Going by the upbeat reaction of the stock market, the slowdown in GDP (gross domestic product) growth seems to have been pretty much discounted. After all, there have been plenty of straws in the wind—the industrial production numbers, the purchasing managers’ index (PMI) data, the slowdown in order inflow of capital goods firms and the pile-up of inventory with auto dealers, to name a few.

Also See | Consumption Drives GDP Growth In Q4 (PDF)

Nevertheless, if we consider the fourth quarter (Q4) numbers on the expenditure side, it’s astounding that gross fixed capital formation contributed a mere 1.6% to the year-on-year (y-o-y) incremental growth in GDP. The chart alongside shows the contribution to growth under various heads in Q4 of fiscal 2011 (FY11), after adjusting for “discrepancies". Notice that higher levels of inventory and the increase in valuables contributed more to growth than the increase in fixed capital formation.

Consumption was clearly the engine of growth in Q4. Even government final consumption expenditure contributed more towards growth than the gross fixed capital formation. This was followed by the external sector or exports minus imports.

Slicing the numbers differently, gross fixed capital expenditure increased by a piffling 0.4% y-o-y in Q4. Here are the y-o-y growth numbers for the previous quarters: 17.4% in Q1, 6.4% in Q2 and 7.8% in Q3. To be sure, there’s a base effect in play, but even then it’s clear that we’re seeing a deceleration in investment demand. That is unfortunate, because if core inflation is to come down, additional capacities have to come on stream.

Incidentally, there does appear to be some deceleration in consumption demand, too. Private final consumption expenditure had a y-o-y growth rate of 8.9% in Q1 and Q2, 8.6% in the Q3 and 8% in Q4. But here the base effect will be pronounced.

On the supply side, it’s interesting that the category “financing, insurance, real estate and business services" grew by 9% in Q4 of FY11, on top of a growth of 6.3% in Q4 of FY10. But it grew by 10.8% in Q3 of FY11 on top of 8.5% growth in Q3 of FY10. That shows a slowing of growth in spite of a lower base effect.

And finally, while export growth has been strong, the latest flash PMI readings indicate a slowing of growth in May in both the euro zone and China. Retail sales in the euro zone fell for the first time in three months in May, according to a survey from Markit Economics. Recent US data, too, has been soft. Therefore, exports are also likely to slow in future.

But after all, a moderation in growth is precisely what the Reserve Bank of India wanted and it has been working assiduously towards it. That explains the market’s taking it in its stride. At the same time, economists are agreed that the GDP growth number in Q4, although it missed estimates, is unlikely to affect the central bank’s attitude towards future rate hikes. That will depend on inflation.

Graphic by Yogesh Kumar/Mint

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