Q3 GDP data: India's growth on the edge

In India, 'slowdown' is a taboo word. It's a word we avoid using during conversations with policy makers, bureaucrats and the likes. Any mention inevitably leads to comparisons with countries that are barely managing to grow between 1 per cent and 2 per cent. The underlying meaning in such conversations is that 7 per cent growth rate is good. But a closer look at the numbers tells a different story.

India's growth rate has been on a constant decline. Annual growth rate for the current fiscal year 2011/12 ending March was originally estimated at 9 per cent, which was later revised downwards to 6.9 per cent. And according to the third quarter GDP numbers, Indian economy grew at 6.1 per cent in the quarter ending December 2011, down from 6.9 per cent in the previous quarter.

This is the slowest rate of growth since first quarter of calendar year 2009 - which was one of the toughest years in recent memory. Secondly, India's manufacturing growth is down to an abysmal 0.4 per cent and mining is down by 4.6 per cent (-4.6%). Shortage of coal and power is one of the most pressing issues plaguing Indian industry; a decline in mining will have an overarching impact on every sector. Farm output also grew at a disappointing 2.7 per cent. In fact, there was hope that a decent monsoon in 2011 would give farm output a boost.



What perhaps should be the most worrying statistic for the government is decline in fixed investment which has been on a constant decline. Fixed capital formation was down to 30.0 per cent of gross domestic product from 32.3 per cent in Q3 of 2010-2011. This essentially means capacity addition in terms of factories, roads, highways and manufacturing facilities as a proportion of economic activity has been declining.

Government and private sector pulled back on investments as high input costs, high interest rates and policy uncertainty weighed on the minds of investors.

"In such a situation, all policy levers should be used to drive a revival in the economy. Project clearances should be hastened, implementation of the manufacturing policy should begin by identifying specific zones where industry can invest and interest rates should be reduced," states India's largest industry body CII.

Until recently there has been much scepticism whether India's growth will slip below 7 per cent, but now a dip below 6 per cent can no longer be ruled out.

"The economy has slowed in the face of especially weaker external demand, rising global uncertainty, elevated interest rates, high inflation, a stagnant government, and declining business confidence. This will cap growth in 2012 through the first half where GDP growth is likely to dip below 6 per cent before lower interest rates and a global recovery lift growth through the second half," states Moody's Analytics.