The slowdown is here

There was perhaps no need for an official confirmation of the economic slowdown at the current juncture. Signs of slowdown have been all pervasive and already seen under many parameters. Even so, the CSO's statistics for the last quarter of 2011-12, which was released on Thursday last, have a special significance of their own.

Slowest pace

The statistics show an economy growing at its slowest pace in any quarter over the past three years. It clocked just 5.3 per cent in the fourth quarter of last year.(January-March, 2012). This in turn pulled down the estimated annual growth rate to 6.5 per cent last year: even as recently as February, official estimates indicated a growth rate of 6.9 per cent. The economy grew 8.4 per cent during 2010-1 1 on top of an extremely impressive 9.2 per cent increase in the fourth quarter. The slowdown is visible across all sectors. Even services, which have posted robust growth rates in the past, grew just 7.9 per cent.

Agriculture posted a meagre 1.7 per cent growth. This has huge implications for rural demand and farmer distress. But it was the performance of the industries segment — growing by just 1.9 per cent in the fourth quarter of 2011-12 that brought down the overall GDP growth rate. Not that these were unexpected. There has been, for instance, a contraction in manufacturing, which was well tracked by the monthly industrial output numbers.

In fact, the deceleration in the economy has visible for quite a while. Nor is the prognosis bright for a possible turnaround in the near future.

The fall in gross fixed capital formation (GFCF), popularly known as the investment rate, to below 30 per cent of the GDP for the first time since 2004-05 does not augur well for the future. Equally importantly, the eight core manufacturing and infrastructure industries grew 2.2 per cent in April, down from 4.4 per cent in the same month last year.

Less than a week earlier, two leading investment banks, Goldman Sachs and Bank of America Merrill Lynch (BOFA), downgraded India's growth outlook for 2012-13 in a sure sign that the economic prospects in the Asia's third largest economy are dimming rapidly.

Goldman Sachs lowered its forecast to 6.6 per cent from 7.2 per cent and BOFA to 6.51 per cent from 6.8 per cent. Earlier, Morgan Stanley had downgraded India's outlook to 6.3 per cent. The argument that even with the lower forecasts materialising India's economic growth would be commendable by global standards does not hold much water.

The slowdown is attributable above all to missed opportunities — of policy paralysis, parliamentary deadlock and an across the board deterioration in most crucial parameters. Comparison between Chinese hare and Indian tortoise has become meaningless.

There is no way that the tortoise can be made to catch up with the hare, even if the latter has problems of its own.

All major economic trends indicate that the economy is in reverse gear. India's fiscal and trade deficits have ballooned to 5.8 per cent of the GDP. The current account deficit threatens to breach 4 per cent. The consensus among leading economists is that the ‘comfort levels' for CAD should be not more than 2.5-3 per cent of the GDP.

Nothing else demonstrates India's fall from grace as spectacularly as the depreciating rupee. It has been falling to record lows against the dollar despite the Reserve Bank of India intervention.

On Wednesday last, the rupee once again breached 56 to the dollar to close at 56.24. The depreciating rupee, in turn, has been fuelling inflation, which, despite strong RBI action, has never fully been brought under control. WPI inflation is now nudging 7 per cent, well above the RBI's stated target.

A weaker rupee should theoretically boost export competitiveness. But this has not happened. The difficult economic conditions in Europe, one of India's principal export destinations, have contributed to sharp declines in exports to and imports from the EU.

Weak rupee

On the other hand, a weak rupee has made oil and other imports more expensive. Industrial output contracted by 3.5 per cent in March and exports have been declining consistently. In the past three months (last quarter of 2011- 12), the economy grew by just 6.1 per cent.

The government's failure to revive the reform agenda has been one of the principal reasons behind the weakening investor sentiment. With policy paralysis gripping many organs of policy making, it has been left to the RBI to wage an almost single-handed fight to preserve the sanctity of monetary policy. Its principal objective has always been to maintain price stability while endeavouring to meet the genuine credit needs of the real economy.

More often than not, these two objectives have been in conflict with each other. A rapidly decelerating economy would suggest cheaper credit. Indeed that is what the central bank aimed at in its April credit policy statement when it boldly cut policy interest rates by 50 basis points.

The idea was to kick start economic growth. But with inflation resurfacing, the central bank is unlikely to persist with further interest rate cuts.

It is obvious that during a period of acute crisis management, policy makers will have to resolve many such dilemmas besides getting the necessary political well to revive the reforms agenda.

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Printable version | May 5, 2021 10:33:03 AM |

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