Growth nosedives to 5.3% in Q3

Growth nosedives to 5.3% in Q3

The Indian economy grew at 5.3 per cent in the third quarter ended December 2008 — the slowest pace in nearly six years — as private consumption and demand for investment fell because of prevailing uncertainty in the wake of the global financial crisis.

Even as private component of Gross Domestic Product (GDP) declined, government expenditure increased by nearly 25 per cent, which enabled the services sector to grow at a healthy 9.9 per cent in the third quarter.

However, agricultural output, which was growing at an average rate of 4 per cent in the last four years, contracted by 2.2 per cent. This is partly attributed to the “base effect” as farm output in the corresponding quarter in 2007-08 went up by 6.9 per cent.

The government’s advance estimate of 7.1 per cent growth in the current fiscal looks optimistic in the background of third quarter numbers, as the Asia’s third largest economy has to grow at 7.6 per cent in the fourth quarter (January-March).

“The massive slowdown in growth during the final months of 2008 has now dismissed speculation that India is more resilient in this global turmoil because it is more domestically-oriented,” wrote Sherman Chan, an economist with Moody’s Economy.com.

With inflation well below 4 per cent level, economists expect the Reserve Bank of India to lower key interest rates and boost economic demand.

“The latest numbers are a signal for the RBI to act. It should not come as a surprise for them as in its mid-term review, the central bank predicted 7 per cent growth with downside risks. And these risks are coming through,” said DK Joshi, economist with Crisil Ltd.

PRIVATE INVESTMENT SLOWS DOWN:

Investment demand, which was driving the growth rate when the economy was growing at 9 per cent and above, has come down to single digits as expected because producers have either postponed or abandoned their proposed capital expansion, said experts.

Gross Fixed Capital Formation (GFCF), which is considered as a proxy for private investment, has dropped to 5.3 per cent in the third quarter of 2008-09 as against 13.74 per cent in the corresponding quarter a year ago. GFCF on a sequential basis also fell.

Industry, which has a 26 per cent weight in GDP, fell to 2.4 per cent in October-December 2008, compared to 8 per cent in the year-ago quarter. All the four components of industry — manufacturing, mining, electricity and construction — grew at a lower rate in the third quarter of the current fiscal compared to the year-ago performance.

GOVERNMENT SPENDING RESCUES GROWTH:

With the Centre implementing the Sixth Pay Commission for its 8.3 million employees and pensioners, the government-induced expenditure played a major role in boosting the growth rate, which would have otherwise fallen below 5 per cent.

Government Final Consumption Expenditure grew at nearly 25 per cent in the October-December quarter, reflecting an increase of over 50 per cent in revenue expenditure excluding interest payments.

For example, in terms of GDP composition by sectors, community services grew 17.3 per cent in the third quarter of 2008-09 as compared to just 5.5 per cent in the year-ago quarter.

The other two components of services — trade, hotels and communications, and financing and insurance — grew at a much lower rate.

Going forward, analysts have either started revising downwards the growth estimate or closely watching the developments. “Given the fiscal stimuli farm waiver, NREGS, higher support prices), there was optimism around rural consumption holding up. However, the weak agri numbers are a source of worry; and trends would need to be closely monitored,” wrote Citi India’s analysts Rohini Malkani and Anushka Shah. Citi is predicting a growth rate of 5.3 per cent in the 2009-10 fiscal.

However, Nomura Financial Advisory and Securities has revised downwards the GDP estimate to 6.4 per cent as against 6.8 per cent for the current fiscal.

Economy records slowest quarterly growth in over 5 years

Impacted by the global economic meltdown, the Indian economy has clocked the slowest quarterly growth in over five years, at 5.3 per cent, in October-December of this fiscal as agriculture and manufacturing contracted, despite a stimulus package.

Against the 8.9 per cent growth in the same period a year ago, economists said it is now the Reserve Bank of India’s (RBI’s) turn to provide stimulus to the economy by cutting rates, as inflation is already down to 3.36 per cent.

While the fall in manufacturing, by 0.2 per cent, in the third quarter was expected, as was evident in negative industrial production numbers for October and December, contraction in farm output by 2.2 per cent was a bit surprising.

“What has come as a surprise is agriculture. There is a turnaround but we can be optimistic that the figures will improve,” Chief Statistician Pronab Sen said.

For the nine months of this fiscal, the economy grew by 6.9 per cent against 9 per cent a year ago, which may make it difficult to attain the 7.1 per cent growth this fiscal, as was pegged officially.

The government put up a brave front, saying the third quarterly growth is not much off the mark.

“We had maintained 7 per cent with a downward bias. That much has been said, but (there is) still a quarter to go. Even with 5.3 per cent, it still comes around 7 per cent, maybe a shade below that,” Minister of State for Finance P K Bansal said here.

However, others are not as sure about the possibility of attaining 7.1 per cent growth this fiscal. “It is unlikely that the growth is going to be 7.1 per cent (for the entire 2008-09),” Sen said.

In December, the government provided the first stimulus package, cutting excise duty by 4 per cent across the board and increasing planned expenditure by Rs 20,000 crore among other things.

However, stimulus packages, also provided in January, and then the Interim Budget, would take some time to work their way through the system, economists said.

“(The) government will not be able to achieve over 7 per cent growth. The stimulus packages will take 6-8 months (to lift the economy) and (it will take) 8-9 months to get about 7 per cent (growth),” Crisil Principal Economist D K Joshi said.

It was only services that provided a sliver lining to the otherwise gloomy situation on the growth front.

Community, social and personal services recorded a robust growth rate of 17.3 per cent in the third quarter against 5.5 per cent a year ago, which is partly due to hike in salaries of government employees from September.

Another category of services — financing, insurance, real estate and business services — expanded by 9.5 per cent against 11.9 per cent.

However, trade, hotels, transport and communication grew by just 6.8 per cent from 11.6 per cent a year ago as tourist arrivals slowed due to the global economic meltdown and the Mumbai terror attacks.

Hit by the sharp slowdown in realty, construction growth fell to 6.7 per cent in the third quarter against 9 per cent a year ago.

However, excise duty cuts by two percentage points or Rs 60 per metric tonne on bulk cement (whichever is higher) in the Interim Budget may provide some stimulus to construction, though it may take some time.

Within industry, mining and quarrying recorded faster growth in the third quarter year-on-year. It expanded by 5.3 per cent against 4.3 per cent.

Electricity, gas and water supply rose by almost the same pace as last year — 3.3 per cent vs 3.8 per cent.

While Joshi attributed the fall in farm output to a high base effect as it grew by 6.9 per cent a year back, Nagesh Kumar, Director-General of think tank Research and Information System, blamed prices of agricultural produce for that.

Economists said as inflation is way below 4 per cent and is expected to fall further, so now the RBI should take the responsibility to provide a fillip to the economy.

“There is certainly more headroom for rate cuts by the RBI,” Nagesh Kumar said.

Joshi said there is headroom for the RBI to cut rates by 50-100 basis points.

“Both the RBI and the government are always responsive to any emerging situations,” Bansal said.

Domestic demand remains buoyant even in the slowing economy. Private final consumption expenditure at current and constant prices stood at 10.7 per cent and 10 per cent, respectively, against 8.7 per cent and 8.4 per cent a year ago.

Gross fixed capital formation, a key factor in determining productive capacity in the economy, stood at 33.4 per cent and 31 per cent at current and constant prices, respectively, against 33 per cent and 30.8 per cent, a year ago.

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