Business Today

Manufacturing contracts, GDP slows to show India economy in peril

The full-year GDP for 2011-12 has dropped to 6.5 per cent, down from a healthy 8.4 per cent in the previous year, with manufacturing contracting acutely to minus 0.3 per cent.

Mail Today Bureau | June 1, 2012 | Updated 17:02 IST

Slip sliding away, the sum of all our fears is equal to 5.3 per cent GDP growth for the quarter ended March 31, 2012. This confirms our worst suspicions and something that the policy mavens have refused to confront - India's economy is rapidly decelerating.

The full-year GDP for 2011-12 has dropped to 6.5 per cent, down from a healthy 8.4 per cent in the previous year, with manufacturing contracting acutely to minus 0.3 per cent in the fourth quarter.

The nine-year low number in GDP is a result of high interest rates choking consumer demand and dampening investor sentiment, while the paralysis in the government has held back big projects in the infrastructure sector.

More than that the absence of a pragmatic policy, a response to the Indian economy's structural inadequacies remains absent leaving the soft underbelly woefully exposed.

A combination of internal ineptitude and extraneous factors has eroded the steel frame, leaving a wasteland in its wake. The rupee has tumbled to record depths, markets have tanked and investors are pulling out capital.

Industry and manufacturing are also hurting owing to the tight monetary conditions as well as burgeoning fiscal and trade deficits.

How the core industries performedAll the danger signs were on the radar. But beleaguered and embattled, the economy now looks to its managers and skywards towards the rain gods (praying for a normal monsoon) for resuscitation and deliverance. The general prognosis is one of despondency.

Rupa Rege Nitsure, chief economist, Bank of Baroda calls it right when she says: "This is definitely an important signal for the government - it is a make or break situation for India and the government has to press the panic button."

Finance minister Pranab Mukherjee's response is: "These are disappointing figures in the context of our recent performance." He adds: "Among the factors that have contributed to the slowdown are the tight monetary policy, which led to a significant rise in interest costs, and the weak global sentiments that affected growth in domestic private investment."

There has been a dramatic slowdown in car sales for the first time in recent years because of high interest rates on loans and rising fuel costs. Similarly, sales of consumer durable goods such as TVs and refrigerators and fast moving consumer goods like cosmetics and processed foods have turned sluggish.

The farm sector posted a meagre 1.7 per cent growth during the fourth quarter, down from 7.4 per cent in the same quarter of the previous year. The latest figures show a marked deterioration in an economy that had clocked an over 9 per cent growth for three successive years between 2005-08 and 8.4 per cent growth in 2010-11.

The delay in the government's decision-making is holding up large projects in the mining sector, which has clocked a negative growth rate for three consecutive quarters and ended the year with a 0.9 per cent contraction.

This has had a cascading effect and grounded investments in big power projects since fuel supplies are not coming through. Even Mukherjee conceded that "the domestic investment sentiments may have also been affected by the environmental policy bottlenecks in the mining sector".

GDP growth: Who said what

A spate of corruption scandals has weakened the government and it has been unable to push through vital economic reforms that could have brought in much-needed FDI and technology to rev up the economy and prevent the slide in the rupee which has touched an alltime low of 56.50 to a dollar.

Assocham president Rajkumar Dhoot says: "The investment environment should be improved and this may even call for some review of tax proposals and further relaxation of FDI norms."

CII Director General Chandrajit Banerjee goes a step ahead, observing: "A comprehensive economic revival package has to be announced at the earliest." Demanding bold action from the government and the RBI exclusively aimed at salvaging the economy, the business chamber expresses hope that the political leadership - across party lines - would converge and their actions would be swift and decisive.

Apex business chamber Ficci feels the global situation remains fragile and there is an urgent need to take steps on the domestic front.

GDP Growth: Who said what

Planning Commission Deputy Chairman Montek Singh Ahluwalia remarks: "It is obvious that the last quarter (growth) was disappointingly low. So, the slowdown is more than what we thought... We have to do something about it."

Nitsure says if the government doesn't step in now, India's sovereign ratings may be jeopardised. "The data highlights an unusual degree of weakening of the country's economy, likely driven by poor investment and widening trade gap," Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong, points out.

The poor numbers come at a time when the finance minister's fiscal policy space to push growth is constrained owing to the spiralling fiscal deficit as the government struggles to foot the subsidy bill for fuel, fertilizers and food.

CII is of the view that repo rate and CRR cuts are called for from the RBI as also measures are needed by the government to kickstart the investment cycle growth. But with skyrocketing international prices of crude building inflationary pressure, the RBI will find it that much more difficult to ease off its tight money policy.

Courtesy: Mail Today

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