Making sense of the latest official numbers on economic growth throws up the old question: Is the glass half empty or half full? Do the numbers confirm an expected slowdown or reveal unexpected resilience? While economists and observers take their pick, the economy is likely to get a double whammy in the form of another interest rate hike in the face of sluggish investment.
To state the facts baldly, India’s economy grew by 7.7 per cent in the first quarter (April-June 2011) of the financial year 2011-12, compared with 8.8 per cent growth in the same quarter last fiscal. Growth in the manufacturing sector dipped to 7.2 per cent from 10.6 per cent, and that in the mining and quarrying sector to 1.8 per cent as against 7.4 per cent. Farm output expanded by 3.9 per cent, much higher than 2.4 per cent in the same quarter last year. The services sector, which contributes almost 55 per cent of India’s GDP, offered a mixed bag.
This is the fifth quarter in a row that the economy has reported a lower year-on-year growth. It is much lower than official estimates of eight to 8.5 per cent.The data comes at a time when India is vulnerable to global economic developments, especially in the United States and the eurozone.
The Reserve Bank of India, or RBI, is unlikely to be impressed by these arguments. It has warned last week against accepting high inflation (9.22 per cent for July) as the new normal.
There is a consensus among professional economists that the central bank will put up key policy rates by at least 25 basis points (0.25 per cent), if not 50, in the next policy review due on September 16. According to them, the performance of the economy in the June 2011 quarter has to be seen against the several domestic and global headwinds it has been facing. Although growth is slowing down, it is not collapsing as feared by some. Also, with full-year growth number still above seven per cent, it allows the central bank to keep focus on fighting inflation. Therefore, a 25 basis point rate increase on September 16 is very likely.
The decline in GDP growth may turn into a sustained trend — unless the RBI realises its hawkish policy has served its purpose. Given the fragile state of the global economy with both the US and the eurozone on the brink of a recession, China slowing down and the home economy losing pace, corporate India’s confidence levels are fairly low. A recent survey by Morgan Stanley revealed that for a second successive year, corporate India is unlikely to up capital spending by more than a tepid 10 per cent.
Moreover, while 15 per cent of those polled are unlikely to spend at all, about a third of those who do invest would do so more with a view to improving productivity rather than adding greenfield capacity. So we are unlikely to see companies rushing to set up too many new plants or build more roads. Having exhausted the fiscal stimulus, the government can no longer spend its way back to higher growth. However, fiscal reform, consensus on land acquisition policy, labour reform, facilitating private investment in food processing, logistics and supply chains, and liberalisation of investment policy in the strategic and defence industries could once again help stimulate the “animal spirits” of entrepreneurs.
If the government could convince industry that it will push through legislation and be less bureaucratic, that in itself would go a long way in boosting industry’s morale.
Views expressed by the author are his own and do not reflect the newspaper’s policy.