The GDP growth data released by the CSO last week showed the economy growing by 6.9 per cent in the second quarter of the current fiscal (July-September, 2011), the lowest in the last nine quarters. It is also lower than the 7.7 per cent in the first quarter (April-June) and well below the (downward) adjusted 8.4 per cent of the second quarter of 2010-11. (The revision was necessary to accommodate the changes in the wake of the new Index of Industrial Production series). The average growth rate in the first half of the year is 7.3 per cent. For a comparable period last year, it was 8.6 per cent.
The slowdown in the economy has been quite apparent for some time. Various corroborating data, notably the monthly IIP numbers, clearly pointed towards a deceleration in key sectors such as manufacturing. Various forecasters, official and private, have been steadily lowering their projections as the year progressed.
The factors behind the slower growth rate in the second quarter are easily identifiable. Agriculture growth slowed to 3.2 per cent from 5.4 per cent in the same quarter last year. Manufacturing and mining declined sharply on a year-on-year basis. Manufacturing growth slid to 2.7 per cent from 7.8 per cent last year and mining output declined by 2.9 per cent. Agriculture is expected to rebound during the later part of the year. Monsoons have been good. The services sector has continued to perform well even as most sub-sectors of industry are reflecting the showdown.
Policy inaction
There are, however, big question marks over mining and manufacturing. Both have been adversely affected by policy inaction or policies that have affected their growth. There has been an inordinate delay in framing a mining policy. Delays in environmental clearances have compounded the problem.
The RBI's monetary tightening — policy rates have been raised by 13 times, pushing up the bank lending rates — is often cited as a cause for the slowdown. Yet, inflation remains entrenched at close to 10 per cent. The RBI, which has signalled a pause (that it will not raise interest rates barring exceptional circumstances), may not cut interest rates in the ensuing policy statement as hoped for by some sections.
An important reason for the slower sub-7 per cent growth is the sharp contraction in investment. Gross fixed capital formation (GFCF) has posted a negative growth of minus 0.6 per cent on a year-on-year basis during the second quarter. The investment rate, which is GFCF as a proportion of the GDP, has slumped to 28 per cent, down from the 33-34 per cent that obtained during 2007-08. The decline in investment rate is particularly worrying as it adversely affects future growth prospects.
More bad news
There is more bad news. While consumption demand is sought to be reined in by the RBI (to check inflation), the scope for government spending to stimulate growth is limited. According to data released last week by the Controller General of Accounts, the fiscal deficit was at Rs.3.07 lakh crore during April-October, which is nearly 75 per cent of the budgetary target for the whole year. The higher deficit is attributed to the slowdown. Revenue collections (direct and indirect taxes) are lower. The Finance Minister had admitted that the budgetary target for fiscal deficit at 4. 6 per cent (of the GDP) will in all probability be breached. According to income-tax sources, refunds have been higher. In short, the government does not have the wherewithal to stimulate growth.
Moreover, the performance of key infrastructure industries has been below par so far this year. The growth of eight infrastructure industries virtually came to a halt in October, growing by a mere 0.1 per cent compared to 7.4 per cent during the same month last year. In September, the core industries grew 2.3 per cent. During April-October, they grew 4.3 per cent against 4.9 per cent during the corresponding period last year. The lacklustre performance of these infrastructure industries will have a bearing on the IIP data. Infrastructure is second only to manufacturing in terms of weightage in the IIP index and the IIP data is already showing a declining trend.
External factors are also behind the slowdown. The export performance was spectacular in the first half of the year. But more recently, its growth is muted. The demand contraction in the developed world — the U.S. and Europe — has finally begun to tell on the domestic export performance. India's external economic management has become extremely challenging in a highly fluid and volatile global environment.
Finally, the lower GDP growth rate for the second quarter corroborated by other data strongly suggest that policy makers need to be realistic about economic prospects for the whole year. A GDP growth rate of 7 per cent will be commendable, given the performance of many other countries.
