Decline in fixed investment growth is a source of concern: FM

Though faring marginally better than anticipated in the current gloomy environment, the gross domestic product (GDP) growth at 5.5 per cent in the first quarter (April-June) of 2012-13 marked a show of persistent sluggishness from a robust 8 per cent expansion in the same period last fiscal.

The official data on GDP estimates for April-June this year released by the Central Statistics Office (CSO) here on Friday reveal that the main culprits for the economic pull-down are the usual laggard sectors — manufacturing, mining and quarrying — which have been responsible for the ongoing slowdown.

So much so, that the first quarter report card this fiscal turned out to be the worst show in a decade. The previous first quarter low was in 2002-03 when GDP growth was pegged at 5.2 per cent.

Benign GDP growth

Curiously, however, the benign GDP growth evoked a mixed bag of reactions in official quarters and by India Inc. Even as industry chambers clamoured for a cut in interest rates to reverse the industrial and investment downturn, Finance Minister P. Chidambaram expressed serious concern over the steady decline in gross fixed capital formation and stressed the need for quick decisions on the part of the government to accelerate investment.

Commenting on the GDP growth data, Mr. Chidambaram, in a statement, said: “... the decline in the growth of fixed investment (0.7 per cent in the first quarter of 2012-13 as against 14.7 per cent in the first quarter of 2011-12) is a source of concern to the government.

It emphasises once again the need to take quick decisions to accelerate investments, especially removing all bottlenecks to investments in the manufacturing sector.”

The silver lining

Despite this, however, there was a silver lining by way of a sequential uptrend in the growth rate. “After continuous reduction in the growth rate in successive quarters beginning in the fourth quarter of 2010-11, this is the first time when quarterly growth rate has exceeded the growth rate in the previous quarter,” the Finance Minister said, while also lauding the encouraging signs such as the growth of the construction sector at 10.9 per cent during April-June this fiscal as against 3.5 per cent in the same quarter of 2011-12.

On the contrary, Planning Commission Deputy Chairman Montek Singh Ahluwalia and Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan appeared to be on the same page and sounded more optimistic over a steady improvement during the rest of the fiscal year. “The good news is that the quarterly growth rate has gone up from the 5.3 per cent in the last quarter (January-March) of previous financial year to 5.5 per cent in April-June quarter... In the second quarter, especially in the third, you will get the rebound,” Mr. Ahluwalia said.

The PMEAC chief could not have agreed more and felt that growth would pick up in the second half of the current fiscal. “The GDP numbers are expected to remain subdued in the first two quarters of the financial year but will pick up in the last two quarters…The first quarter numbers are on the expected lines and it is consistent with an overall growth rate at 6.7 per cent, which we have projected,” Dr. Rangarajan said.

Even as the three apex chambers, CII, FICCI and Assocham, pointed to the dismal GDP numbers and pressed for a cut in interest rates, economic analysts are of the view that the Reserve bank of India (RBI) is unlikely to tweak its policy rates on September 17, especially in the absence of any significant measures aimed at fiscal consolidation on the part of the government at a time when inflation continues to rule at elevated levels. To drive home India Inc.’s oft-repeated point in a statement, the CII said: “The GDP numbers leave no doubt about the criticality of the situation and we once again appeal for a coordinated monetary and fiscal intervention to address this deteriorating situation … Opportunities for revival of economic growth would soon peter out if the economy dives into a downward growth spiral due to steep decline in growth of gross capital formation.”

Immediate reset

While Assocham also called for an immediate reset of the credit policy, FICCI President R. V. Kanoria felt that a turnaround could be brought about and even indicated what needed to be done. “I think with a little bit of confidence building, things can change dramatically. One or two big ticket announcements will change the sentiment…I would like to emphasise that many needed economic decisions can be taken on administrative basis without new legislation,” he said.

As per the CSO data, while the manufacturing sector fared dismally with a growth of 0.2 per cent during the quarter as against 7.3 per cent increase in the same period of 2011-12, Mining and quarrying also recorded a measly 0.1 per cent growth as against a contraction of 0.2 per cent a year ago.

Farm sector growth was at 2.9 per cent in the first quarter as against 3.7 per cent in the same period last year.

However, on the brighter side was the robust growth in the construction sector at 10.9 per cent during the quarter of 2012-13 as against 3.5 per cent a year ago in the same period. Alongside, the growth rate in services, including insurance and real estate, also rose to 10.8 per cent in the first quarter from 9.4 per cent in April-June quarter last fiscal.

Keywords: Indian economyIndian GDP

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