Memo to warring MPs PDF Print E-mail
Thursday, 01 December 2011 04:49
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GDP growth down to 9-qtr low, investment to 10 qtr


: While India’s MPs continue to wage war over any type of reform—and this includes those within the UPA combine, not just the NDA—GDP growth has fallen to a 9-quarter low. Indeed, had it not been for the fact that Q2FY11 growth was lowered from 8.9% to 8.4% (Q1FY11 growth has been lowered from 9.3% to 8.8%), GDP growth for Q2FY12 would have been 6.5% instead of the 6.9% that was reported on Wednesday. Even more worrying is the contraction in investments by 0.6% (they grew 10.6% in Q2FY11) since many of the growth-drivers in the first half of this year will not be present in the second half—along with the rapidly deteriorating global economy, that means a sub-7% growth for the year looks increasingly likely. The only thing that seems to be doing well is purchases of gold—as a percentage of GDP, this accounted for 2.4% of GDP in the first half of FY11 and this was up to 3% in the first half of FY12—though that is an indicator of increasing lack of confidence in the economy.

Going forward, export growth will slow down—as a proportion of GDP, this rose from 21.2% in the first half of FY11 to 24.8% in the first half of FY12. While private consumption expenditure growth fell from 6.3% in Q1FY12 to 5.9% in Q2FY12, government consumption growth rose from 2.1% to 4% during this period—with the deficit now so seriously out of whack the government is even planning to get PSUs to buy its holdings in fellow PSUs to meet the R40,000 crore disinvestment target, this growth-driver will also disappear in the second half of the year. By October, the government’s fiscal deficit was almost three-fourths of the full year’s target—last year, at the same time, the figure was 43%. Take any data-set you wish from corporate profits to funds raised (see S-L-O-W-I-N-G on the Reflect page) and you can see the dramatic slowdown.

Any worsening of the European situation means all bets are off, but the fact that GDP growth is well below potential output—Goldman Sachs puts India’s potential GDP growth at 7.6%—suggests inflation will come down, leaving room for RBI to start cutting interest rates. Any real increase in investment levels, though, will depend on government policy. While the Parliament logjam is a matter of serious concern, there are enough levers in the government’s hands that don’t require Parliament’s approval—indeed, the fight over 3G spectrum, arm-twisting Cairn, Lavasa, T Rowe Price … none of these have anything to do with Parliament but all have hit investor sentiment. Which is why it is vital the government does not give in on FDI in retail—it doesn’t need Parliament’s approval but does signal a commitment to reform of some sort.


Last Updated ( Thursday, 08 December 2011 08:05 )

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