India headed for hard-landing?

If the much-needed reforms push does not come from the government, GDP growth could slip to six per cent.

For six successive quarters, India’s GDP growth has contracted. For the last three quarters, GDP has grown below the trend level of eight per cent. If one goes by the conventional definition of recession, the country is not in the midst of one. But, for an economy used to clocking eight per cent growth, such a sharp slowdown comes with all the characteristics of a recession.

The 6.9 per cent growth the economy has clocked in the second quarter of FY12, is the worst that the country has seen since June 2009. The central bank’s quixotic battle against inflation has yielded the necessary results.

From manufacturing to agriculture, every sector, except services, is slowing. According to Siddhartha Sanyal of Barclays Capital, the decline in non-agriculture growth has been driven by weakness in gross fixed capital formation, which fell 0.9 per cent year-on-year in the latest quarter and was the first contraction since March 2009. While GDP grew at 8.5 per cent in the corresponding quarter of last year, agriculture and industry grew by 5.4 per cent and 7.9 per cent, respectively.

What has surprised economists the most is the slowdown in agriculture. This was unexpected, as the monsoon had been good. Agriculture has grown at a shockingly slow pace of 3.2 per cent, compared to 3.9 per cent in the first quarter of FY12. Industry growth almost crash-landed at 2.8 per cent year-on-year. In the first quarter, industry grew at 6.7 per cent. The mining ban in Karnataka probably explains the sharp contraction in mining, which clocked negative growth of 2.9 per cent in Q2, compared to a 1.8 per cent growth in Q1 FY12.

More worrying is the slowdown in private consumption, which grew at 5.6 per cent in Q2, compared to 6.9 per cent in Q1. India’s growth is driven by domestic consumption and if this shows signs of coming off, then fear of a protracted slowdown may become real.

Exports are likely to come under pressure if global economic sentiment worsens. Dharmakirti Joshi, chief economist at Crisil, believes the economy can benefit from some swift policy action, which would lift the sagging business sentiment and raise growth potential. Mole Hau of BNP Paribas believes GDP growth looks on course to slide further, to around six per cent for a few quarters. “Our long-held expectation for a hardish landing for the economy is materialising,” he warns.