Consumption drives GDP in Q1

Govt needs to address the widening gap between investment and consumption.

The Reserve Bank of India’s strategy is working. The real Gross Domestic Product (GDP) growth eased to 7.8 per cent y-o-y in the first quarter of 2011, below the government’s projection and consensus estimates of economists. While a slowdown was imminent due to the high base of 9.4 per cent growth clocked in the corresponding period last year, this fall is not only due to a high base but a slowdown in investments.

Growth has fallen below the psychologically important barrier of eight per cent, a benchmark threshold for foreign investors chasing growth outside their countries. In 2010-11, the real GDP has risen 8.5 per cent, below the advance estimate of 8.6 per cent, claim economists.

The sharp moderation in the GDP growth has been caused primarily by a slowdown in investment activity. From agriculture to manufacturing, everything slowed in this quarter. The agricultural growth eased to 7.5 per cent, while industrial output came in at 5.5 per cent. The mining and construction activity also slowed down.

Investment growth slowed noticeably (0.4 per cent against 7.8 per cent in the previous quarter). Despite the investment activity coming to a standstill, the engines of the economy have been kept alive by private consumption and net exports, which together contributed 84 per cent to growth during this quarter.

Interestingly, private consumption moderated to a still robust eight per cent in Q1, due to solid growth in disposable incomes, while government consumption notched up to 4.9 per cent in the same period.

According to Sonal Varma, chief economist at Nomura, “Continued high inflation, rising interest rates and supply-chain disruptions due to the crises in Japan are likely to result in the real GDP growth remaining sub-eight per cent in the next two-quarters.”