Be prepared for a slowdown

The latest data released by the Central Statistical Organisation (CSO) have confirmed fears of a slowdown in India's economy. The country's GDP growth during the fourth quarter of the fiscal 2010-11 declined to 7.8 per cent — the slowest in the past five quarters — against 9.4 per cent in the corresponding quarter of the previous year.

This lower GDP growth during the fourth quarter was despite the tremendous improvement in the farm output, which grew at 7.5 per cent, compared with a meagre 1.1 per cent in the same quarter last year. Moreover, services, including banking and insurance, grew by 9 per cent during the quarter compared with 6.3 per cent in the same quarter a year before.

However, it is the poor growth of 5.5 per cent in manufacturing, against 15.2 per cent a year ago, which was primarily responsible for pulling down the overall GDP growth during the quarter. In addition, the mining and quarrying sector, which grew by only 1.7 per cent during the quarter against 8.9 per cent in the previous corresponding quarter, also contributed to the slowdown.

INVESTMENT BLUES

For the full year to March, the revised GDP growth was 8.5 per cent, only a shade lower than the earlier estimate of 8.6 per cent, against 8 per cent recorded in 2009-10. This could be largely attributed to a very healthy growth of 6.6 per cent in agriculture and allied sectors during the year, against a meagre 0.4 per cent in the previous year.

However, the deceleration of GDP growth during the fourth quarter of 2010-11, despite the turnaround in farm output, is a clear signal of an impending slowdown during the current fiscal.

What lends credence to this view is that growth during the quarter was dragged down by a significant slowing of investment (gross fixed capital formation) to just 0.37 per cent, the lowest in the last six quarters, compared with 19.48 per cent a year ago.

According to Mr. Pronab Sen, Principal Advisor in the Planning Commission, the deceleration in investment rate was obvious from the falling factory output of capital goods in the past few months. “Unless the economy enters a new investment cycle, it may lead to supply-side constraints in the second half of the year,” he added.

The growth so far has been largely supported by private consumption which held on to a fairly high growth of 8 per cent during the January-March period, compared with 7.23 per cent during the same quarter a year ago. This was no doubt helped by huge outlays on various social sector schemes. However, it had slowed down to some extent compared with the preceding quarter ended December, when it had grown by 8.6 per cent.

Going by the Budget estimates, government expenditure will be only marginally higher this year, and hence sustaining the consumption growth may not be easy. Moreover, continuing high inflation could also affect consumption demand in the coming quarters. Hence a pick-up in investment demand would be necessary to bridge the gap. If investment remains subdued for a longer period, the growth momentum of the economy will suffer.

Though the growth momentum of the economy has not yet collapsed, the quality of governance has. With the government pre-occupied with damage control exercises following a series of corruption scandals, the much-needed reforms are in a limbo. Uncertainties relating to tax reforms, environmental clearances and foreign direct investment will continue to have a dampening effect on growth. Power sector reforms have been short-circuited.

POOR GOVERNANCE

Unfortunately, there seems to be no respite from inflation with the WPI-based headline inflation remaining in the range of 8.5-9.0 per cent over the past more than two years.

Food price inflation, despite some slowing down in recent months, continues to remain high, pushing some 30 million more people below the poverty line and forcing even the so-called middle class to cut back on other expenses.

What is more worrisome is the fact that despite the record foodgrains output last year following favourable monsoons, we are witnessing a paradox of soaring stocks and high prices.

Apart from the failure of the government on the supply management front, taking into account the growing population, the per capita food production has continued to fall.

Unfortunately, many in rural India and quite a large segment of urban population lack the means to satisfy their requirements of food items, even as government warehouses have no place to store foodgrains and millions of tonnes have been rotting in the open. This is the result of utter failure on the supply management front and declining standards of governance.

It is high time the government moves ahead with long-pending reforms and intensifies efforts to rein in raging inflationary pressures through fiscal consolidation measures and better supply management.

It must also cut back on wasteful subsidies and non-developmental expenditure and step up the investment spending.