The slowdown has arrived

Many analysts feared it; some expected it, but almost everyone will be surprised at the extent of the fall in GDP in the first quarter of the current fiscal — a hefty one percentage below the level in the same quarter of 2010-11. No one expressed it better than the Finance Minister, Mr Pranab Mukherjee, who was in no doubt that that 7.7 per cent growth was “disappointing”. This, despite the bumper rabi crop and, relative to last year, better growth in electricity, gas and water supply. That agriculture with improved quarterly results at 3.93 per cent could not help pull GDP to higher levels only confirms the place it occupies in the national output.

What proved disappointing were growth rates of the two main contributors to GDP — manufacturing and services. From a little over 10 per cent to 7.2 per cent in 12 months is a steep fall for the former. For mining and quarrying to fall from 7.36 per cent to 1.81 per cent is even steeper but, then, that decline is not unexpected. What it indicates, as usual, is the dismal failure of policymakers to get the new mining policy into operational mode. Services growth also declined but less sharply than manufacturing with all segments other than construction — trade, hotels, financial services — holding up the sector average. The most dramatic decline was in construction from 7.66 per cent last April-June to 1.2 per cent in the current first quarter. So, what pulled down the GDP to disappointing levels were manufacturing and construction. Both growth drivers have turned into agents of GDP fall. Neither performance is really surprising, and to understand the numbers is to appreciate just how successful the Reserve Bank of India's monetary tightening has been in combating what it has considered for the last eight months, the principal impetus for inflation: Excessive demand driving the two aforementioned sectors. So, Mr Mukherjee should not be disappointed since the drop in GDP is the outcome of an evidently successful monetary intervention. And neither should Mr Kaushik Basu expect things to get better this year, because the next sector to be hit with falling demand, again in line with the RBI's expectations, will be “interest-sensitive” automotive sales.

The decline in GDP growth may turn into a sustained trend — unless the RBI realises its hawkish policy has served its purpose. Even if the RBI does reverse its policy stance at the earliest, the transmission of lower interest rates will take some time. However, the reversal will have perked up business sentiment. Stakeholders would know the RBI does not intend to starve the patient it had put on a diet.

COMMENT NOW