The Indian elephant is limping. Which means this elephant can't dance — at least not for a while. While the poor industrial production numbers all along hinted at lacklustre economic growth, the services sector that still held the show thus far is now showing initial signs of giving in. If this trepidation is proved right in the next couple of quarters, then urgent measures may have to be taken to shake the economy out of lethargy. And such measures would have to come from the government and not just the RBI.

What's shocking?

The 5.3-percent growth in the March quarter GDP, as well as the 6.5-per cent expansion for FY-12, does come as a shock for many reasons: One, this annual growth is the lowest in nine years, since the 4 per cent expansion seen in FY-03. The economy grew at a marginally higher 6.7 per cent in March 2009, post the Lehman crisis. On a quarterly basis too, the current number is the worst since 2004-05, when the base year was changed.

Impediments to growth

A break-up of the supply side of GDP suggests widespread weakness across supply segments. The weakness was most pronounced in the manufacturing sector. For the first time, since the start of the new base year, manufacturing segment dipped 0.3 per cent in the March 2012 quarter over a year ago. That held back the annual growth in manufacturing to just 2.5 per cent.

Policy logjams, land acquisition issues, high interest rates as well as inflation have all taken a toll on fresh investment activity, thus curtailing production. Unlike 2007-08, when it was mere demand slowdown that hurt the sector, this time around, manufacturers' appetite for increasing capacities has taken a beating as a result of the above impediments. Investment activity (gross fixed capital formation) expanded by a mere 5.3 per cent in FY-12 as against the 8.1 per cent seen even during the slump year of FY-09.

Growth in agriculture too eased to 2.8 per cent from a robust 7 per cent in FY-11. Strangely enough, agriculture, despite a high base to contend with, expanded at a better pace than manufacturing. While the weather department has forecast a normal monsoon for 2012, this sector may not contribute towards GDP since its share is a mere 14 per cent now.

Agriculture is unpredictable and industrial production slowdown evident. So, what is the surprise? It's the sign of fragility in the services sector that should be sending mild shivers down North Block. Take trade, hotels, transport and communications, which accounted for 28 per cent of the GDP. While the 9.9 per cent annual increase in this segment appears healthy, the quarterly numbers suggest weakness. At 7 per cent in the March quarter, this is the first time since mid-2009 that the segment has slipped below 9 per cent.

Why is this sector so important? One, because it is the largest contributor to GDP at present. Two, with retail and wholesale trade coming under this space, it is closely linked to the consumption in the economy. And it is the consumption side that has kept the economy moving, post the 2008 economic slowdown, thanks partly to the Sixth Pay Commission.

While it may be early days yet to say the segment is slowing, this number seen together with lacklustre private final consumption expenditure does cause concern.

Any signs of revival?

No doubt, the slackening GDP growth per se may be a good reason for the RBI to cut rates to boost economic activity. But that may not be an easy decision at present. For one, the high inflation continues to act as a deterrent. Two, consumption expenditure, although slowing a little, has still been buoyant when compared with the supply-side numbers. That implies that the economy faces structural issues on the supply side rather than any demand worries. Which is why mere monetary policy action is no panacea.

With the depreciating rupee adding to the RBI's inflation concern, there appears little room for the central bank to manoeuvre. That leaves the ball on the Government's court to draft and clear all the policies/bills relating to investment and manufacturing activity that would give the much-needed impetus for private investment. Fast tracking its own capital spending would also trigger improved asset formation.

vidya@thehindu.co.in

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