Growth may have bottomed out in Q3

Recovery hinges on fiscal consolidation, inflation control, capital formation

The growth in the Indian economy may have bottomed out in the October-December quarter, going by an improved show subsequently, according to the Reserve Bank of India (RBI).

The optimism stems from early signs of improvement in investment activities, resilience in the service sector, strong credit offtake in the last two months and prospects of higher capacity utilisation, going forward. While a dip in inflation and election-related spending in a few states are expected to boost consumption, investment demand is also seen improving, largely on account of base effect.

"Current indications are that growth may have bottomed out in Q3.... The implicit growth rate for Q4 works out to 6.9 per cent," the central bank said in its Macroeconomic and Monetary Developments report for 2011-12. The report was released here on Monday.

India's gross domestic product (GDP) growth is expected to decline to 6.9 per cent in 2011-12 after expanding at a rate of 8.4 per cent in the previous two years. In October-December of FY12, the growth rate had moderated to 6.1 per cent -- its lowest in the last eleven quarters. There was a slowdown in the farm, mining and quarrying, manufacturing and construction sectors.

Core industries dragged the industrial growth, while capacity utilisation slackened even as employment generation moderated and the services sector growth rate began losing momentum. Corporate investments remained subdued, and their profitability was impacted by higher interest rates and rising input costs.

"While the moderation of growth in agriculture was largely on account of the base effect and structural impediments, the slowdown in industry reflected a number of factors, including domestic policy uncertainties, cumulative impact of monetary tightening and slackening of external demand," RBI noted.

The banking regulator, however, remained confident that peaking of the interest rate cycle and its two-step cut in the cash reserve ratio in January and March will provide some momentum to growth going forward. RBI said the risk of monsoon on agriculture growth remains low and the current stock of food grains, at 53 million tonnes, continues to be higher than the quarterly buffer and security reserve requirements.

The central bank is also convinced that while output gap may stay in 2012-13, the deficit will shrink during the course of the year.

"On current assessment, the year 2012-13 is likely to be a year when the economy starts to recover slowly from the large negative output gap created by growth falling significantly below trend," it said. "The growth in H1 may be dragged down by low pipeline investment. However, demand conditions may improve slowly."

While farm-sector growth is expected to gain pace, improvements in external climate and measures to address supply-side bottlenecks are expected to improve industrial performance in the current year.

RBI, however, said that there was an urgent need for a credible fiscal consolidation strategy to support the significant budgeted reduction in fiscal deficit for the year 2012-13. It cautioned that increasing dependence on market borrowing for financing fiscal deficit may put pressure on interest rates, especially at the long end.

"Economic recovery hinges on credible fiscal consolidation, inflation control and higher capital formation," the report said.