Slowing growth, growing pain

The Indian economy grew at its slowest pace in more than two years during the quarter ended September 2011 at just 6.9 per cent, down from 7.2 per cent in the first quarter and 8.4 per cent in the same period last year. The GDP growth during the first half (April-September) of the current fiscal works out to 7.3 per cent, compared with 8.6 per cent in the first half of 2010-11.

The slowdown during the quarter has been broad-based, affecting almost every sector. Manufacturing growth dipped to 2.7 per cent in the September quarter from 7.2 per cent in the preceding quarter. The growth of agriculture and allied sectors declined to 3.2 per cent from 3.9 per cent in the previous quarter. Mining and quarrying output declined to 2.9 per cent during the quarter against the growth of 1.8 per cent in the previous quarter.

Delayed investment

A more worrying aspect of this is the slowdown in investment activity that has a bearing on future growth. With rising interest rates, slowing consumption growth and an uncertain business environment, the corporate sector has been delaying its investment decisions. There has been a setback to the rate of gross fixed capital formation during the three months ending September 2011, to 28 per cent from 30.3 per cent a year-ago. There is a slowdown in new recruitments also.

The slowdown in investment activity has reflected in the core sector growth. The output of eight infrastructure industries — coal, crude oil, natural gas, refinery items, fertilisers, cement, steel and electricity — dropped to an over six-year low of 0.1 per cent during October this year. For the April-October period this year, the output of core industries slowed to 4.3 per cent from 5.9 per cent in the same period last year.

Investment activity is unlikely to pick up in the near future since private consumption has been slowing down because of a prolonged period of high inflation, which has been eroding the purchasing power of consumers. The growth in private consumption — a major growth driver of the economy — declined to 5.6 per cent in the second quarter of this fiscal from 6.9 per cent in the first quarter and 8.0 per cent in the last quarter of 2010-11.

Tough times FOR INDIA INC

Also, the revenue and profit margins of India Inc have been witnessing a significant decline. The quarter ending September has turned out to be the worst period for the corporate sector in three years with a sharp fall in net profit and shrunk margins. A sharp rise in fuel, other raw materials and interest costs has impacted the overall performance of companies adversely.

Even sectors such as automobiles, petrochemicals, consumer durables and textiles, which had shown resilience earlier, reported a fall in profits for the first time in several quarters. The sharp depreciation in the exchange value of the rupee since August this year has impacted the profit margins of bigger companies having significant exposure to foreign currency loans.

The manufacturing sector's contribution to GDP during the September quarter has slumped to just 6.5 per cent, only a bit more than that of the agriculture sector. This is an indication of how weak the manufacturing sector has become. The contribution of the services sector to GDP growth during the quarter is more than four-fifths at 81.2 per cent, which, otherwise, accounts for about 58 per cent of the GDP.

BLEAK OUTLOOK

To add to the worry, the outlook for the economy has turned bleak for the coming quarters, on account of the policy paralysis at home and the worsening global economic situation.

The UN's ‘World Economic Situation and Prospects 2012' report has warned that the world is on the brink of another recession and even economic powerhouses such as China and India, which led the recovery last time, will get bogged down.

The report has cut the global growth forecast for next year to 2.6 per cent from 4.0 per cent in 2010. “Following two years of anaemic and uneven recovery from the global financial crisis, the world economy is teetering on the brink of another major downturn,” it added.

The Purchasing Managers' Index (PMI) data released by HSBC on December 1 showed that manufacturing contracted across the Euro zone and Asia. China's official PMI showed that factory activity shrank in November for the first time in nearly three years to 49, dipping below the 50-mark, indicating contraction.

For India, it was 51 for November compared with 52 in October, 52.6 in August and 58 in April this year, indicating a steadily worsening situation. For the Euro zone, this index was down at 46.4 in November from 47.1 in October, indicating a steadily worsening economic environment. The factory activity in both its biggest economies, Germany and France, is weakening.

Moody's caution

Considering all these factors, the global ratings major Moody's has said that tough times are ahead for the Indian economy and it may revise downwards the country's growth forecast for 2011-12 to 6.5 per cent. “It is difficult to see this (economy) turning around anytime soon, especially as the troubles in Europe appear to have some way still to play out,” it said.

To add to the growing worry of policymakers, most economists are of the view that the slowdown in growth is set to get worse in 2012-13 given weaker government spending, private consumption and private investment.

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