GDP growth slows down to 6.9% in Q2

Mining, manufacturing are main drag on the economy

THE continuing tight monetary policy along with high inflation brought down the country's GDP growth to 6.9 per cent in the second quarter. The last time such slow growth was recorded was in 2009, when the economy expanded by just 6 per cent.

Latest data prove that the slowdown seen in the first quarter (when growth was 7.7 per cent) has only aggravated, and this is largely due a 2.9 per cent contraction in mining. In the first quarter, the sector had grown by 1.8 per cent, in itself much lower than the 8 per cent growth it had seen in the corresponding quarter of the previous year.

India’s real GDP at 2004-05 prices in the second quarter was Rs 13.21 lakh crore. Nominal GDP at market prices was Rs 20.09 lakh crore.

Reacting to the slowing of growth, planning commission deputy chairman Montek Singh Ahluwalia said, “We are not focusing on the current year in the planning commission. It is a year of slow(down). We know that.”

The finance ministry's chief economic advisor, Kaushik Basu, blamed three factors for what he called “this temporary slowdown”.

1.There is a global slowdown. (“It is in a gloomy global scenario that India’s growth has slowed down.)

2. We are battling inflation. (“There is no getting away from that.”) and

3. There is some slowdown in decision-making.

Among the sectors that added to deceleration was agriculture. Unlike the first quarter, when the farm sector GDP growth was buoyant, in the second quarter it was down at 3.2 per cent. Last year’s corresponding growth was 3.9 per cent and 5.4 per cent, respectively. This, despite a bountiful monsoon this year. Farm GDP growth was pulled down by a drop in pulses production; it contracted by 6.2 per cent and 9.7 per cent, respectively, according to advance estimates.

The full impact of monetary tightening was felt in manufacturing. The sector growth decelerated sharply to 2.7 per cent from 7.2 per cent in the first quarter and 7.8 per cent in the second quarter last year. Surprisingly, the interest rate sensitive construction sector grew by 4.3 per cent, against a 1.2 per cent growth in the first quarter. In the second quarter last year the sector had grown by 6.7 per cent.

The services sector continued to do well. It grew by 10.5 per cent (9.1 per cent in the first quarter this year and 10 per cent in the second quarter last year. The social sector grew by 6.6 per cent, accelerating from a growth of 5.6 per cent in the first quarter.

On the expenditure side, weak consumer spending pulled down private final consumption expenditure (PFCE) growth to 5.91 per cent at 2004-05 prices, down from a 6.32 per cent growth in the first quarter. In the second quarter last year the growth was 8.9 per cent. PFCE as a component of the GDP was down to 59.5 per cent from 60.5 per cent in the first quarter this year and 59.9 per cent in second quarter last year.

Government final consumption expenditure (GFCE) growth was only 4.05 per cent, a slight improvement over the first quarter’s 2.07 per cent but way below the 6.37 per cent growth logged in the second quarter last year.

The major surprise was sharp fall in gross fixed capital formation (GFCF). GFCF captures investment in the economy. GFCF shrank to 30.5 per cent of GDP at 2004-05 prices. In the first quarter it was 31.2 per cent and 32.8 per cent in the second quarter lat year. At current prices GFCF was 28 per cent, lower than threshold of 29 per cent. Any drop below this is normally seen as a danger signal, indicating a longer recovery period.

Global rating agency Moody's senior economist Glenn Levine warned of more headwinds. He said, “The economy is struggling under the weight of higher interest rates, ostensibly to cool inflation. It is difficult to see this turning around any time soon, especially as the troubles in Europe appear to have some way still to play out. We may need to revise our 2012 growth outlook from current 7 per cent and towards something like 6.5 per cent. By recent Indian standards this is a poor performance.”

Domestic rating agency CARE’s chief economist Madan Sabnavis agreed that growth was unlikely to be anywhere close to what government had estimated. “I would assume growth to be around 7.2 per cent this year, but there are headwinds. The area of concern is slowdown in capital formation and this will likely impact long- term growth.”

The uncertainty over long-term growth also stemmed from high inflation, as measured by the GDP deflator.

Bank of Baroda’s chief economist Rupa Rege Nitsure said, “The rise in deflator does not mean that rates will rise. Status quo will be maintained.” She added that credit offtake is a leading indicator. The bottom line, she said, is that “we are entering an era of a stagflation,” that is high inflation and low growth.