The Hindu Business Line : Weak manufacturing drags down economic growth

New Delhi, Aug. 29 The near halving of manufacturing sector growth in the first quarter of this fiscal has led to the country’s gross domestic product (GDP) growth decelerating to 7.9 per cent during April-June 2008..

It is lower than the 9.2 per cent growth recorded in the same period last year. This performance was the slowest quarterly growth in the last 14 quarters.

Official data released today by the Central Statistical Organisation (CSO) pegged the manufacturing sector growth for the period under review at 5.6 per cent against a robust 10.9 per cent in April-June 2007.

Rising borrowing costs due to monetary tightening by the Reserve Bank of India has weighed on manufacturing sector performance, say economists. Besides manufacturing, the other two planks of GDP — agriculture and services sector — too saw a noticeable slowdown in growth.

The CSO has estimated the quarterly GDP at factor cost at constant (1999-2000) prices at Rs 7,82,357 crore, as against Rs 7,24,949 crore in Q1 of 2007-08. GDP grew 8.8 per cent in the March quarter.

‘Dip expected’

The Commerce and Industry Minister, Mr Kamal Nath, told reporters here today that he was hopeful that GDP growth would be in excess of 8 per cent this fiscal. “We expected that with the global economic outlook and a contraction in money supply growth, there would be a dip (in June quarter GDP growth),” Mr Nath said.

Analysts see the latest GDP performance as only “growth moderation” and not an overall slowdown. They view the latest GDP growth number as a “healthy one” despite the marked slowdown in manufacturing sector growth.

“Manufacturing sector has been most impacted by the rise in interest rates due to monetary tightening. Services has also been impacted to some extent,” Mr D.K. Joshi, Crisil’s principal economist, told Business Line.

He, however, highlighted that the worrying factor in the first quarter numbers related to the “electricity, gas and water supply” front, where output growth has slumped to 2.6 per cent in Q1 from 7.9 per cent in the same period last year.

Agri and services

Agricultural sector, an important constituent in the GDP, grew 3 per cent (4.4 per cent).

In the services sector, with a combined weight of more than 50 per cent, there has been a slippage in growth in some segments like financing, insurance, real estate and business services at 9.3 per cent (12.6 per cent). Growth in trade, hotels, transport and communication stood at 11.2 per cent (13.1 per cent).

Global effect

Meanwhile, Moody’s Economy.com said that the slowdown in the year-on-year GDP growth was in line with its forecast. It said that the services sector were the major cause of slowdown. Growth in financing, insurance, real estate and business services slipped into single-digit territory as global financial market turmoil has taken its toll on the Indian markets.

“As it is still difficult to predict when the global woes will bottom, it is likely that investors would maintain a cautious stance for the rest of 2008. This will see further slow down in the finance-related sectors during the second half of 2008,” says Moody’s.

Crisil, a rating agency, has pegged the GDP growth at 7.8 per cent this fiscal. It expects the growth rates for the next three quarters to hover in the 7.5 per cent to 8 per cent range.