The new ‘Hindu’ growth rate

The Indian economy has posted a 5.5 per cent annual growth during the first quarter of this fiscal, beating most analyst estimates that were closer to five per cent. Also, coming after four consecutive quarters of decline – from 9.2 per cent to 5.3 per cent between January-March 2011 and January-March 2012 – the latest GDP growth number would suggest that the current slowdown has ‘bottomed out’ and the worst is over. But this optimism is not borne out by the top-line growth reported by companies making up the S&P CNX 500 index: Their net sales at current market prices rose by only 15.1 per cent year-on-year in the April-June quarter, compared to 21 per cent and 27 per cent in the previous two quarters. If one adjusts for price increases effected due to input cost pressures, the above growth wears an even more anaemic look. This data, when combined with other indicators such as the minus 1.7 per cent growth in exports during the first quarter, provides little evidence of any improvement underway.

Even going only by the Central Statistics Office’s (CSO) 5.5 per cent figure, much of it has come from just two sources – construction (10.9 per cent) and financing, insurance, real estate & business services (10.8 per cent). The basis for these estimates is not clear, when both deposit as well as credit growth of banks have clearly slowed down, just as there are few tell-tale signs of a rebound in construction activity. On the contrary, the real estate market is in a slump mode, while cash-strapped developers are keeping away from bidding for any new highway projects. In any case, double-digit growth in these sectors is not sustainable if mainstream industrial and commercial businesses are floundering. The CSO data, in fact, shows manufacturing growth at just 0.2 per cent in the first quarter, and at 0.1 per cent for mining and 4 per cent for trade, hotels, transport & communication. Even worse is the 0.7 per cent year-on-year increase in gross fixed capital formation. That points to an investment slowdown, having more worrying implications than a mere growth slowdown.

Whichever way one looks at these numbers, it would seem 5-6 per cent is the new Hindu rate of growth we seem headed for in the current circumstances. That may be hard to digest for an economy, which registered an average annual growth of 8.4 per cent between 2003-04 and 2010-11. Getting that growth momentum back depends entirely on a revival in investment activity, for which the onus primarily rests with the Government. The Government today not only needs to invest directly (which can happen only through a redirection of its expenditures away from the revenue to capital account), but also remove the various bottlenecks holding up private investments. That includes mediating between the interests of different stakeholders in matters concerning land acquisition, environmental clearances or labour disputes.