a much more reliable hope for the market than government action. In the meantime, things can possibly get worse, before they start improving any time soon.