New Delhi: India’s economy grew at its slowest pace in nine years in the fourth quarter (January-March) of 2011-12, and at a rate marginally lower than the growth rate in 2008-09, when the world was roiled by a financial crisis for the entire fiscal year, stoking fears that the economy is losing momentum faster than anticipated, and that the famed India story is coming to a sorry end.
More worryingly, economic data released on Thursday showed that consumption is visibly faltering alongside a decline in investment levels in the economy. Economists and analysts said the window for a policy response to reverse the trend, especially in the context of lengthening shadows over the global economy, may be rapidly closing on the Congress-led United Progressive Alliance (UPA), already under pressure from a raft of allegations of graft, internal differences and policy inaction.
The economy grew at 5.3% in the fourth quarter, driving down growth for the year ended 31 March to 6.5% as opposed to the earlier projection of 6.9% by the Central Statistics Office. While the quarterly growth is the slowest since the same quarter in 2003, the full-year growth rate is even lower than the 6.7% seen in 2008-09.
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The size of the Indian economy was $1.848 trillion (Rs 8,232,652 crore) in 2011-12 compared with $1.684 trillion (Rs 7,157,412 crore) the previous year.
After the data was released, most economists revised their growth projections for 2012-13 downwards. All eyes will now be on international rating agencies, some of which have already red flagged India for its inertia on the policy front and the failure to address the fiscal imbalance.
With quarterly GDP growth falling to a nine-year low, economist Aditi Nayar discusses RBI’s policy dilemma and what the government can do to boost growth
Citibank said in its macro report that it is projecting gross domestic product (GDP) growth of 6.4% for the current financial year on the assumption of 3% agriculture growth, 4.1% industry growth and 8.3% service sector growth. Yes Bank Ltd said in a report that it is revising its growth estimate to 6.5% subject to further downside risks owing to any negative outcome emanating either from the euro zone or domestic monsoon conditions.
Pronab Sen, principal adviser in the Planning Commission, said the growth number is “very shocking” and added that the government needs to act fast. “Even if government starts reacting now, it will take at least two quarters to show results. If the government sits back and does nothing, then it may take the country to a 1997 kind of scenario, which led to five years of industrial stagnation.”
According to Sen, the high current account deficit that was at 4% of GDP in the first three quarters of the financial year is a big worry, and the government has no option but to take measures such as increasing fuel prices. Sen believes such hikes will not be inflationary in a sustained basis. “If the fuel price increase leads to an increase in credibility of the country and more fund flows, which in turn lead to appreciation of the rupee, then it could have a positive impact on the inflationary problem,” he reasoned.
Wholesale and retail price inflation stood at 7.2% and 10.4%, respectively, in April. The rupee has depreciated around 23% against the dollar from its last year’s level. On Thursday, it ended at 56.08/09 to the dollar, after hitting a record low of 56.52 prior to the release of the GDP data.
Finance minister Pranab Mukherjee conceded that the data is “disappointing”, but tried to play down fears by seeking to deflect the blame to global developments.
Mukherjee insisted that the worst is over.
“The rate cycle has been reversed, mining sector growth has turned around, progress has been made on fuel linkage for coal-based power projects, there is a turnaround in the investment growth rate in the fourth quarter, which had been negative in the preceding quarters of 2011-12, and a normal south-west monsoon has been predicted for 2012-13. There are no major adverse results on corporate performance in the last quarter of 2011-12. All these factors should help in the recovery of growth momentum.”
Economists don’t quite see it that way.
Samiran Chakraborty, India head of research at Standard Chartered Bank, said it is difficult to expect an autonomous pick-up in economic growth in the absence of “policy measures”. “Unless we take measures to address business and consumer sentiment, it will be difficult to tackle the situation, especially at a time when the global situation is worsening,” he added.
Chakraborty said the government can undertake only supply-side reforms as there is very little scope for a demand-side fiscal stimulus due to the already-high fiscal deficit. “The solutions are pretty much known. It is more of a question of implementation.”
Under pressure from coalition partners and opposition parties, the government has put on hold a spate of reforms such as allowing foreign investment in multi-brand retail. Less politically sensitive measures such as allowing foreign airlines to buy stakes in domestic carriers have also not seen any progress. Key economic legislation such as the Direct Taxes Code and the goods and services tax are also on hold. The government has also not been able to raise diesel and cooking gas prices for a year. The recent sharp revision in petrol prices has also drawn flak from all quarters—a partial roll-back seems imminent—and has made the government even more cautious.
Mukherjee said on Thursday that he will take all necessary steps to address the imbalance on the fiscal and on the current account deficit front. “It will help in checking inflationary expectations and inspire confidence for improved capital flows as well as recovery in domestic investment growth.”
Later in the evening, the finance ministry issued a statement banning the creation of new Union government posts and asked all Union government departments to cut their non-Plan expenditure by 10%. The statement didn’t put a number to such savings.
The sharp deceleration in the fourth-quarter growth was because of a contraction in manufacturing by 0.3% and the base effect of an upward revision of growth in the same quarter last year to 9.2%. Tepid performance by the electricity and construction sectors, which grew at 4.9% and 4.8%, respectively, also proved to be dampeners. While agriculture production at 1.7% failed to provide support to overall growth, a poor show by the services sectors, especially the trade hotel and transport sector, further reduced overall growth.
Chakraborty said the key takeaway from the data is the fear of faltering consumption growth. He said the so-called trade hotel sector, which is used as a proxy for consumption, grew 7% in the fourth quarter while its average growth in the first three quarters was 11%. Consumption expenditure as a percentage of GDP came down to 52.2% in the fourth quarter from 60.4% in the third quarter.
The data will further complicate the policy choices before the Reserve Bank of India (RBI). Consistently high inflation has meant that the central bank has been cautious about easing its tight monetary policy. In April, after 13 policy rate hikes, it cut rates by 50 basis points (bps) while maintaining that there wasn’t much headroom for further monetary easing, given the high inflationary pressure in the economy.
A basis point is one-hundredth of a percentage point.
Soon after the rate cut, credit rating agency Standard and Poor’s revised the outlook on India’s long-term rating to negative from stable, warning that there was at least a one-in-three chances of a downgrade in the country’s sovereign rating within the next 24 months. It said a downgrade was likely if the country’s economic growth prospects dim, the external position deteriorates, and the political climate worsens or fiscal reforms slow.
Chakraborty said that because RBI’s expectations of a better fourth-quarter growth rate (than the third quarter) has not materialized and its growth projection of 7.3% looks at risk, it may be forced to rethink its growth-inflation balance while deciding monetary policy. RBI is scheduled to release its mid-quarter monetary policy review on 18 June.
Yes Bank in its report said it expects RBI to ease policy rates as early as in its next policy review, against its earlier projection of a rate cut in September this year. It expects a cut of 50-75 bps in 2012-13 along with a 100 bps cut in the cash reserve ratio, which defines the amount of money banks have to keep with the central bank (the more they do, the less they have to lend to customers).
Mint’s Kirthi Rao and Reuters contributed to this story.
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