At 7.7%, GDP grows slowest in 6 quarters

The government’s statistics department revised downward the comparative base for the year-ago quarter to 8.8% from 9.3% previously to incorporate the new industrial production series with the 2004-05 base year. Without the revision, the figure would have been lower than the consensus forecast of 7.6% by economists.

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Finance minister Pranab Mukherjee expressed disappointment over the data. “I hope the third and fourth quarter would be much better. We shall have to keep in mind that there are still some areas of uncertainty in the global scenario," he said. The finance ministry has projected a growth rate of 8.6% for the current fiscal, although this is expected to be revised after the release of the latest first quarter data.

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Rising inflation has prompted the Reserve Bank of India (RBI) to raise policy rates 11 times since March 2010, making loans costlier. This has not only dampened investment sentiment, but also led to a squeeze on consumer spending. Headline inflation based on wholesale prices stood at 9.22% in July after peaking at 9.74% in April.

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The data released by the Central Statistics Office (CSO) showed a moderation in both private and public consumption, resulting in headline consumption growth slowing to 5.7% from 7.5% in the previous quarter. Investments, however, posted a positive surprise, with fixed capital formation rising 7.9% from the low of 0.4% seen in the previous quarter. However, investment growth is lower than 11.1% during the same quarter a year ago.

Samiran Chakraborty, head of India research at Standard Chartered Bank, said the consumption numbers are worrying, though the expenditure side data is not very reliable.

Greater economic uncertainty that leads to a marked slowing of global growth may also impart a downward bias to the projection of around 8% growth in India, RBI has said.

In its annual report released on 25 August, RBI said growth could moderate on account of global uncertainty, sticky inflation, hardening interest rates and a high year-ago base, especially for agriculture.

“On the other hand, though global commodity prices appear to have plateaued, inflation is likely to be elevated in (the) near term and fall only towards the latter part of the year as monetary transmission works through further," RBI said.

Chakraborty said export growth, which was the saving grace in the first quarter, may not decline too sharply in the second half of the year, as he expects US growth to be higher during that period than in the first half.

“From that perspective, there will not be a sharp drop in the support from the external sector," he added.

During the quarter, agriculture grew at 3.9% compared with 2.4% a year ago. However, confirming the fears of an industrial slowdown, the mining and construction sectors grew at 1.8% and 1.2%, respectively. Manufacturing slowed to 7.2% from 10.6%, while electricity grew at a healthy 7.9% compared with 5.5% a year ago. Among the services sectors, trade, hotels and transportation grew at 12.8%, while finance, insurance and real estate sector grew at 9.1%. Community, social and personal services, which mostly represent government spending, slowed to 5.6% from 8.2%.

The latest numbers led Rajeev Malik, senior economist at CLSA Singapore, to revise his growth forecast for the current fiscal to 7.3% from 7.5%. Both Chakraborty and Abheek Barua, HDFC Bank Ltd’s chief economist, held on to their projection of 7.7%.

Expectations of how the industrial sector, including construction, performs during the second half of the fiscal reflect the difference between GDP growth rate forecasts closer to 7% and those closer to 8%, Barua said. “We expect that by the middle of the third quarter, industry, including construction, will recover," he said.

The latest data is consistent with the overall impression that the economy is slowing, said chief statistician of India T.C.A. Anant.“If revival is substantially high in the second half, then the economy may be able to pull up (to) 8% growth," he said.

Manufacturing is the unknown quantity, Anant said, and added, “Given its past history of volatility, one has to wait and watch."

The impact of a slowdown in the US and Europe on services exports is not clear as this sometimes leads to more business for domestic firms through outsourcing, Barua said.

“Hence, we expect services to grow at the last year’s level of 9.3%," he said.

Both Barua and Chakraborty expect a 25 basis points rate increase by the central bank in its 16 September policy review. “The kind of growth path that RBI has anticipated, the current data is not too much in divergence from that," Chakraborty said.

However, even as domestic interest rates have gone up, industry has access to low-cost capital through foreign currency borrowings, Barua said. “Hence, too much emphasis should not be given to rising domestic borrowing cost for industries," he added.

Many economists were displeased about CSO not releasing revised quarterly GDP data for the rest of the three quarters of 2010-11, making it difficult for them to make quarterly projections and for sequential comparisons.

“Strangely, India does not announce the revised data for all the quarters at the same time," said Malik. “Thus, we have revised 2Q 2010 (Q1 FY10-11) GDP, but revisions are not yet available for the remaining quarters of FY11."

A CSO official, speaking on condition of anonymity, said the data wasn’t ready yet.

Graphic by Sandeep Bhatnagar/Mint

Reuters contributed to this story.

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