|Growth cycle turns|
|Wednesday, 15 February 2012 00:00|
OECD leading indicators reinforce trend change
Though December IIP growth was a much lower 1.8% compared to 5.9% in November, evidence suggests the cycle has probably turned. Manufacturing PMI has been rising for the past couple of months and even though the year’s GDP growth is to be just 6.9% as compared to 8.5% for 2010-11, that data also showed a bottoming of the cycle. While consumption grew 5.6% in the first half of 2011-12, it is expected to grow 6.4% for the full year; in the case of investment, while this grew 3.5% in the year’s first half, the full year’s growth is expected to be 5.6%.
OECD trends, though, need to be viewed with some care. While OECD’s composite leading indicators (CLI) index rose to 95.6 in November versus 95.1 in October, this is still lower than the 103.5 in February 2010, for instance, and shows that growth remains below trend—100 signifies trend growth. Much of the current euphoria, apart from that in the Sensex, which seems more driven by the surplus European liquidity ($4 billion has already come into the country in the last six weeks), has to do with the view that RBI will now start lowering interest rates. Tuesday’s continued fall in inflation levels (from 9.9% in October to 6.6% in January) suggests RBI should be more amenable to lowering rates in April.
It is important, however, to keep in mind that investment levels in India started declining long before RBI started its interest rate tightening cycle. From a level of 38.2% of GDP in 2007-08, investment levels are around 35.5% in 2011-12, higher than the previous year, but lower than in 2007-08. While there are several reasons for this, keep in mind that 2007-08 was also the year of the lowest fiscal deficit, 2.5% of GDP. In that year, public sector capital formation rose 12.3% while that for 2010-11 was just 6.1%—as a share of total investments in the country, the share of the public sector has been falling over the past few years. Any revival in GDP then critically depends upon investment levels and that, in turn, is influenced heavily by public sector investment. This means any GDP revival depends upon fiscal deficits being kept in check and a more positive attitude towards investments on the part of the government. Right now, it doesn’t seem likely there will be a sea change in either of these parameters.