Business Standard

Slowdown gets worse, GDP growth sinks to 9-year low

Manufacturing drags growth to 6.5% in 2011-12 India Inc calls for economic revival package

BS Reporter  |  New Delhi 

The country’s economic growth fell to 6.5 per cent in 2011-12, according to official figures released on Thursday. The growth was the lowest in nine years, including the global financial crisis period of 2008-09 when it was 6.7 per cent. The advance estimates for 2011-12 had pegged the growth at 6.9 per cent. In 2003-04, GDP (gross domestic product) had grown four per cent.

Economists have attributed the fall this time to a poor performance in manufacturing, mining and construction, a high interest rate regime, environmental issues, land acquisition problems and an uncertain global economy.

The industry demanded a revival package for the economy. “A comprehensive economic revival package has to be announced at the earliest,” Confederation of Indian Industry Director General Chandrajit Banerjee said. Adi Godrej, chairman, Godrej Group, said the message was clear. “We have to work doubly hard to revive growth. The reforms process should be given top priority. Subsidies should be cut and FDI in various sectors allowed. Above all, politics must not be allowed to come in the way of all this,” he said.

V N Dhoot, chairman and managing director, Videocon Industries, said, “Globally, growth has practically vanished. In that sense, India’s GDP growth of 5.3 per cent is better. But, we need to restore the confidence of foreign investors in India's growth story. We have to manage both our fiscal deficit and current account deficit better.”

GDP growth in the fourth quarter last fiscal fell to a 32-quarter low of 5.3 per cent. Even in the worst quarter (January-March) of 2008-09, the economy had grown 5.9 per cent. In fact, the quarterly growth was the lowest since the GDP base was revised to 2004-05 from the earlier 1999-2000.

Part of the low growth in the fourth quarter could be explained by a sharp revision of GDP expansion in the corresponding period of 2010-11 to 9.2 per cent from the earlier estimate of 7.8 per cent, according to an analysis by YES Bank.

When mining started looking up slightly, growing 4.3 per cent in the fourth quarter against a contraction in the previous three quarters, manufacturing declined 0.3 per cent against a meagre growth of 0.6 per cent in the previous quarter and 2.9 per cent and 7.3 per cent in the second and first quarter, respectively.

Growth in construction services came down to 4.8 per cent after it rose to 6.6 per cent in the third quarter from 6.3 per cent in the second quarter and 3.5 per cent in the first. The sector grappled with land acquisition problems and high interest rates.The otherwise booming trade, hospitality, transport and communication sector also decelerated, as growth fell to seven per cent in the fourth quarter, against 10 per cent in the third, 9.5 per cent in the second and 13.8 per cent in the first.

Farm sector growth decelerated to 1.4 per cent in the fourth quarter, the lowest in the last fiscal. But, that had been factored in the advance estimates.

The economy had grown 8.4 per cent in the previous two years of 2010-11 and 2009-10.

However, there is a silver lining in the form of a pick-up in investment growth. Gross Fixed Capital Formation grew 3.6 per cent in the fourth quarter against a contraction of 0.32 per cent in the third, though it was less than 5.02 per cent in the second quarter and nowhere near the 14.88 per cent in the first quarter.

That, coupled with the Reserve Bank’s move to cut the repo rate 50 basis points in its annual policy, led Finance Minister Pranab Mukherjee to see a recovery in the current fiscal.

He said the rate cycle had been reversed, mining sector growth had picked up, progress had been made on fuel linkages for coal-based power projects and the investment growth rate had turned around in the fourth quarter.

Besides, a normal southwest monsoon had been predicted for 2012-13 and there were no major adverse results in corporate performance in the last quarter of 2011-12, the minister said.

“All these factors should help in the recovery of the growth momentum,” he said.

However, the Budget assumption and the Economic Survey projection of 7.6 per cent growth does not seem to be coming true this fiscal, given the initial trend of core sector growth. Eight core industries, having a weight of almost 38 per cent in the Index of Industrial Production, grew just 2.2 per cent in April 2012 against 4.2 per cent a year ago. The Prime Minister’s Economic Advisory Council Chairman, C Rangarajan, on Thursday pegged GDP growth at 6.5-7 per cent for the current fiscal.

Demand in the economy has not shown any revival. Private consumption expenditure grew 6.12 per cent in the fourth quarter, less than 6.17 per cent in the third quarter.

However, government consumption expenditure also came down to 4.13 per cent in the fourth quarter to 4.65 per cent in the previous quarter, which helped the Centre rein in the fiscal deficit at 5.75 per cent of GDP in 2011-12 against the projection of 5.9 per cent in the Budget. That was despite a lower size of the economy than anticipated. The Budget had assumed the economy to be Rs 89.12 lakh crore in 2011-12 whereas the acutal size stood at Rs 88.55 lakh crore.

Mukherjee said the government would take all necessary steps to address the imbalance on the fiscal and current account fronts. “It would help in checking inflationary expectations and inspire confidence for improved capital flows as well as a recovery in domestic investment growth,” he added.

“We now expect the RBI to ease the repo rate another 50-75 basis points in 2012-13 along with a CRR (cash reserve ratio) cut of 100 basis points,” said YES Bank chief economist Shubhada Rao.

“The inflation data for May 2012, to be released prior to the RBI’s June policy review, remains a key determinant of the magnitude and timing of any future rate cuts,” ICRA economist Aditi Nayar said.

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First Published: Fri, June 01 2012. 00:22 IST