A growth of 7.7 per cent in GDP in the first quarter of the current fiscal year (2011-12) is a continuation of the slowdown that descended on our economy in the third quarter of the previous fiscal year (2010-11).

The pace of growth has been decelerating since then, though the decline in GDP growth to 7.7 per cent is only marginally lower than in the fourth quarter of 2010-11, at 7.8 per cent. The inflationary pressure, however, continues unabated, in spite of serial tightening of the monetary policy, exposing the economy to the risk of stagflation.

We have been saved a sharper slowdown in Q1 of FY'12, thanks to a rebound in the GDP of the services sector , that registered 10 per cent growth, up from 8.7 per cent in Q4 of 2010-11. Agriculture, too, has helped with 3.9 per cent growth, compared with 2.4 per cent in Q1 of FY'11.

The slowdown in Q1 of FY'12 is entirely due to the industrial sector, which has been witnessing a consistent decline in growth since Q2 of 2010-11. It can be counted as a comforting factor that ours isn't a case of an economy-wide slowdown, but one that is confined to the industrial sector.

DOMESTIC FACTORS

Also, contrary to general perception, the industrial slowdown has little to do with the state of the global economy, but more to do with domestic turmoil, that is hampering the investment climate and the economic environment in the country.

Those who believe that the external economic environment is responsible for the current slowdown should take note that our external economy has remained exceptionally buoyant, amidst an adverse global economic environment. The performance of the external economy has been completely at variance with the domestic economy.

One should take note of the performance of exports, in relation to the performance of the industrial, and mainly manufacturing, sector as a whole. Let us briefly look at the scenario during 2008-09 to 2010-11 — the period of global financial-cum-economic crisis and subsequent recovery.

During this period, our GDP growth had fallen to 6.8 per cent and then recovered to 8.5 per cent, while growth in manufacturing output had dropped to 2.5 per cent and later recovered to 8.9 per cent. Export growth, too, had suffered. It was negative 3.5 per cent in 2009-10, but had immediately recovered to a record high of 37.5 per cent in 2010-11, even as the global economy was in the midst of doubtful recovery.

In recent months, growth in our exports has been extraordinarily high, which is neither in tandem with the deteriorating global economic scenario nor with the state of our domestic economy, especially the falling growth in industrial output. Interestingly, export growth and GDP growth are moving in opposite directions. Export growth is galloping, while output growth is decelerating.

There are two inconsistencies here — between export growth vis-à-vis the state of the global economy, and export growth and growth in manufacturing output.

GOVERNANCE ISSUES

The Indian economy tends to benefit, rather than suffer, from the global economic crisis, by way of higher capital inflows from global investors and non-resident Indians.

Our foreign exchange reserves are consistently rising, though not as fast as China. The rupee is undergoing some implicit depreciation, helping exports to grow and narrowing the trade gap in the process. However, the real economy sectors are bearing the full brunt of anti-inflationary measures. Low growth in agriculture and industrial output is both a cause and effect of inflationary pressures in the economy.

It is imperative for the government to rejuvenate the real economy sectors at this time, when the global economic outlook is uncertain. The problem is that we often tend to neglect sustained growth in agriculture and industry, and allow all sorts of hurdles to come in the way.

Slowdown in industrial growth in the first quarter is mainly on account of want of governance, or rather, inaction on the part of the government, and absence of economic reform. We had started well on the path of inclusive growth, but didn't support it with the reform process.

We have indeed missed a great opportunity on the industrial front, by way of delays in implementation of key infrastructural projects, besides stalling of some big-ticket investment plans that could have changed the growth outlook in a big way.

With two consecutive years of good monsoon, the time was also ripe for major agricultural reforms and initiatives that could have put our agriculture on the path of sustainable high growth. We could have really ushered a new growth paradigm in agriculture and rural economy.

(The author is Economic Advisor, J .K. Organisation, New Delhi. The views are personal.)

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