Was 2011-12 India’s worst year since the global crisis?

Was 2011-12 India’s worst year since the global crisis?

Thursday’s gross domestic product (GDP) numbers could reveal that 2011-12 was the Indian economy’s worst year since the global financial crisis. If GDP growth for the year comes in at less than 6.8%, it would be the worst rate of growth in the last nine years, since 2002-03.

In February, the Central Statistics Office (CSO) estimated real GDP growth at factor cost to be 6.9% for 2011-12, a smidgen higher than the 6.8% notched up in 2008-09, the year Lehman Brothers collapsed. With growth coming in at a dismal 6.1% for the December quarter, GDP growth for the March quarter would have to be 6.9% to meet the estimate for the full year. But many economists are expecting the fourth quarter growth to be even lower than that in the December quarter.

Will the March quarter GDP numbers galvanize policymakers into action? The Reserve Bank of India (RBI) fired its first salvo when it cut the repo rate by 50 basis points last month. This is what it said then: “Growth decelerated significantly to 6.1% in the third quarter of 2011-12, though it is expected to have recovered moderately in the fourth quarter. Based on the current assessment, the economy is clearly operating below its post-crisis trend." That suggests if there’s no recovery in the March quarter, it could open the door for another rate cut. True, headline inflation continues to be high, but non-food inflation in manufactured products, RBI’s proxy for demand-led inflation, has been trending lower.

The March quarter corporate financials show that sales growth, which had remained robust earlier, is slowing. And RBI had specifically stated in its last policy statement that the stance of monetary policy is intended to “adjust policy rates to levels consistent with the current growth moderation; guard against risks of demand-led inflationary pressures re-emerging and provide a greater liquidity cushion to the financial system". That last objective, too, has not been met and liquidity has remained tight in the money markets.

In short, growth so far below what RBI considers the trend rate of growth of around 7.3%, could mean the central bank becomes more worried about growth than about inflation.

What about the government? It is in no position to spur growth through fiscal stimulus, the way it did after the Lehman crisis. It has shown no signs of going in for the supply-side structural reforms that are needed to increase the non-inflationary rate of growth. Economists, commentators and the central bank have been pointing ad nauseam to the need to rein in the deficit, shift government expenditure from consumption and subsidies to investment and start putting in place the incentives and measures needed to improve productivity. But, given its track record, there seems to be no point in pinning one’s hopes on the government.

There are several reasons for the fourth quarter growth to be worse than that of the previous quarter. Growth in the Index of Industrial Production, which averaged 1.23% in the December quarter, fell to 0.57% in the March quarter. Some items of consumption, such as car sales, have been slowing. Exports also haven’t been doing well. The latest Purchasing Managers’ Index numbers show growth momentum has decelerated.

But there are positives as well. Non-food credit growth in banks was 16.8% in the middle of December, the same rate as on 23 March, before the year-end window-dressing. Agriculture is expected to do well and will be helped by a lower base. Much depends, of course, on how resilient the services sector proves to be, but community, social and personal services suffer from a high base effect—growth in this category was -0.8% in the third quarter of 2010-11 and 7% in the fourth quarter that year. Of course, it’s entirely possible that the fourth quarter data for 2010-11 will be revised.

One of the key things to look out for will be consumption growth. It is well-known that two of the Indian economy’s three growth engines—investment demand and exports—have been sputtering. So far, consumption demand has held up well. Growth in private final consumption expenditure was 6.2% in the December 2011 quarter, well above the September quarter’s 2.9%, although the GDP by expenditure numbers are rather suspect, given the huge discrepancies. The March quarter volume growth of retail firms hasn’t been encouraging.

The last time GDP growth dipped to 6.8%, the government and the central bank stepped in to rescue the economy with fiscal and monetary stimulus packages. That led to growth rebounding to 8% in 2009-10. This time, a fiscal contraction rather than a stimulus is on the cards. And the amount of monetary easing RBI can do is limited.

This time, there are no easy ways out.

Manas Chakravarty looks at trends and issues in the financial markets. Comment at capitalaccount@livemint.com

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