NEW DELHI: In what came as a shock to even the most pessimistic,India’s economy expanded at just 5.3% during the last quarter of 2011-12, the slowest pace since the corresponding quarter of 2002-03, as manufacturing contracted and agricultural growth plateaued. With a decline in growth for the fourth straight quarter, GDP growth for the full year was dragged down to a nine-year low of 6.5%.
The dismal economic data gave further credence to talk of stagflation and increased the threat to the country’s investment-grade sovereign rating.
A continuing sluggishness in consumption demand and a decline in the investment rate to below 30% of GDP underscored the urgency of comprehensive reforms to pep up growth, with analysts calling it a make-or-break situation for the economy. Policymakers too expressed dismay at the poor data released by the Central Statistics Office on Thursday, but sought to find comfort from certain positives — a slight turnaround in the investment growth rate and a heartening 4.3% growth in mining output in Q4, bucking the trend of negative growth rates reported in the previous three quarters.
The CSO’s advance estimate in February had pegged GDP growth in 2011-12 at 6.9%.
With the investment-GDP ratio falling almost 1 percentage point over a year and no strong signals of a revival of sentiment, economists feared GDP growth in 2012-13 could be even below 6%, let alone the 7.6% projected by the government, on which the Budget numbers are based.
However, finance minister Pranab Mukherjee said most of the factors behind the unexpectedly slow growth have “bottomed out”.
Finance minister Pranab Mukherjee said: “The slowdown is due to tight monetary policy and weak global sentiments… environmental policy bottlenecks in the mining sector may also have affected investment sentiments… (but) most of these factors have bottomed out. There is a turnaround in investment growth rate in Q4.” Mukherjee said the government would take all necessary steps to address the imbalance on the fiscal front and on the current account,” adding these would help improve capital inflows and aid recovery in domestic investment growth.
The minister listed out other positives: “The (interest) rate cycle has been reversed.. progress has been made on fuel linkage for coal-based power projects; a normal south west monsoon has been predicted for 2012-13.”
The industry begged to differ: “Gross capital formation registered a growth of 5.3% in FY12 compared to the 11.1% in the previous year. This shows a grave crisis of investors’ confidence. We may be in danger of slipping into a 1991-like crisis. Therefore, urgent and bold steps are immediately needed to prevent the economy from descending into a full blown crisis,” said Rajiv Kumar, secretary general, Ficci.
Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan said he still expects the economy to grow at 6.5-7% in 2012-13. Delhi-based economist Mathew Joseph warned: “Growth this year could be even less than 6%, which means that the fiscal deficit could be higher than 6%, as against the budgeted 5.1%.”
As for remedial action, policymakers hardly have fiscal tools to stimulate growth (on the contrary, austerity measures are being mulled), while lingering price pressures have squeezed the leeway for any substantial monetary easing by the central bank at its June 18 meeting.
Barring mining, growth in seven other industries have slowed in the January-March quarter, while five of the eight industries witnessed deceleration during the last fiscal. The deceleration in growth in 2011-12 was sharper than the 6.7% recorded during the global financial crisis in 2008-09. The economy had grown at 9.2% in the fourth quarter of 2010-11 while the growth for the full fiscal was 8.4%.
Manufacturing output contracted 0.3% in the last quarter of 2011-12, compared with a 7.3% expansion a year before. Agriculture and allied sectors managed to grow at just 1.7% from 7.5% a year before. Mining, however, was the only silver lining during the quarter with a 4.3% expansion, compared with 0.6% in the corresponding quarter of the 2010-11 fiscal. For the full year, however, mining output growth was still negative at 0.9% – the first slump in around four decades.
Electricity, gas and water supply expanded 4.9% in the March quarter from 5.1% a year earlier while growth in construction slumped to 4.8% from 8.9% during the period. Similarly, the trade, hotels, transport and communications sector grew 7% from 11% a year before, and community, social and personal services expanded at 7.1% during the quarter, compared with 9.5% a year earlier. Growth in the financing, insurance, real estate and business services sector remained unchanged at 10% during the review period.
The manufacturing sector grew 2.5% in 2011-12 – the lowest since the Lehman crisis in 2008-09 when it expanded just 2.4%. Environmental laws and lack of policy decisions halted mining activities in many places during the year. Agriculture and allied sectors grew 2.8% in 2011-12 from 7% a year before.
At current prices, gross fixed capital formation – a gauge for investment – has inched up to 28.6% of the GDP in the March quarter from 27.8% in the previous quarter but sharply lower than 32% before the Lehman crisis. Investment rate declined to 29.5% in 2011-12 from 30.4% in 2010-11.
Private final consumption expenditure has declined to 56% of the GDP from 56.5% a year before, while government final consumption expenditure slowed to 11.7% from 11.9% during the period.
As per official data released separately on Thursday, fiscal deficit stood at 5.8% of GDP during 2011-12, a tad lower than the revised estimate of 5.9%. The improvement was due to a fall in Plan expenditures which offset the impact of a lower GDP figure.
“Concerns build up as services have slipped to around 8%. Negative manufacturing was anticipated, but the overall number points to a worrisome trajectory going forward, as it is yet to take on board the impact of weaker rupee especially from the first quarter of the current fiscal. It may be difficult for the RBI to ignore this number,” said Shubhada Rao, chief economist at Yes Bank. The rupee has depreciated by more than 11% since March.
“A rate cut is a given now. We expect a 25-basis point reduction in repo rate on June 18,” said Anubhuti Sahay, economist at Standard Chartered Bank.
“The Reserve Bank ofIndiahas already adopted a pro-growth policy. But inflation is not softening, so it cannot do a significant rate cut. We think they will focus more on making liquidity surplus,” said Sujan Hajra, chief economist at Anand Rathi Securities. He, however, added that growth in the current fiscal could be better if the government takes some concrete steps.
The moderation in growth suggests a harder landing forIndiain the ongoing global macro-economic crisis thanChina. The Communist country grew 9.2% in 2011, compared with 10.4% a year before despite being an export-driven economy. Indian inflation slowed since December after exceeding 9% in each of the 11 months of 2011, although at 7.23% in April, it still remained the highest among the BRIC group that also includesBrazil,RussiaandChina.
Crisil Research, which had predicted a 7% GDP growth for 2012-13, said it would release a revised forecast next week due to “significant increase in downside risk.” It said: “Though the services sector grew at a robust 8.9% in FY12, its growth has fallen below 9% for the first time since 2004-05. Private consumption growth dropped sharply to 5.5% in FY12 as compared to 8.1% in FY11. Hurt by the policy logjam investment demand dropped to 5.5% in FY12 as against 7.8% in the previous fiscal.”