Manufacturing growth in Q3 lowest in a decade

Gross domestic product (GDP) growth for the December quarter, at 6.1%, was slightly higher than the 5.8% growth notched up during the December quarter of 2008-09, when Lehman Brothers went under.

That’s bad enough, but a closer look at the details makes it worse. That’s because the agriculture sector (agriculture, forestry and fishing) contracted by 3.3% during the third quarter (Q3) of 2008-09. Year-on-year (y-o-y) growth in the non-agricultural sector in that quarter was a respectable 8.2%. In the third quarter of 2011-12, however, y-o-y growth in the non-agricultural sector was 6.8%. In short, growth in the non-agricultural part of the economy in Q3, 2011-12, was much lower than in the quarter during which the Lehman crisis occurred.

Let’s look at the details. Y-o-y growth in mining and quarrying was 2.5% in Q3 of 2008-09 and it’s minus 3.1% in Q3 of the current fiscal, thanks to the ban on iron ore mining and the abdication of policymaking in the sector. Manufacturing growth was 2.6% in Q3 of 2008-09, far higher than the 0.4% notched up in Q3 this fiscal. Even in the services sector, growth in the financing, insurance, real estate and business services segment was higher in Q3 of 2008-09 than in Q3 of 2011-12. The construction; electricity, gas and water supply; trade, hotels, transport and communication sectors, however, have been doing better in the last quarter than in the same period of 2008-09.

The data show that with growth at a mere 0.4%, the manufacturing sector came almost to a standstill in Q3, 20011-12. This is the lowest growth since the GDP data with 2004-05 as a base started. It’s well below the earlier low of 1.3% growth seen in manufacturing in the fourth quarter of 2008-09, in the quarter after the Lehman shock. Indeed, even if we take the earlier series, with 1999-2000 as a base, manufacturing growth has never been so low in a quarter.

After the global shock following the Lehman collapse, growth had returned by the second quarter of 2009-10, when it was back at 8.6%, thanks to a strong fiscal-cum-monetary stimulus. Recall that the central government’s fiscal deficit went up from 6% in 2008-09 to 6.4% the next year. This time, there’s little scope for a fiscal stimulus—in fact, the clamour is for cutting the deficit. That leaves only interest rate cuts to stimulate the economy. But between end-July 2008 and April 2009, the Reserve Bank of India (RBI) had reduced the repo rate by 4.25 percentage points, because of the panic caused by the Lehman bust and the seizing up of the financial markets. This time, the pace of rate cuts is certainly not going to be so rapid.

The RBI governor has also clearly said that he considers a 7% GDP growth rate as India’s current non-inflationary rate of growth. If so, the 6.1% growth reading for Q3 does make a strong case for a rate cut. But the 7% target also means the quantum of rate cuts is unlikely to be large.

Growth has been 6.9% in the first nine months of 2011-12. If the advance GDP estimate of 6.9% growth for the full fiscal year 2011-12 is to be achieved, growth in the fourth quarter too will have to be 6.9%. One reason why growth in Q4 will be stronger is because of the base effect. Growth in Q3 of 2011-12 was at 6.1% on top of 8.3% growth in Q3 of 2010-11. In Q4 of 2010-11, growth had slowed to 7.8%, though much depends on whether that growth number for the base year is revised. It does look, however, that the manufacturing growth number for the full year, at 3.9%, is optimistic. That’s because, if we take the first nine months of 2011-12, y-o-y growth in manufacturing has been 3.4%.

Other indicators such as the purchasing managers’ indices that reflect month-on-month changes indicate growth bottomed out during Q3 of 2011-12 and has rebounded since, so the 6.1% growth in Q3 very likely marks a trough, particularly because it also coincided with a period of marked uncertainty globally on account of concerns over the euro zone. But, as mentioned earlier, though growth is likely to rebound, the pace will be slow.

If we look at the GDP numbers by expenditure, what’s interesting is that though there’s a y-o-y contraction in gross fixed capital formation in Q3 2011-12 of 1.2%, it’s less than Q2’s y-o-y contraction of 4%. Moreover, growth in fixed capital formation in Q3 has been a high 8% sequentially over Q2.

But then the expenditure side numbers are severely flawed, simply because they contain a huge amount of discrepancies. In Q3, 2011-12 these discrepancies amounted to 6,222 crore, compared with 63,628 crore in Q3 of 2010-11 and 30,848 crore in Q2 of 2011-12. Further, for some inexplicable reason, growth in private final consumption expenditure fell to 2.9% in Q2 of 2011-12, while it was 5.9% in Q1 and 6.2% in Q3. Computing growth in consumption and investment from the expenditure side numbers is, therefore, fraught with peril, and it is unclear what the Central Statistical Organisation hopes to achieve by furnishing this data.

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

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