Setting aside a more volatile IIP (Index of Industrial Production), which touched a low of 3.3 per cent growth in July 2011, a dissection of the GDP (Gross Domestic Product) numbers for April-June 2011 shows that the economy is indeed slowing.

First, the overall GDP growth at constant prices came in at 7.7 per cent, a tad lower than the growth of January-March 2011 and much lower than the 8.8 per cent growth achieved in the same period a year ago. Going by the industry-wise classification of GDP, manufacturing growth has clearly slackened. But two sectors in which growth may still hold up are agriculture and services.

Rural demand may help

The assumption that the services sector might continue to support growth is refuted going by the leads in the PMI survey. Also, in the first quarter, service sectors such as banking and finance, telecom, mid-tier software, realty and construction are a majority among the CNX-500 companies that witnessed profit declines. However, what might continue to be a bright spot is the decent 3.9 per cent growth clocked by agriculture.

Good monsoons, denoting good prospects for the winter crop, a steady increase in tractor production as reflected by the IIP, an above-the-industry growth witnessed in two-wheeler sales (which has a higher rural market share than four-wheelers) support this point of view.

If this is indeed the case, companies with a rural tilt will benefit from sustained demand. Yet the trend of a shrinkage in private consumption expenditure witnessed in the first quarter GDP numbers might continue for some more time, given the high inflation and interest rate scenario. Moreover, even as gross fixed capital formation numbers in GDP improved in the June quarter, indicating better investment activity, it is difficult to assume this trend will continue.

slowing Investments

For one, the erratic growth patterns clocked by capital goods in the IIP does not allow for too positive an interpretation.

But infrastructure /construction companies in the first quarter, for example, have already shown signs of slowing order inflows, execution delays and elongating working capital cycles.

Economists also feel that in a scenario where the fiscal situation is under pressure and the government is not able to effectively control its revenue expenditure, the casualty will be capex spends.

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